<PAGE> 1
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:
<TABLE>
<S> <C>
/ / 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 sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
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):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
[RED LION LETTERHEAD]
October 10, 1996
To the Stockholders of Red Lion Hotels, Inc.:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Red Lion Hotels, Inc. ("Red Lion") to be held on Friday,
November 8, 1996, at 8:00 a.m. (local time), at Le Parker Meridien Hotel, Salon
Concorde, 119 West 56th Street, New York, New York 10019.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger dated as of
September 12, 1996 (the "Merger Agreement"), by and among Red Lion, Doubletree
Corporation ("Doubletree") and RLH Acquisition Corp., a wholly owned subsidiary
of Doubletree ("Merger Sub"), and the merger of Merger Sub with and into Red
Lion (the "Merger"). Under the terms of the Merger Agreement, each share of
Common Stock, par value $.01 per share, of Red Lion ("Red Lion Common Stock")
which is outstanding immediately prior to the Merger will be converted into the
right to receive (i) $21.30 in cash and (ii) 0.2398 shares of common stock, par
value $.01 per share, of Doubletree (such cash and stock consideration,
together, the "Merger Consideration"), subject to adjustment under certain
circumstances as described in the accompanying Proxy Statement/Prospectus.
Detailed information concerning the proposed Merger are set forth in the
accompanying Notice of the Special Meeting and Proxy Statement/Prospectus, which
you are urged to read carefully.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF RED LION HAS
UNANIMOUSLY DETERMINED THAT THE TERMS OF THE PROPOSED MERGER ARE FAIR TO, AND IN
THE BEST INTERESTS OF, RED LION AND ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS
HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS AND CONDITIONS OF THE MERGER
AGREEMENT AND THE OPINION OF SMITH BARNEY INC., RED LION'S FINANCIAL ADVISOR,
STATING THAT, AS OF THE DATE OF SUCH OPINION, THE MERGER CONSIDERATION TO BE
RECEIVED BY THE HOLDERS OF RED LION COMMON STOCK WAS FAIR FROM A FINANCIAL POINT
OF VIEW TO SUCH HOLDERS. ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND THE MERGER, AND UNANIMOUSLY RECOMMENDS THAT ALL
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
The affirmative vote of the holders of not less than a majority of the
outstanding shares of Red Lion Common Stock will be necessary for approval and
adoption of the Merger Agreement and the Merger. As of October 9, 1996, Red
Lion, a California Limited Partnership (the "Partnership") beneficially owned
20,900,000 shares (or approximately 66.7% of the then outstanding shares) of Red
Lion Common Stock entitled to vote at the Special Meeting, and therefore the
Partnership has sufficient voting power to constitute a quorum and to approve
and adopt the Merger Agreement and the Merger, regardless of the vote of any
other stockholder. Pursuant to a separate agreement, the Partnership has agreed
to vote in favor of approval and adoption of the Merger Agreement and the
Merger. As a result, upon the vote of the Partnership in accordance with such
agreement, approval and adoption of the Merger Agreement and the Merger by the
stockholders of Red Lion is assured.
Nevertheless, because of the significance to Red Lion of the Merger, your
participation in the Special Meeting, in person or by proxy, is important. IN
ORDER TO ENSURE THAT YOUR INTERESTS ARE REPRESENTED AT THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. If you attend
the Special Meeting in person you may, if you wish, vote personally on all
matters brought before the Special Meeting even if you have previously returned
your Proxy.
Sincerely,
/s/ David J. Johnson
David J. Johnson
Chairman of the Board,
Chief Executive Officer and President
<PAGE> 3
RED LION HOTELS, INC.
4001 MAIN STREET
VANCOUVER, WASHINGTON 98663
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 8, 1996
------------------------
To the Stockholders of Red Lion Hotels, Inc.:
A Special Meeting of Stockholders (the "Special Meeting") of Red Lion
Hotels, Inc., a Delaware corporation ("Red Lion"), will be held on Friday,
November 8, 1996, at 8:00 a.m. (local time), at Le Parker Meridien Hotel, Salon
Concorde, 119 West 56th Street, New York, New York 10019, for the following
purposes:
(1) to consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger dated as of September 12, 1996 (the "Merger
Agreement"), by and among Red Lion, Doubletree Corporation, a Delaware
corporation ("Doubletree"), and RLH Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of Doubletree ("Merger Sub"), and
the merger of Merger Sub with and into Red Lion upon the terms and subject
to the conditions thereof (the "Merger"), pursuant to which, among other
things, each share of Common Stock, par value $.01 per share, of Red Lion
("Red Lion Common Stock") which is outstanding immediately prior to the
Merger (other than shares as to which appraisal rights have been perfected,
and not withdrawn or lost, under the Delaware General Corporation Law) will
be converted into the right to receive (i) $21.30 in cash (plus, if the
Merger does not occur on or prior to November 18, 1996, interest accruing
at a fluctuating rate per annum equal to the prime interest rate from time
to time of Bankers Trust Company, compounded daily, on $30.106 plus such
accrued interest, for the period commencing on November 18, 1996 and ending
on the day on which the Merger occurs) and (ii) 0.2398 shares (the
"Exchange Ratio") of common stock, par value $.01 per share, of Doubletree
("Doubletree Common Stock"); provided, however, that in the event that the
"volume-weighted average quote" of the reported sales prices per share of
the Doubletree Common Stock quoted on The Nasdaq Stock Market's National
Market, as reported by Bloomberg L.P., for the 10 consecutive trading days
(on which shares of the Doubletree Common Stock are actually traded)
immediately preceding the second business day prior to the effective time
of the Merger (the "Final Doubletree Stock Price"), is equal to or less
than $34.89, or equal to or greater than $38.56, the Exchange Ratio shall
be subject to adjustment as follows: (a) if the Final Doubletree Stock
Price is equal to or less than $31.22, then the Exchange Ratio shall be
equal to the sum of 0.2398 plus the quotient obtained by dividing $0.8806
by the Final Doubletree Stock Price ; (b) if the Final Doubletree Stock
Price is greater than $31.22 and equal to or less than $34.89, then the
Exchange Ratio shall be equal to the quotient obtained by dividing $8.3657
by the Final Doubletree Stock Price; (c) if the Final Doubletree Stock
Price is equal to or greater than $38.56 but less than $42.23, then the
Exchange Ratio shall be equal to the quotient obtained by dividing $9.2463
by the Final Doubletree Stock Price; (d) if the Final Doubletree Stock
Price is equal to or greater than $42.23 but less than $44.07, then the
Exchange Ratio shall be equal to the difference of 0.2398 minus the
quotient obtained by dividing $0.8806 by the Final Doubletree Stock Price;
and (e) if the Final Doubletree Stock Price is equal to or greater than
$44.07, then the Exchange Ratio shall be equal to the quotient obtained by
dividing $9.6866 by the Final Doubletree Stock Price; and
(2) to consider and transact such other business as may properly come
before the Special Meeting or any adjournments or postponements thereof.
The Board of Directors of Red Lion has fixed the close of business on
October 9, 1996 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof, and only stockholders of record at such time will be
entitled to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof. The affirmative vote of the holders of not less than a
majority of the outstanding shares of Red Lion Common Stock will be necessary
for approval and adoption of the Merger Agreement and the Merger.
<PAGE> 4
IN ORDER TO ENSURE THAT YOUR INTERESTS ARE REPRESENTED AT THE SPECIAL
MEETING, PLEASE COMPLETE, SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY, WHICH
IS BEING SOLICITED BY THE BOARD OF DIRECTORS, WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING. A PRE-ADDRESSED, STAMPED RETURN ENVELOPE WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES IS ENCLOSED FOR THAT PURPOSE.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
By Order of the Board of Directors,
/s/ Beth A. Ugoretz
Beth A. Ugoretz
Secretary
October 10, 1996
2
<PAGE> 5
RED LION HOTELS, INC.
PROXY STATEMENT
------------------------
DOUBLETREE CORPORATION PROSPECTUS
------------------------
GENERAL INFORMATION
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") is
furnished in connection with the solicitation of proxies by the Board of
Directors of Red Lion Hotels, Inc., a Delaware corporation ("Red Lion"), for use
at a Special Meeting of Stockholders of Red Lion (the "Special Meeting"), to be
held on November 8, 1996, or any adjournments or postponements thereof.
At the Special Meeting, the stockholders of Red Lion will consider and vote
upon a proposal to approve and adopt an Agreement and Plan of Merger dated as of
September 12, 1996 (the "Merger Agreement"), by and among Red Lion, Doubletree
Corporation, a Delaware corporation ("Doubletree"), and RLH Acquisition Corp., a
Delaware corporation and a wholly owned subsidiary of Doubletree ("Merger Sub"),
and the merger of Merger Sub with and into Red Lion upon the terms and subject
to the conditions thereof (the "Merger"). A copy of the Merger Agreement is
attached to this Proxy Statement/Prospectus as Appendix A. As more fully
described herein, in the Merger and pursuant to the Merger Agreement, Red Lion
will become a wholly owned subsidiary of Doubletree, and each share of Common
Stock, par value $.01 per share, of Red Lion ("Red Lion Common Stock") which is
outstanding immediately prior to the Merger (other than shares as to which
appraisal rights have been perfected, and not withdrawn or lost, under the
Delaware General Corporation Law) will be converted into the right to receive
(i) $21.30 in cash (plus, if the Merger does not occur on or prior to November
18, 1996, interest accruing at a fluctuating rate per annum equal to the prime
interest rate from time to time of Bankers Trust Company, compounded daily, on
$30.106 plus such accrued interest, for the period commencing on November 18,
1996 and ending on the day on which the Merger occurs) and (ii) 0.2398 shares
(the "Exchange Ratio") of common stock, par value $.01 per share, of Doubletree
("Doubletree Common Stock"); provided, however, that in the event that the
"volume-weighted average quote" of the reported sales prices per share of the
Doubletree Common Stock quoted on The Nasdaq Stock Market's National Market, as
reported by Bloomberg L.P., for the 10 consecutive trading days (on which shares
of the Doubletree Common Stock are actually traded) immediately preceding the
second business day prior to the Effective Time (as defined below) (the "Final
Doubletree Stock Price"), is equal to or less than $34.89, or equal to or
greater than $38.56, the Exchange Ratio shall be subject to adjustment as
follows: (a) if the Final Doubletree Stock Price is equal to or less than
$31.22, then the Exchange Ratio shall be equal to the sum of 0.2398 plus the
quotient obtained by dividing $0.8806 by the Final Doubletree Stock Price; (b)
if the Final Doubletree Stock Price is greater than $31.22 and equal to or less
than $34.89, then the Exchange Ratio shall be equal to the quotient obtained by
dividing $8.3657 by the Final Doubletree Stock Price; (c) if the Final
Doubletree Stock Price is equal to or greater than $38.56 but less than $42.23,
then the Exchange Ratio shall be equal to the quotient obtained by dividing
$9.2463 by the Final Doubletree Stock Price; (d) if the Final Doubletree Stock
Price is equal to or greater than $42.23 but less than $44.07, then the Exchange
Ratio shall be equal to the difference of 0.2398 minus the quotient obtained by
dividing $0.8806 by the Final Doubletree Stock Price; and (e) if the Final
Doubletree Stock Price is equal to or greater than $44.07, then the Exchange
Ratio shall be equal to the quotient obtained by dividing $9.6866 by the Final
Doubletree Stock Price. Appendix E to this Proxy Statement/Prospectus sets forth
the number of shares of Doubletree Common Stock which would be issued in the
Merger for each share of Red Lion Common Stock based on various assumed Final
Doubletree Stock Prices.
This Proxy Statement/Prospectus also constitutes a prospectus of Doubletree
with respect to up to 8,802,545 shares of Doubletree Common Stock to be issued
to holders of Red Lion Common Stock and holders of options to purchase Red Lion
Common Stock in the Merger. On October 3, 1996, the last reported sale price of
the Doubletree Common Stock on The Nasdaq Stock Market's National Market was
$45.50 per share.
SEE "RISK FACTORS" COMMENCING ON PAGE 19 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE MERGER.
This Proxy Statement/Prospectus is first being mailed to the stockholders
of Red Lion on or about October 10, 1996.
------------------------
THE SHARES OF DOUBLETREE COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON OR ENDORSED
THE MERITS OF THE MERGER. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Proxy Statement/Prospectus is October 10, 1996.
<PAGE> 6
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS
PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY FROM ANY PERSON, IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN
OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS
PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF DOUBLETREE OR RED LION SINCE THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
Doubletree and Red Lion are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by Doubletree and Red Lion with the
Commission are available for inspection and copying at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048, and 500
West Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at
prescribed rates. The shares of Red Lion Common Stock are listed on the New York
Stock Exchange and, as such, certain of the periodic reports, proxy statements
and other information filed by Red Lion with the Commission can be inspected at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005. The shares of Doubletree Common Stock are quoted on The Nasdaq Stock
Market's National Market, and, as such, certain of the reports, proxy statements
and other information concerning Doubletree can be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington D.C.
20006. Such materials can also be inspected on the Internet at
http://www.sec.gov.
Doubletree has filed a Registration Statement on Form S-4 (together with
any amendments thereto, the "Registration Statement") with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the shares of Doubletree Common Stock to be issued in connection with the
Merger. This Proxy Statement/Prospectus also constitutes the Prospectus of
Doubletree filed as part of the Registration Statement. This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. The Registration Statement,
including exhibits filed as a part thereof, are available for inspection and
copying as set forth above. Statements contained in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Doubletree are
incorporated by reference in this Proxy Statement/Prospectus:
1. Doubletree's Annual Report on Form 10-K for the year ended December
31, 1995 (the "Doubletree 10-K");
2. The portions of the Proxy Statement dated March 15, 1996 for the
1996 Annual Meeting of Stockholders of Doubletree that have been
incorporated by reference in the Doubletree 10-K;
ii
<PAGE> 7
3. Doubletree's Quarterly Reports on Form 10-Q for the interim periods
ended March 31, 1996 and June 30, 1996;
4. Doubletree's Current Reports on Form 8-K dated February 27, 1996
and September 12, 1996; and
5. The description of the Doubletree Common Stock contained in the
Registration Statement on Form 8-A filed by Doubletree pursuant to Section
12 of the Exchange Act, and any amendment or report filed for the purpose
of updating such description.
The following documents filed with the Commission by Red Lion are
incorporated by reference in this Proxy Statement/Prospectus:
1. Red Lion's Annual Report on Form 10-K for the year ended December
31, 1995 (the "Red Lion 10-K");
2. The portions of the Proxy Statement dated April 15, 1996 for the
1996 Annual Meeting of Stockholders that have been incorporated by
reference in the Red Lion 10-K;
3. Red Lion's Quarterly Reports on Form 10-Q for the interim periods
ended March 31, 1996 and June 30, 1996;
4. Red Lion's Current Reports on Form 8-K dated August 29, 1996 and
September 12, 1996; and
5. The description of the Red Lion Common Stock contained in its
Registration Statement on Form 8-A filed by Red Lion pursuant to Section 12
of the Exchange Act, and any amendment or report filed for the purpose of
updating such description.
All documents and reports filed by Doubletree or Red Lion with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act
after the date hereof and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference herein and shall be a part hereof from
the date of filing of such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein or in any other subsequently filed document (which
also is or is deemed to be incorporated by reference herein) modifies or
supersedes such statement. Any such statement so modified or superseded, except
as so modified or superseded, shall not be deemed to constitute a part of this
Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO DOUBLETREE AND RED LION WHICH ARE NOT ATTACHED HERETO OR DELIVERED
HEREWITH. SUCH DOCUMENTS RELATING TO DOUBLETREE (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE,
FROM DOUBLETREE, 410 NORTH 44TH STREET, SUITE 700, PHOENIX, ARIZONA 85008,
ATTENTION: WILLIAM L. PEROCCHI, TELEPHONE: (602) 220-6666. SUCH DOCUMENTS
RELATING TO RED LION (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS
ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, FROM RED LION, 4001 MAIN
STREET, VANCOUVER, WASHINGTON 98663, ATTENTION: RANDALL OLIVER, DIRECTOR OF
INVESTOR RELATIONS, TELEPHONE: (360) 696-0001. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING, ANY SUCH REQUEST SHOULD
BE MADE BY NOVEMBER 1, 1996.
------------------------
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS RELATING TO
RED LION HAS BEEN SUPPLIED BY RED LION, AND ALL INFORMATION CONTAINED HEREIN
RELATING TO DOUBLETREE HAS BEEN SUPPLIED BY DOUBLETREE, AND NEITHER RED LION NOR
DOUBLETREE WARRANTS THE ACCURACY OR COMPLETENESS OF INFORMATION RELATING TO THE
OTHER PARTY.
iii
<PAGE> 8
Unless otherwise noted, the statistics set forth in "Business of Red Lion"
in this Proxy Statement/Prospectus relating to the lodging industry (other than
Red Lion statistics) are from, or have been derived from, information published
or provided by Smith Travel Research, an industry research organization. Smith
Travel Research has not provided any form of consultation, advice or counsel
regarding any aspect of the Merger, and Smith Travel Research is in no way
associated with the proposed transaction.
CORPORATE ORGANIZATION
DOUBLETREE
Doubletree Corporation ("Doubletree") was incorporated on May 19, 1994 to
succeed to all the assets, liabilities and business operations of Doubletree
Partners, formerly Guest Quarters Hotel Partnership ("GQHP"). On December 16,
1993, Doubletree Partners and Doubletree Hotels Corporation ("DHC") were
combined through the transfer of the ownership interests in DHC to Doubletree
Partners in exchange for cash and partnership interests in Doubletree Partners
(the "Doubletree Combination Transaction"). On June 30, 1994 (immediately prior
to the initial public offering of Doubletree Common Stock), the partners of
Doubletree Partners, other than Samantha Hotel Corporation ("Samantha"),
contributed their general partnership interests to Doubletree, and the Samantha
owners contributed all the capital stock of Samantha to Doubletree in
consideration for an aggregate of 15,500,000 shares of Doubletree Common Stock,
distributed in proportion to their respective ownership interests in Doubletree
Partners prior to such transfers (the "Doubletree Reorganization").
RED LION
Red Lion Hotels, Inc. ("Red Lion") was incorporated in March 1994 as a
wholly-owned subsidiary of Red Lion, a California Limited Partnership (prior to
August 1, 1995, "Historical Red Lion" and, on and after August 1, 1995, the
"Partnership"). Red Lion's operations commenced in March 1995 when Historical
Red Lion contributed a 49.4% interest in a joint venture which owns the Santa
Barbara Red Lion Hotel to Red Lion. Red Lion completed an initial public
offering of Red Lion Common Stock on August 1, 1995 (the "Red Lion Offering").
After giving effect to the Red Lion Offering, the Partnership currently owns
approximately 67% of outstanding Red Lion Common Stock. Immediately prior to the
closing of the Red Lion Offering, Historical Red Lion repaid certain of its
outstanding indebtedness with existing cash balances and contributed
substantially all of its assets (excluding 17 hotels (the "Red Lion Leased
Hotels"), certain minority joint venture interests and certain current assets)
and certain liabilities to Red Lion (the "Red Lion Formation").
On August 1, 1995, Red Lion refinanced or repaid substantially all of the
debt contributed pursuant to the Red Lion Formation with the net proceeds of the
Red Lion Offering, borrowings under a new term loan and existing cash (the "Red
Lion Refinancing"). Red Lion also entered into a long-term master lease with the
Partnership for the Red Lion Leased Hotels.
------------------------------
Doubletree Hotels(R), Doubletree Guest Suites(R), Doubletree Club Hotels(R)
and Club Hotels by Doubletree(R) are registered trademarks of Doubletree.
Red Lion Hotel(R), Red Lion Inns(R) and Red Lion(R) are registered
trademarks of Red Lion.
iv
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... i
AVAILABLE INFORMATION................................................................. ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... ii
CORPORATE ORGANIZATION................................................................ iv
SUMMARY............................................................................... 1
The Parties......................................................................... 1
The Combined Company................................................................ 2
The Special Meeting................................................................. 4
The Merger.......................................................................... 5
Forward Looking Information......................................................... 10
Unaudited Summary Pro Forma Financial Data of Doubletree............................ 11
Summary Financial Information of Doubletree......................................... 13
Summary Financial Information of Red Lion........................................... 16
Common Stock Price Range of Doubletree and Red Lion................................. 18
Dividends........................................................................... 18
RISK FACTORS.......................................................................... 19
Financing of the Merger; Leverage................................................... 19
Integration of the Two Companies.................................................... 19
Competition for and Dependence on Management Contracts, Leases and Franchise
Agreements; Competition for Guests............................................... 20
Risk of Contract Turnover........................................................... 20
Dependence on Certain Hotel Owners.................................................. 21
Risks Associated with Expansion..................................................... 22
Risks Associated with Owning and Leasing Real Estate................................ 22
Investment Losses; Risks Associated with Joint Ventures; Contingent Liabilities..... 23
Risks Associated with New Construction.............................................. 24
Risks Associated with the Lodging Industry.......................................... 24
Fluctuations in Operating Results................................................... 24
Government Regulations.............................................................. 24
Environmental Regulations........................................................... 25
Potential Conflicts of Interest..................................................... 25
Significant Stockholders............................................................ 26
Anti-Takeover Provisions............................................................ 26
Price Volatility.................................................................... 26
Shares Eligible For Future Sale..................................................... 26
THE SPECIAL MEETING................................................................... 27
Time and Place; Purposes............................................................ 27
Record Date; Quorum................................................................. 27
Votes Required...................................................................... 27
Proxies............................................................................. 28
THE MERGER............................................................................ 29
Background of the Merger............................................................ 29
Reasons for the Merger; Recommendation of Board of Directors........................ 33
Opinions of Financial Advisors...................................................... 35
Interests of Certain Persons in the Merger.......................................... 42
Accounting Treatment................................................................ 45
Certain Federal Income Tax Consequences............................................. 45
Regulatory Approval................................................................. 46
Nasdaq Quotation.................................................................... 46
Federal Securities Law Consequences................................................. 46
Appraisal Rights.................................................................... 47
</TABLE>
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<TABLE>
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<S> <C>
Financing of the Merger............................................................. 49
THE MERGER AGREEMENT.................................................................. 51
The Merger.......................................................................... 51
Merger Consideration................................................................ 51
Exchange of Certificates............................................................ 52
Effect of the Merger on Stock Options............................................... 54
Representations and Warranties...................................................... 54
Certain Covenants................................................................... 54
Conditions.......................................................................... 59
Termination......................................................................... 61
Termination Fees.................................................................... 62
Expenses............................................................................ 62
Amendment and Waiver................................................................ 62
Registration Rights Agreement; Lock-Up.............................................. 62
Partnership Services Agreement...................................................... 63
THE COMBINED COMPANY.................................................................. 64
Business and Strategy............................................................... 64
Directors and Executive Officers.................................................... 67
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION...................... 70
SELECTED CONSOLIDATED FINANCIAL DATA OF DOUBLETREE.................................... 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF DOUBLETREE....................................................................... 79
Overview............................................................................ 79
Results of Operations............................................................... 79
Liquidity and Capital Resources..................................................... 82
BUSINESS OF DOUBLETREE................................................................ 84
Recent Developments................................................................. 84
The Lodging Industry................................................................ 86
Hotel Operations: Doubletree Brand Hotels........................................... 86
Hotel Operations: Non-Doubletree Brand Hotels....................................... 89
Investments and Commitments......................................................... 91
Hotel Properties.................................................................... 93
The RFS Acquisition................................................................. 98
Competition......................................................................... 98
Government Regulation............................................................... 98
Environmental Matters............................................................... 99
Intellectual Property............................................................... 99
Insurance........................................................................... 99
Employees........................................................................... 99
Legal Proceedings................................................................... 99
SELECTED PRO FORMA FINANCIAL, HISTORICAL FINANCIAL AND OTHER DATA OF RED LION......... 100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF RED LION......................................................................... 102
Results of Operations............................................................... 102
Liquidity and Capital Resources..................................................... 106
Seasonality......................................................................... 106
Inflation........................................................................... 106
BUSINESS OF RED LION.................................................................. 107
General............................................................................. 107
Hotels.............................................................................. 107
</TABLE>
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<TABLE>
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<S> <C>
Customers and Marketing............................................................. 109
Hotel Management and Centralized Support Services................................... 110
Management Contracts................................................................ 111
Joint Ventures...................................................................... 111
The Partnership Lease............................................................... 111
Competition......................................................................... 112
Environmental Matters............................................................... 113
Employees........................................................................... 113
Trademarks and Service Marks........................................................ 114
Legal Proceedings................................................................... 114
Government Regulation............................................................... 114
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF DOUBLETREE.......... 115
DESCRIPTION OF CAPITAL STOCK OF DOUBLETREE............................................ 118
Common Stock........................................................................ 118
Preferred Stock..................................................................... 118
Registration Rights................................................................. 118
Certain Provisions of Delaware Law.................................................. 119
Limitation of Liability and Indemnification Agreements.............................. 120
COMPARATIVE RIGHTS OF STOCKHOLDERS.................................................... 121
General............................................................................. 121
Authorized Capital.................................................................. 121
Number of Directors; Removal; Filling Vacancies..................................... 121
Classified Board of Directors....................................................... 122
Special Meetings of Stockholders.................................................... 122
Stockholder Action by Written Consent............................................... 122
Advance Notice Provisions for Stockholder Proposals, Including Nomination of
Directors........................................................................ 123
Cumulative Voting................................................................... 124
Amendment of the Certificate of Incorporation and Bylaws............................ 124
Business Combinations............................................................... 124
Limitation of Liability of Directors................................................ 125
Indemnification of Directors and Officers........................................... 125
LEGAL MATTERS......................................................................... 126
EXPERTS............................................................................... 126
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
APPENDIX A -- Agreement and Plan of Merger (excluding exhibits)....................... A-1
APPENDIX B -- Opinion of Smith Barney Inc. ........................................... B-1
APPENDIX C -- Opinion of Morgan Stanley & Co. Incorporated............................ C-1
APPENDIX D -- Section 262 of the Delaware General Corporation Law..................... D-1
APPENDIX E -- Sample Exchange Ratio Adjustments....................................... E-1
</TABLE>
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<PAGE> 12
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus (the "Proxy Statement/Prospectus"). Reference
is made to, and this summary is qualified in its entirety by reference to, the
more detailed information contained elsewhere, or incorporated by reference, in
this Proxy Statement/Prospectus and the Appendices attached hereto. Stockholders
are urged to read carefully this Proxy Statement/Prospectus, the attached
Appendices and such information incorporated by reference, in their entirety. As
used in this Proxy Statement/Prospectus, (i) "Doubletree" refers to Doubletree
Corporation and, unless the context otherwise requires, its subsidiaries, (ii)
"Red Lion" refers to Red Lion Hotels, Inc. (and, for periods prior to the Red
Lion Formation, the operations of Historical Red Lion and Historical Red Lion's
subsidiaries, affiliates and joint ventures) and, unless the context otherwise
requires, its subsidiaries, (iii) the "Partnership" means Red Lion, a California
Limited Partnership, and its subsidiaries, subsequent to the Red Lion Formation
and (iv) the "Combined Company" refers to the operations of Doubletree
(including Red Lion) after giving effect to the Merger. For a discussion of the
historical corporate organization of Doubletree and Red Lion, see "Corporate
Organization." Unless the context otherwise requires, all assumptions relating
to the Merger assume no adjustment to the Exchange Ratio (as defined herein) has
been made.
THE PARTIES
Doubletree. Doubletree is one of the nation's leading hotel management
companies. At June 30, 1996, Doubletree managed, leased, or franchised 179
hotels with an aggregate of 41,232 rooms in 37 states, the District of Columbia
and Mexico. This represents a 63% and 43% increase in managed, leased or
franchised hotels and aggregate room count, respectively, during the twelve
month period ended June 30, 1996. Excluding the hotels which became part of the
Doubletree system through the acquisition of RFS, Inc., a privately held hotel
operator ("RFS Management"), in February 1996 (the "RFS Acquisition") through
which Doubletree significantly expanded its portfolio of non-Doubletree brand
hotels (the "RFS Hotels"), this growth was 17% and 19%, respectively. See
"Business of Doubletree -- The RFS Acquisition." Doubletree provides hotel
owners with management and franchise services under its Doubletree Hotels,
Doubletree Guest Suites, Doubletree Club Hotels and Club Hotels by Doubletree
brand names, as well as management services for non-Doubletree brand hotels. At
June 30, 1996, the Company's hotels included 60 Doubletree Hotels, 37 Doubletree
Guest Suites, 13 Doubletree Club Hotels, and 69 hotels operated by Doubletree
under third party brand names or as independent hotels.
Merger Sub, a Delaware corporation and a wholly owned subsidiary of
Doubletree, was organized at the direction of Doubletree to effect the Merger
described herein, and has not conducted any business other than in connection
with the Merger.
The principal executive offices of Doubletree and Merger Sub are located at
410 North 44th Street, Suite 700, Phoenix, Arizona 85008, their telephone number
at such address is (602) 220-6666 and Doubletree maintains a web site at
http://www.doubletreehotels.com.
Red Lion. Red Lion is a leading full service hospitality company. At June
30, 1996, Red Lion operated 55 hotels containing 14,540 rooms in the western
United States. In July 1996, Red Lion acquired a hotel in Houston, Texas,
containing 319 rooms. In September 1996, Red Lion purchased the Modesto,
California hotel, which it managed prior to such acquisition. These two
acquisitions and the April 1996 acquisition of a hotel in San Antonio, Texas are
referred to herein as the "Red Lion 1996 Hotel Acquisitions." A typical Red Lion
property is a full service hotel located in close proximity to a business or
commercial center, airport, major highway or tourist destination. Red Lion
hotels target the business traveler (both individual and group) and compete
primarily in the upscale segment of the lodging industry with national chains.
Red Lion has long term operating control over substantially all of its
properties. As of September 15, 1996, Red Lion owned or leased, under a
long-term lease, 41 of its 56 hotels. Red Lion's remaining 15 hotels are
operated pursuant to management contracts. Owned hotels consist of 100% owned
properties (17 hotels) and properties in which Red Lion holds at least a 50%
interest through joint venture agreements (seven hotels).
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Red Lion's principal executive offices are located at 4001 Main Street,
Vancouver, Washington 98663, its telephone number at such address is (360)
696-0001, and Red Lion maintains a web site at
http://www.travelweb.com/thisco/redlion/common/redlion.htm1.
THE COMBINED COMPANY
The Combined Company will be one of the largest full service hotel
operating companies in the United States. On a pro forma basis, as of June 30,
1996, the Combined Company would have had a portfolio of 234 hotels (197 of
which it would have managed and 37 of which it would have franchised) containing
55,770 rooms in the United States and Mexico. On a pro forma basis, the Combined
Company would have had revenues of $599.3 million for the year ended December
31, 1995 and $327.9 million for the six months ended June 30, 1996, with
operating income of $60.7 million and $46.1 million and net income of $21.0
million and $15.0 million, respectively.
Doubletree's principal business strategy is, and the Combined Company's
principal business strategy will be, to provide its hotel owners with high
quality, responsive hotel management and franchise services designed to improve
hotel profitability and to provide its hotel guests with a high level of
satisfaction. In executing this business strategy, Doubletree seeks to implement
policies and programs designed to increase revenues while minimizing operating
expenses. Doubletree seeks to grow hotel revenues by continuing to strengthen
the Doubletree brand and implementing national, regional and local sales and
marketing programs. Programs designed to reduce costs include providing
purchasing services at favorable prices to hotel owners, offering management
services and the Doubletree brand for one combined fee, minimizing the costs
associated with operating under the Doubletree brand name, and promoting
employee productivity and morale. As a result of these and other Doubletree
business strategies, net operating income for the 46 hotels managed by
Doubletree for the period from January 1, 1991 through December 31, 1995 has,
Doubletree believes, increased on average by approximately 20% per annum during
such period.
Doubletree's growth strategy is, and the Combined Company's growth strategy
will be, focused on four areas: (i) improving the revenue and operating
performance of its existing hotels; (ii) increasing the number of rooms under
its management or brand in its hotel portfolio; (iii) expanding the support
services it offers to hotel owners; and (iv) acquiring other hotel management
companies.
Doubletree believes that it has several competitive strengths that will
enable it to implement its growth strategy and continue to obtain additional
management contracts, leases and franchise agreements, including: (i) a proven
track record of generating profits for hotel owners; (ii) the strength of the
Doubletree brand; (iii) the ability to offer capital and flexible management
structures to hotel owners; (iv) established relationships with institutional
hotel investors; (v) the operation of multiple product lines and brands; and
(vi) the ability to increase penetration into Doubletree's existing markets.
Doubletree has pursued its growth strategy in 1996 by completing the
following transactions:
- Acquisition of RFS, Inc. and Strategic Alliance with RFS Hotel Investors,
Inc. In February 1996, Doubletree significantly expanded its portfolio
of non-Doubletree brand hotels with the acquisition of RFS Management,
which operates 50 hotels with approximately 7,000 rooms under such
franchise brands as Holiday Inn, Holiday Inn Express, Residence Inn by
Marriott, Hampton Inn, and Comfort Inn. The RFS Acquisition allows the
Combined Company to further pursue non-Doubletree brand management
contract and lease opportunities. Doubletree also separately negotiated a
Right of First Refusal (as defined below in "Business of
Doubletree -- Recent Developments -- Acquisition of RFS Management") with
RFS Hotel Investors, Inc., a leading hotel real estate investment trust
(the "REIT"), which provides a new source of long-term hotel management
and lease opportunities for additions to the Combined Company's hotel
portfolio.
- Formation of Candlewood. Doubletree has entered the mid-priced extended
stay segment of the hotel industry through a joint venture ("Candlewood")
with entities controlled by Mr. Jack DeBoer, the founder of Residence
Inns, whom the industry credits with creating the extended stay concept.
Mr. DeBoer is primarily responsible for the development and day-to-day
operations of Candlewood.
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<PAGE> 14
Candlewood's first hotel commenced operations in May 1996. Doubletree
believes that Candlewood provides an opportunity to generate additional
revenue and participate in a rapidly expanding and high demand segment of
the lodging industry.
- Formation of Joint Venture Strategic Alliance with Patriot American
Hospitality, Inc. In August 1996, Doubletree and Patriot American
Hospitality, Inc. ("Patriot"), one of the nation's leading hotel real
estate investment trusts, committed to invest $20.0 million and $200.0
million, respectively, of equity capital to acquire hotels that would be
managed, branded and leased by Doubletree. Management believes this
strategic alliance will provide the Combined Company with another source
of long-term hotel management and lease opportunities. The joint venture
has successfully completed the acquisition of four Doubletree hotels.
The Merger is consistent with, and is an important step in, Doubletree's
growth strategy. The Red Lion hotels complement Doubletree's current brand
portfolio and create critical mass for improved national brand awareness. While
there can be no assurance that the integration of Doubletree and Red Lion will
be successful or accomplished in a timely fashion or that the Combined Company
will successfully implement its growth strategy (see "Risk
Factors -- Integration of the Two Companies" and "Risk Factors--Risk of Contract
Turnover"), Doubletree believes the Merger will generate several benefits,
including:
- Doubletree believes that the Combined Company's expanded size and diverse
geographic presence presents opportunities for enhancing Doubletree's
brand recognition. Subject to the receipt of necessary third party
approvals, Doubletree currently intends to convert most of the Red Lion
hotels to one of the Doubletree brands, thereby providing a major
increase in market coverage for Doubletree's full service product,
particularly in the western United States. Based on its examination of
Red Lion hotels, Doubletree believes that such properties are generally
in well maintained condition and of high quality. As a result Doubletree
does not expect that such hotel brand conversions will require
significant capital expenditures. If the plans to convert the Red Lion
hotels to Doubletree brand hotels are successful, the Merger will nearly
double the number of upscale, non-suite Doubletree brand hotels, with
limited overlap in existing markets served. Notwithstanding the increased
size and presence of the Combined Company, Doubletree believes that there
will be a significant number of available markets offering expansion
potential for the Combined Company, including many of the markets in
which the Combined Company's hotels will be located.
- Doubletree believes that as a result of Doubletree's national brand
recognition, marketing strength, and higher average daily rate ("ADR")
structure compared to Red Lion's, the conversion of the Red Lion hotels
to the Doubletree brand presents opportunities for improvement in both
ADR and occupancy rates.
- Doubletree believes that the majority of leases and management agreements
covering the Red Lion hotels are long-term, stable assets that do not
present a significant risk that they will be terminated or renegotiated
in the ordinary course of the Combined Company's business.
- Doubletree believes that the Combined Company will create economies of
scale in services provided to its hotel owners, such as centralized
reservations services, national sales and marketing departments,
centralized accounting, management information services and other
administrative departments. As a result of the Merger, Doubletree
believes that the Combined Company will achieve additional cost savings
in these centralized services departments over those that have been
experienced by Doubletree or Red Lion separately. In addition, Doubletree
believes that the opportunity to integrate Red Lion's and Doubletree's
corporate headquarters and services will result in cost savings that will
directly benefit the Combined Company.
- Doubletree believes that the combination of the experienced hotel
employees at each of Doubletree and Red Lion will result in the Combined
Company having a large pool of hotel employees with proven track records
that can further support the implementation of Doubletree's business
strategy and support the Combined Company's future growth. In addition,
the Merger presents Doubletree with the opportunity to augment its
successful corporate management team with individuals from Red Lion's
experienced corporate management team.
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<PAGE> 15
- Doubletree believes it can extend its purchasing power and leverage with
vendors to the Red Lion hotels. Doubletree offers purchasing services to
the hotels in its portfolio and uses its purchasing power, and, where
appropriate, the purchasing power of certain of its major stockholders,
to negotiate favorable contract terms with vendors, on both a regional
and national basis. Doubletree believes that the Combined Company's
increased size will further increase its purchasing power with such
vendors and any prospective vendors, which may therefore result in cost
savings to the hotel owners and may generate increased profits for the
Combined Company.
- Doubletree believes Red Lion's significant investments in upgrading its
reservation system will enhance the performance of its current
reservation system. Red Lion has invested approximately $11 million in
developing a new, state-of-the-art central reservations system, which
includes a direct interface with airline reservation systems, advanced
marketing database capabilities and improved revenue management tools,
including real-time room inventory, and is anticipated to be operational
throughout the Red Lion system in early 1997. Doubletree currently
intends to integrate its current reservation system with Red Lion's
reservation system, capitalizing on the best aspects of each system, for
use by the Combined Company's portfolio of hotels.
As a result of the Merger, Doubletree will acquire 100% ownership in 17 of
Red Lion's 56 hotel properties. Doubletree believes that these hotels can
benefit substantially from the implementation of the Combined Company's business
strategy. Doubletree, however, remains focused on managing hotels, and once such
operating improvements outlined above have been realized, will explore all of
its alternatives, including the sale of one or more of such properties while
retaining the right to manage the hotels sold.
It is expected that Doubletree's management team will continue to manage
the operations of the Combined Company after the completion of the Merger.
Doubletree intends to review its own operations and the operations of Red Lion
in order to develop a plan to integrate the operations of both companies,
capitalizing on the best aspects of each organization. Although no specific
plans have been developed, Doubletree anticipates that there are opportunities
to integrate corporate functions, sales and marketing, central reservations and
accounting functions. The Board of Directors of Doubletree will be expanded to
include two additional members to be designated by the Partnership, an entity
affiliated with Kohlberg Kravis Roberts & Co. ("KKR"). The Partnership is the
majority stockholder of Red Lion and will own approximately 12.9% of all
outstanding Doubletree Common Stock upon consummation of the Merger and the
Financing Plan (as defined below). GE Investment Management Incorporated
("GEIM"), Doubletree's principal stockholder, and the Trustees of General
Electric Pension Trust ("GEPT") will beneficially own an aggregate of
approximately 23.8% of the Doubletree Common Stock upon consummation of the
Merger and the Financing Plan (as defined below). See "The Merger -- Financing
of the Merger" and "Security Ownership of Certain Beneficial Owners and
Management of Doubletree."
THE SPECIAL MEETING
Date, Time, Place and Purpose. This Proxy Statement/Prospectus relates to
a Special Meeting of Stockholders of Red Lion (the "Special Meeting"), to be
held at Le Parker Meridien Hotel, Salon Concorde, 119 West 56th Street, New
York, New York 10019 on Friday, November 8, 1996, starting at 8:00 a.m., local
time. At the Special Meeting, the stockholders of Red Lion will be asked (i) to
consider and vote upon a proposal to approve and adopt the Merger Agreement and
the Merger and (ii) to consider and transact such other business as may properly
come before the Special Meeting or any adjournments or postponements thereof.
Record Date; Quorum. The record date for the Special Meeting is October 9,
1996 (the "Record Date"). Accordingly, only holders of record of Red Lion Common
Stock as of such date will be entitled to notice of and to vote at the Special
Meeting. The presence, in person or represented by proxy, of the holders of a
majority of the outstanding shares of Red Lion Common Stock entitled to vote at
the Special Meeting is necessary to constitute a quorum for the transaction of
business at the Special Meeting. As of the Record Date, there were approximately
31,315,000 shares of Red Lion Common Stock outstanding and entitled to vote at
the Special Meeting.
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<PAGE> 16
Votes Required. Under the Delaware General Corporation Law (the "DGCL"),
the affirmative vote, in person or by proxy, of the holders of a majority of the
shares of Red Lion Common Stock outstanding on the Record Date is required for
the approval and adoption of the Merger Agreement and the Merger. As of the
Record Date, the directors and executive officers of Red Lion as a group
beneficially owned in the aggregate 929,730 shares (or approximately 3.0% of the
outstanding shares) of Red Lion Common Stock.
In addition, as of the Record Date, the Partnership beneficially owned
20,900,000 shares (or approximately 66.7% of the then outstanding shares) of Red
Lion Common Stock entitled to vote at the Special Meeting, and therefore the
Partnership has sufficient voting power to constitute a quorum and to approve
and adopt the Merger Agreement and the Merger, regardless of the vote of any
other stockholder. Pursuant to a Shareholder Support Agreement dated as of
September 12, 1996 by and between Doubletree and the Partnership (the "Red Lion
Shareholder Support Agreement"), the Partnership has agreed to vote in favor of
approval and adoption of the Merger Agreement and the Merger. As a result, upon
the vote of the Partnership in accordance with such agreement, approval and
adoption of the Merger Agreement and the Merger by the stockholders of Red Lion
are assured.
THE MERGER
Effect of the Merger and Merger Consideration. Upon consummation of the
Merger, Red Lion will become a wholly owned subsidiary of Doubletree, and each
share of Red Lion Common Stock which is outstanding immediately prior to the
Effective Time (other than shares as to which appraisal rights have been
perfected, and not withdrawn or lost, under the DGCL) will be converted into the
right to receive (i) $21.30 in cash (plus, if the Merger does not occur on or
prior to November 18, 1996, interest accruing at a fluctuating rate per annum
equal to the prime interest rate from time to time of Bankers Trust Company,
compounded daily, on $30.106 plus such accrued interest, for the period
commencing on November 18, 1996 and ending on the day on which the Effective
Time occurs) (the "Cash Consideration") and (ii) 0.2398 shares (the "Exchange
Ratio") of common stock, par value $.01 per share, of Doubletree ("Doubletree
Common Stock") (the "Stock Consideration" and, together with the Cash
Consideration, the "Merger Consideration"); provided, however, that in the event
that the "volume-weighted average quote" of the reported sales prices per share
of the Doubletree Common Stock quoted on The Nasdaq Stock Market's National
Market ("Nasdaq"), as reported by Bloomberg L.P., for the 10 consecutive trading
days (on which shares of the Doubletree Common Stock are actually traded)
immediately preceding the second business day prior to the Effective Time (the
"Final Doubletree Stock Price"), is equal to or less than $34.89, or equal to or
greater than $38.56, the Exchange Ratio shall be subject to adjustment as
follows: (a) if the Final Doubletree Stock Price is equal to or less than
$31.22, then the Exchange Ratio shall be equal to the sum of 0.2398 plus the
quotient obtained by dividing $0.8806 by the Final Doubletree Stock Price; (b)
if the Final Doubletree Stock Price is greater than $31.22 and equal to or less
than $34.89, then the Exchange Ratio shall be equal to the quotient obtained by
dividing $8.3657 by the Final Doubletree Stock Price; (c) if the Final
Doubletree Stock Price is equal to or greater than $38.56 but less than $42.23,
then the Exchange Ratio shall be equal to the quotient obtained by dividing
$9.2463 by the Final Doubletree Stock Price; (d) if the Final Doubletree Stock
Price is equal to or greater than $42.23 but less than $44.07, then the Exchange
Ratio shall be equal to the difference of 0.2398 minus the quotient obtained by
dividing $0.8806 by the Final Doubletree Stock Price; and (e) if the Final
Doubletree Stock Price is equal to or greater than $44.07, then the Exchange
Ratio shall be equal to the quotient obtained by dividing $9.6866 by the Final
Doubletree Stock Price. Appendix E to this Proxy Statement/Prospectus sets forth
the number of shares of Doubletree Common Stock which would be issued in the
Merger for each share of Red Lion Common Stock based on various assumed Final
Doubletree Stock Prices. See "The Merger Agreement -- The Merger" and "The
Merger Agreement -- Merger Consideration."
At the Effective Time, each option to purchase Red Lion Common Stock then
outstanding under Red Lion's 1995 Equity Participation Plan (each, a "Red Lion
Option") will be converted into and represent the right to receive (i) the
Merger Consideration into which the share or shares of Red Lion Common Stock
issuable upon exercise of such Red Lion Option would have been converted if such
Red Lion Option had been exercised immediately prior to the Effective Time,
reduced by (ii) the aggregate exercise price for the shares
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<PAGE> 17
of Red Lion Common Stock then issuable upon exercise of such Red Lion Option and
the amount of any withholding taxes which may be required thereon. See "The
Merger Agreement -- Effect of the Merger on Stock Options."
Recommendation of the Board of Directors. The Board of Directors of Red
Lion has unanimously determined that the terms of the proposed Merger are fair
to, and in the best interests of, Red Lion and its stockholders. Accordingly,
the Board of Directors of Red Lion has unanimously approved the Merger Agreement
and the Merger, and unanimously recommends that all stockholders vote for
approval and adoption of the Merger Agreement and the Merger. For a discussion
of the factors considered by the Red Lion Board of Directors in reaching its
decision, see "The Merger -- Reasons for the Merger; Recommendation of Board of
Directors."
Opinions of Financial Advisors. Smith Barney Inc. ("Smith Barney") has
acted as financial advisor to Red Lion in connection with the Merger and has
delivered a written opinion, dated September 12, 1996, to the Board of Directors
of Red Lion to the effect that, as of the date of such opinion and based upon
and subject to certain matters stated therein, the Merger Consideration was
fair, from a financial point of view, to the holders of Red Lion Common Stock.
On September 12, 1996, Morgan Stanley & Co. Incorporated ("Morgan Stanley")
rendered its opinion (the "Morgan Stanley Opinion") to the Doubletree Board of
Directors that, as of such date, the Merger Consideration to be paid to the
holders of Red Lion Common Stock pursuant to the Merger Agreement was fair from
a financial point of view to Doubletree.
Copies of the full texts of the written opinions of Smith Barney and Morgan
Stanley which set forth the assumptions made, procedures followed, matters
considered and limits of their respective reviews, are attached to this Proxy
Statement/Prospectus as Appendices B and C, respectively, and should be read
carefully in their entirety. See "The Merger -- Opinions of Financial Advisors."
Interests of Certain Persons in the Merger. In considering the
recommendation of the Board of Directors of Red Lion with respect to the Merger
Agreement and the transactions contemplated thereby, stockholders should be
aware that certain members of the management of Red Lion and the Board of
Directors of Red Lion have certain interests in the Merger that are in addition
to the interests of stockholders of Red Lion generally. Red Lion's executive
officers, including Mr. David Johnson, its Chief Executive Officer, have
severance and other agreements providing for certain lump sum payments upon
termination of the executive officers in connection with the Merger and gross-up
payments for certain excise taxes. The vesting of all options granted to these
officers will be accelerated immediately prior to the consummation of the
Merger, and all such options will be converted into the right to receive the
Merger Consideration, less the option exercise price and any withholding taxes
thereon. In addition, pursuant to the Merger Agreement, Doubletree will be
required to maintain or cause Red Lion to maintain, subject to certain insurance
premium limitations, directors' and officers' liability insurance for Red Lion's
officers and directors for six years following the Merger. Mr. Edward Gilhuly
and Mr. Michael Michelson, directors of Red Lion, will be appointed to the Board
of Directors of Doubletree, effective upon consummation of the Merger. Pursuant
to the Merger Agreement, at the Effective Time, the 1993 Registration Rights
Agreement will be amended to grant to the Partnership certain demand and
"piggyback" registration rights covering the shares of Doubletree Common Stock
to be issued to the Partnership in the Merger. For a more detailed discussion of
these interests, see "The Merger -- Interests of Certain Persons in the Merger,"
"The Merger Agreement -- Certain Covenants" and "The Merger
Agreement -- Registration Rights Agreement; Lock-Up."
At the Effective Time, Doubletree, Red Lion and certain affiliates of Red
Lion, will enter into a Partnership Services Agreement (the "Partnership
Services Agreement") pursuant to which Doubletree will, upon request from the
Partnership, provide certain support services to the Partnership in return for a
fee. In addition, pursuant to the Partnership Services Agreement, Doubletree
will agree to guaranty, subject to defenses available to Red Lion, the
liabilities and obligations of Red Lion owed to the Partnership and its
affiliates arising out of or related to Red Lion's business. See "The Merger
Agreement -- Partnership Services Agreement."
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Conditions to the Merger. The obligations of Doubletree and Red Lion to
consummate the Merger are subject to the satisfaction or, where legally
permitted, waiver of certain conditions, including, among others, (i) the
effectiveness of the registration statement on Form S-4 with respect to the
issuance of Doubletree Common Stock in the Merger and the absence of any stop
order suspending the effectiveness thereof and no proceeding for that purpose
having been initiated or threatened by the Commission, (ii) obtaining requisite
stockholder approvals, (iii) the expiration or termination of the waiting period
applicable to the consummation of the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, (iv) the absence of any statute,
rule, regulation, decree, injunction or other order of any governmental or
regulatory authority or any court prohibiting the consummation of the Merger or
any other material transaction pursuant to the Merger Agreement, (v) the absence
of any change, event, occurrence or circumstance in the business, operations,
properties, financial condition or results of operations of Red Lion or
Doubletree and their respective subsidiaries (each taken as a whole) which,
individually or in the aggregate, has had or is reasonably likely to have a
material adverse effect on the business, operations, properties, financial
condition or results of operations of Red Lion or Doubletree and their
respective subsidiaries, each taken as a whole, and (vi) the receipt of
customary "comfort" letters from the independent public accountants of Red Lion
and Doubletree. See "The Merger Agreement -- Conditions."
Approval of Doubletree Stockholders. Doubletree has received an exemption
from certain corporate governance requirements of Nasdaq for it to obtain the
approval of its stockholders for the issuance of Doubletree Common Stock
pursuant to the Merger ("Doubletree Stockholder Approval"). See "The Merger
Agreement -- Certain Covenants -- Approval of Doubletree Stockholders."
Termination of the Merger Agreement. The Merger Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time of the Merger (i) by mutual consent of Doubletree and Red Lion, (ii) by
either Doubletree or Red Lion if (a) the Merger shall not have been consummated
by January 31, 1997, (b) Doubletree shall not have received an exemption from
the requirements of Nasdaq to obtain the Doubletree Stockholder Approval, and
the Doubletree Stockholder Approval shall not have been obtained upon a vote at
a meeting of stockholders of Doubletree duly convened therefor (a "Doubletree
Stockholders Meeting") or at any adjournment thereof, or (c) a court or
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
the Merger Agreement and such order, decree, ruling or other action shall have
become final and non-appealable (and the party seeking to terminate the Merger
Agreement therefor shall have used all reasonable efforts to remove such
injunction, order or decree), (iii) by the Board of Directors of Red Lion (a)
if, by reason of a proposal with respect to a merger, acquisition or similar
transaction involving 15% or more of the stock or consolidated assets of Red
Lion (as further described herein, an "Alternative Transaction Proposal") being
made, the Board of Directors of Red Lion determines that it will not recommend
approval of the Merger by the stockholders of Red Lion, or withdraws such
recommendation, whether before or after approval and adoption of the Merger
Agreement by the stockholders of Red Lion, or (b) the Final Doubletree Stock
Price is equal to or less than $29.38, or (iv) by the Board of Directors of
Doubletree if (a) the Board of Directors of Red Lion shall have withdrawn or
modified in a manner materially adverse to Doubletree its approval or
recommendation of the Merger Agreement or the Merger or shall have recommended
an Alternative Transaction Proposal to the stockholders of Red Lion (together
with the circumstances described in (iii)(a) immediately above, a "Change of
Recommendation"), (b) all of the conditions to the obligations of Doubletree to
consummate the Merger shall have been satisfied, and Doubletree is unable to
consummate the Merger or to pay the Merger Consideration as a result of its
failure to obtain financing in an amount necessary to consummate the Merger or
to pay the Merger Consideration due to the nonfulfillment of certain conditions
precedent to the initial loans under the New Credit Facility (as defined below)
or, to the extent the Bridge Loan (as defined below) is necessary for such
financing, certain of the conditions precedent to the Bridge Loan (each, a
"Financing Contingency"), or (c) the Final Doubletree Stock Price is equal to or
less than $25.71. See "The Merger Agreement -- Termination."
7
<PAGE> 19
Termination Fees. In the event that the Merger Agreement is terminated due
to a Change of Recommendation, Red Lion is required to pay Doubletree a cash fee
of $25.0 million simultaneously upon (or, in the case of any such termination by
Doubletree, no later than two business days after) such termination. In the
event that the Merger Agreement is terminated for failure to obtain an exemption
from the requirements of Nasdaq to obtain the Doubletree Stockholder Approval
and the Doubletree Stockholder Approval shall not have been obtained at a
Doubletree Stockholders Meeting, Doubletree is required to pay Red Lion a cash
fee of $25.0 million. In the event that the Merger Agreement is terminated due
to a Financing Contingency, Doubletree is required to pay Red Lion a cash fee of
$12.0 million, which fee shall be the sole and exclusive remedy of Red Lion for
the failure of the parties to consummate the Merger. Any such fees payable by
Doubletree will be paid simultaneously with (or, in the case of any such
termination by Red Lion in connection with the failure of Doubletree to obtain
any required Doubletree Stockholder Approval, no later than two business days
after) such termination. See "The Merger Agreement -- Termination Fees."
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger (as defined below) with the Secretary of State
of the State of Delaware or such later time as is specified in such certificate
(the "Effective Time"). Such filing will be made as promptly as practicable
after the requisite stockholder approvals have been obtained and all other
conditions to the Merger have been satisfied or waived. Subject to the
satisfaction (or waiver) of the other conditions to the obligations of
Doubletree and Red Lion to consummate the Merger, it is presently expected that
the Merger will be consummated immediately following the Special Meeting or as
soon thereafter as such other conditions are satisfied.
Exchange of Certificates. Upon consummation of the Merger, each holder of
a certificate or certificates representing shares of Red Lion Common Stock or
certificates or instruments representing Red Lion Options (collectively,
"Certificates") outstanding immediately prior to the Merger will, upon the
surrender thereof together with a letter of transmittal, duly executed, to a
designated exchange agent (the "Exchange Agent"), be entitled to receive the
aggregate Cash Consideration and a certificate or certificates representing the
number of whole shares of Doubletree Common Stock into which such shares of Red
Lion Common Stock or Red Lion Options will have been converted (in the case of
the Red Lion Options, reduced as described above) as a result of the Merger.
After the consummation of the Merger, the Exchange Agent will mail a letter of
transmittal with instructions to all holders of record of Red Lion Common Stock
as of the Effective Time for use in surrendering the Certificates in exchange
for certificates representing shares of Doubletree Common Stock. Such letter of
transmittal and instructions will also be available prior to the Effective Time
upon written request and compliance with certain other requirements.
CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL AND
INSTRUCTIONS ARE RECEIVED. See "The Merger Agreement -- Exchange of
Certificates."
Appraisal Rights. In connection with the Merger, holders of shares of Red
Lion Common Stock will be entitled to demand appraisal rights in respect of such
shares of Red Lion Common Stock under Section 262 of the DGCL ("Section 262"),
subject to satisfaction by such stockholder of the conditions for appraisal
rights established by Section 262. Failure to take any of the steps required
under Section 262 on a timely basis may result in the loss of appraisal rights.
Section 262 is set forth in full in Appendix D to this Proxy Statement/
Prospectus. See "The Merger -- Appraisal Rights."
Accounting Treatment. The Merger will be accounted for under the
"purchase" method of accounting in accordance with generally accepted accounting
principles. Under this method of accounting, the purchase price will be
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the Effective Time. Income of the Combined Company will not
include income (or loss) of Red Lion prior to the Effective Time. See "The
Merger -- Accounting Treatment."
Certain Federal Income Tax Consequences. The exchange of Red Lion Common
Stock in the Merger will be fully taxable to holders of such stock.
Consequently, a holder of Red Lion Common Stock who, pursuant to the Merger,
exchanges his or her Red Lion Common Stock for cash and Doubletree Common Stock
will realize a gain or loss measured by the difference between (i) the sum of
the amount of cash and the fair market value of the Doubletree Common Stock
(based on its trading price on the date of the Merger)
8
<PAGE> 20
received in the Merger and (ii) such holder's tax basis in the Red Lion Common
Stock. See "The Merger -- Certain Federal Income Tax Consequences."
Because certain tax consequences of the Merger may vary depending upon the
particular circumstances of each stockholder, it is recommended that Red Lion
stockholders consult their tax advisors concerning the Federal (and any State,
local and foreign) tax consequences of the Merger in their particular
circumstances.
Resales of Doubletree Common Stock. The shares of Doubletree Common Stock
to be issued to the stockholders of Red Lion in connection with the Merger have
been registered under the Securities Act. All shares of Doubletree Common Stock
received by Red Lion stockholders in the Merger will be freely transferable,
except that shares of Doubletree Common Stock received by persons who are deemed
to be "affiliates" (as such term is defined under the Securities Act) of Red
Lion at the time of the Special Meeting may be resold by them only in certain
permitted circumstances. See "The Merger -- Federal Securities Law Consequences"
for a discussion of the limitations on transfer of shares of Doubletree Common
Stock held by such affiliates.
Registration Rights Agreement; Lock-Up. Pursuant to the Merger Agreement,
Doubletree will grant to the Partnership four demand and unlimited "piggyback"
registration rights with respect to the shares of Doubletree Common Stock to be
issued to the Partnership in the Merger. See "Description of Capital Stock of
Doubletree -- Registration Rights." Pursuant to the Red Lion Shareholder Support
Agreement, the Partnership has agreed not to sell or otherwise dispose of any
such shares of Doubletree Common Stock for 180 days following the Effective Time
of the Merger, except for a distribution to a limited partner of the Partnership
(which shares will represent approximately 2.3% of Doubletree Common Stock to be
outstanding after giving effect to the Merger and the Financing Plan (as defined
herein)). See "The Merger -- Interests of Certain Persons in the Merger" and
"The Merger Agreement -- Registration Rights Agreement; Lock-Up."
Financing of the Merger. The total amount of funds required by Doubletree
to consummate the Merger and to pay related fees and expenses is expected to be
approximately $918.8 million, including approximately $684.3 million to be paid
to stockholders and optionholders of Red Lion as Cash Consideration in the
Merger, approximately $213.3 million which will be used to retire existing
outstanding indebtedness of Red Lion immediately following consummation of the
Merger and $21.2 million of estimated fees and expenses excluding underwriters
discounts and commissions of the Equity Offering (as defined below). It is
currently anticipated that such amounts will be financed (the "Financing Plan")
through (i) $600.0 million of borrowings under a $736.0 million term loan and
revolving credit facility committed by Morgan Stanley and the Bank of Nova
Scotia (the "New Credit Facility"), (ii) approximately $191.0 million in net
proceeds from the public offering and sale by Doubletree of newly-issued shares
of Doubletree Common Stock at or prior to the Effective Time (the "Equity
Offering"), (iii) $100.0 million in proceeds from the sale of newly-issued
shares of Doubletree Common Stock, and warrants to purchase additional
newly-issued shares of Doubletree Common Stock (the "Warrants"), to GEPT or an
affiliate thereof (the "GEPT Equity Investment"), and (iv) cash on hand.
9
<PAGE> 21
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN MILLIONS)
<S> <C>
Sources of Funds:
Borrowings under the New Credit Facility....................... $600.0
Proceeds from the GEPT Equity Investment....................... 100.0
Net proceeds from the Equity Offering.......................... 191.0
Cash on hand................................................... 27.8
----
Total sources of funds.................................... $918.8
====
Uses of Funds:
Cash Consideration in the Merger............................... $684.3
Repayment of existing indebtedness of Red Lion................. 213.3
Estimated fees and expenses, excluding underwriting discounts
and commissions in connection with the Equity Offering....... 21.2
----
Total uses of funds....................................... $918.8
====
</TABLE>
In the event that the Equity Offering is not consummated at or prior to the
Effective Time, Doubletree currently intends to obtain substitute financing, to
the extent necessary, through additional borrowings under the New Credit
Facility and bridge financing of up to $150.0 million for which Doubletree has
received a written commitment from Morgan Stanley (the "Bridge Loan"). See "The
Merger -- Financing of the Merger."
FORWARD LOOKING INFORMATION
The statements contained in this Proxy Statement/Prospectus that are not
statements of historical fact may include forward-looking statements that
involve a number of risks and uncertainties. The following factors are among the
factors that could cause actual results to differ materially from the
forward-looking statements: national or local economic conditions affecting the
supply and demand for hotel space; competition in hotel operations, including
additional or improved services or facilities of competitors and price
competition; competition for acquisition and other expansion opportunities which
could limit the ability of Doubletree to implement its external growth strategy;
availability of financing to fund expansion opportunities; and integration of
the business of Doubletree and Red Lion following the Merger. The
forward-looking statements should be considered in light of these factors.
10
<PAGE> 22
UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA OF DOUBLETREE
The following combined statement of operations table presents unaudited pro
forma summary financial information for Doubletree for the year ended December
31, 1995 and the six month periods ended June 30, 1995 and June 30, 1996 as if
the Merger, the Financing Plan, the Red Lion Formation and the Red Lion 1996
Hotel Acquisitions had each occurred on January 1, 1995. Additionally, the
balance sheet data below is based on the unaudited June 30, 1996 balance sheets
of Red Lion and Doubletree and assumes that the Merger and the Financing Plan
were completed as of June 30, 1996 and that the two hotels acquired subsequent
to June 30, 1996 in connection with the Red Lion 1996 Hotel Acquisitions had
been purchased as of June 30, 1996. The unaudited pro forma financial data set
forth below is presented for informational purposes only and may not reflect
Doubletree's future results of operations and financial position or what the
results of operations and financial position would have been had such
transactions occurred on the dates indicated. The information below should be
read in conjunction with the "Unaudited Pro Forma Condensed Consolidated
Financial Information" and notes thereto and "Management's Discussion and
Analysis of Results of Operations and Financial Condition of Doubletree"
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE
DECEMBER 31, 30,
------------ -----------------------
PRO FORMA PRO FORMA PRO FORMA
1995 1995 1996
------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues......................................... $599,309 $ 286,670 $ 327,888
Total operating costs and expenses..................... 538,613 250,571 281,754
Operating income....................................... 60,696 36,099 46,134
Interest, net.......................................... (37,050) (18,819) (18,838)
Income before income taxes and minority interest....... 23,646 17,280 27,296
Net income............................................. 20,970 9,725 14,970
Earnings per share(1).................................. $ 0.55 $ 0.26 $ 0.39
Weighted average common and common equivalent
shares(1)........................................... 38,091 37,856 38,721
OTHER DATA:
Operating Data Excluding Non-Recurring Items
Operating income.................................... $ 77,923(2) $ 36,099 $ 46,134
Net income.......................................... 22,011(3) 9,189(3) 14,970
Earnings per share(1)............................... $ 0.58(3) $ 0.24(3) $ 0.39
EBITDA(4).............................................. $119,296 $ 64,836 $ 75,747
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 39,121
Total assets............................................................ 1,736,766
Long-term debt, net of current portion.................................. 595,000
Stockholders' equity.................................................... 728,363
Book value per common share............................................. $ 18.70
</TABLE>
- ---------------
(1) Pro forma per share information assumes that the approximately 15.9 million
shares to be issued in connection with the Merger were issued as of January
1, 1995.
(2) Excludes $2.6 million of business combination expenses incurred by
Doubletree in the fourth quarter of 1995 related to the RFS Acquisition and
$14.7 million of formation expenses incurred by Red Lion as a result of the
Red Lion Formation in August 1995.
11
<PAGE> 23
(3) Adjusted to (a) provide for increased income tax expense on the excluded
business combination and formation expenses incurred during the year ended
December 31, 1995, (b) exclude the deferred tax benefit of $9.7 million
related to the Red Lion Formation and provide for income taxes at the
statutory rate and (c) provide for taxes on RFS Management's earnings that
were not taxed due to its Sub-Chapter S status for both 1995 periods.
(4) EBITDA represents earnings before interest expense, income taxes, income
(loss) attributable to joint venturers' interest, and depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
as defined by generally accepted accounting principles, and such information
should not be considered as an alternative to net income, cash flow from
operations or any other measure of performance prescribed by generally
accepted accounting principles. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for measuring
the ability to service debt.
For the year ended December 31, 1995 EBITDA includes $14.7 million of
non-recurring formation expenses associated with the Red Lion Formation and
$2.6 million of business combination expenses related to the RFS
Acquisition. Excluding these expenses, EBITDA for the year ended December
31, 1995 would have been $136.5 million.
COMBINED SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
AS OF DECEMBER
31, AS OF JUNE 30,
----------------- -----------------
1994 1995 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
NUMBER OF HOTELS
Owned Hotels.......................................... 21 21 21 22
Management Contracts.................................. 92 97 96 102
Lease Agreements...................................... 21 22 22 73
Franchise Agreements.................................. 23 30 24 37
------ ------ ------ ------
Total.............................................. 157 170 163 234
====== ====== ====== ======
NUMBER OF ROOMS
Owned Hotels.......................................... 5,113 5,113 5,117 5,406
Management Contracts.................................. 25,729 28,105 27,322 29,552
Lease Agreements...................................... 4,608 5,006 5,006 12,234
Franchise Agreements.................................. 4,969 6,641 5,209 8,580
------ ------ ------ ------
Total.............................................. 40,419 44,865 42,654 55,772
====== ====== ====== ======
OTHER DATA
Total Doubletree average daily rate(1)................ $82.21 $86.41 $82.22 $87.93
Doubletree branded hotels average daily rate(1)....... 84.59 88.99 88.55 94.99
Red Lion average daily rate........................... 70.52 75.14 74.80 79.75
Total Doubletree occupancy percentage(1).............. 71.0% 71.8% 72.8% 74.5%
Doubletree branded hotels occupancy percentage(1)..... 71.2 71.9 72.1 73.9
Red Lion occupancy percentage......................... 72.1 72.7 72.2 71.0
Total Doubletree REVPAR(1)(2)......................... $58.38 $62.03 $59.86 $65.51
Doubletree branded hotels REVPAR(1)(2)................ 60.22 63.96 63.84 70.20
Red Lion REVPAR(2).................................... 50.85 54.59 54.10 56.61
</TABLE>
- ---------------
(1) For the years ended 1994 and 1995, includes information only for hotels
continuously managed by Doubletree (including RFS Management, but excluding
Red Lion) since January 1, 1994. For the six months ended June 30, 1995 and
1996, includes only information for hotels continuously managed by
Doubletree (including RFS Management, but excluding Red Lion) since January
1, 1995. Doubletree branded hotels include only those hotels managed by
Doubletree under the Doubletree brand. Total Doubletree includes all hotels
(other than Red Lion hotels) managed by Doubletree.
(2) REVPAR is occupancy percentage multiplied by average daily rate.
12
<PAGE> 24
SUMMARY FINANCIAL INFORMATION OF DOUBLETREE
The following tables present summary historical consolidated financial
information for Doubletree, all of which have been restated to give effect to
the RFS Acquisition in February 1996, which was accounted for as a pooling of
interests. The table also presents summary pro forma consolidated financial
information for the year ended December 31, 1993, assuming that the Doubletree
Combination Transaction and the Doubletree Reorganization had each occurred on
January 1, 1993. The information below should be read in conjunction with the
consolidated financial statements of Doubletree and notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition of Doubletree." Pro forma results of operations are not necessarily
indicative of the results of operations as they might have been had the
Doubletree Combination Transaction and the Doubletree Reorganization been
consummated at the beginning of the period shown. The results of operations for
the six months ended June 30, 1995 and 1996 are not necessarily indicative of
the results expected for the full year. For a discussion of the historical
corporate organization of Doubletree, see "Corporate Organization."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- --------------------
PRO FORMA(1) ACTUAL ACTUAL ACTUAL ACTUAL
1993 1994 1995 1995 1996
------------ -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues................... $ 56,796 $112,482 $196,586 $91,349 $117,376
Total operating costs and
expenses...................... 41,171 93,711 174,282 79,452 100,181
Operating income................. 15,625 18,771 22,304 11,897 17,195
Interest, net.................... (1,247) 799 3,920 1,726 1,947
Income before income taxes and
minority interest............. 14,378 19,570 26,224 13,623 19,142
Net income....................... 8,615 13,235(2) 17,791 9,387 12,427
Earnings per share............... $ 0.47 $ 0.66(2) $ 0.80 $ 0.43 $ 0.54
Pro forma net income(3).......... $ 18,736 $ 8,851
Pro forma earnings per
share(3)...................... $ 0.84 $ 0.40
Weighted average common and
common equivalent shares(4)... 18,228 20,071 22,219 21,984 22,849
OTHER DATA:
EBITDA(5)........................ $ 19,115 $ 23,344 $ 31,137(5) $15,811 $ 22,225
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1996
--------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 46,566
Total assets.................................................................... 211,973
Long-term debt, net of current portion.......................................... --
Stockholders' equity............................................................ 154,461
Book value per common share..................................................... $ 6.70
</TABLE>
13
<PAGE> 25
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------- -----------------
1994 1995 1995 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
SUMMARY OPERATING DATA:
NUMBER OF HOTELS
Doubletree Full-Service Hotels...................... 44 56 49 60
Doubletree Guest Suite Hotels....................... 33 36 34 37
Doubletree Club Hotels.............................. 14 13 14 13
------ ------ ------ ------
Total Doubletree Brand Hotels.................... 91 105 97 110
Non-Doubletree Brand Hotels......................... 13 11 13 69
------ ------ ------ ------
Total Company Hotel Portfolio.................... 104 116 110 179
====== ====== ====== ======
Management Contracts................................ 77 81 81 86
Lease Agreements(6)................................. 4 5 5 56
Franchise Agreements................................ 23 30 24 37
------ ------ ------ ------
Total Company Hotel Portfolio.................... 104 116 110 179
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------- -----------------
1994 1995 1995 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
NUMBER OF ROOMS
Doubletree Full-Service Hotels...................... 14,207 18,422 16,269 19,334
Doubletree Guest Suite Hotels....................... 7,138 7,693 7,378 8,033
Doubletree Club Hotels.............................. 2,573 2,386 2,573 2,364
------ ------- ------ ------
Total Doubletree Brand Hotels.................... 23,918 28,501 26,220 29,731
Non-Doubletree Brand Hotels......................... 2,620 2,114 2,551 11,501
------ ------- ------ ------
Total Company Hotel Portfolio.................... 26,538 30,615 28,771 41,232
====== ======= ====== ======
Management Contracts................................ 20,952 22,957 22,545 24,407
Lease Agreements(6)................................. 617 1,017 1,017 8,245
Franchise Agreements................................ 4,969 6,641 5,209 8,580
------ ------- ------ ------
Total Company Hotel Portfolio.................... 26,538 30,615 28,771 41,232
====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------
1994 1995 1995 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
REVPAR ANALYSIS(7)
Doubletree Full-Service Hotels...................... $56.48 $ 60.08 $58.22 $64.28
Doubletree Guest Suite Hotels....................... 69.57 73.74 77.00 84.13
Doubletree Club Hotels.............................. 41.59 43.99 47.34 50.74
Total Doubletree Brand Hotels.................... 60.22 63.96 63.84 70.20
Non-Doubletree Brand Hotels......................... 49.02 52.51 50.60 54.69
Total Company Hotel Portfolio.................... 58.38 62.03 59.86 65.51
</TABLE>
- ---------------
(1) Assumes that the Doubletree Combination Transaction and the Doubletree
Reorganization had each occurred on January 1, 1993.
(2) Doubletree's effective tax rate for the year ended December 31, 1994 was
32.4% due to the organizational structure of Doubletree prior to its initial
public offering. Had a 35% rate been applied, 1994 net income and earnings
per share would have been $12.7 million and $0.63, respectively.
(3) During the fourth quarter of 1995, Doubletree and RFS Management incurred,
in the aggregate, $2.6 million of business combination expenses related to
the RFS Acquisition which closed in February 1996. RFS Management, as a
Subchapter S corporation for Federal income tax purposes, was generally not
liable for Federal income taxes for 1995. Accordingly, RFS Management did
not provide for Federal
14
<PAGE> 26
income taxes in its 1995 financial statements. Pro forma adjustments have
been made for the year ended December 31, 1995 and the six months ended June
30, 1995 to provide for income taxes on the earnings of RFS Management at
the effective tax rate of Doubletree; also, for the year ended December 31,
1995 pro forma adjustments have been made to exclude the business
combination expenses and provide for a related increase in income tax
expense.
(4) Assumes that the 15,500,000 shares issued in connection with the Doubletree
Reorganization and 2,727,811 shares issued to acquire RFS Management, which
was accounted for as a pooling of interests, were outstanding for all
periods presented.
(5) Includes $2.6 million of business combination expenses related to the RFS
Acquisition. Excluding these expenses, EBITDA would have been $33.7 million
for the year ended December 31, 1995.
(6) Includes one owned hotel (239 rooms).
(7) For the years ended 1994 and 1995, includes only information for hotels
managed by Doubletree (including RFS Management) for the entire two-year
period. For the six months ended June 30, 1995 and 1996, includes only
information for hotels managed by Doubletree (including RFS Management)
during both periods.
15
<PAGE> 27
SUMMARY FINANCIAL INFORMATION OF RED LION
The following tables present pro forma summary consolidated financial
information for 1994 and 1995 for Red Lion giving effect to the Red Lion
Formation and the Red Lion Refinancing as if they had occurred on January 1,
1994 and the actual results of operations for the six months ended June 30,
1996. THE FINANCIAL INFORMATION FOR ALL PERIODS PRESENTED HAS BEEN ADJUSTED TO
CONFORM TO THE FINANCIAL STATEMENT PRESENTATION OF DOUBLETREE. The information
below should be read in conjunction with the consolidated financial statements
of Red Lion and notes thereto, "Unaudited Pro Forma Condensed Consolidated
Financial Information" and notes thereto and "Management's Discussion and
Analysis of Results of Operations and Financial Condition of Red Lion." Pro
forma results of operations are not necessarily indicative of the results of
operations as they might have been had the Red Lion Formation and the Red Lion
Refinancing been consummated at the beginning of the period shown. The results
of operations for the six months ended June 30, 1996 are not necessarily
indicative of the results expected for the full year. For a discussion of the
historical corporate organization of Red Lion, see "Corporate Organization."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
PRO FORMA PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED AS ADJUSTED AS ADJUSTED
1994 1995 1995 1996
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................ $ 345,857 $ 375,948 $ 181,810 $ 198,416
Total operating costs and expenses........ 284,515 318,183 148,264 159,106
Operating income.......................... 61,342 57,765(1) 33,546 39,310
Interest, net............................. (18,814) (16,929) (9,496) (6,939)
Income before income taxes and minority
interest............................... 42,528 40,836(1) 24,050 32,371
Net income................................ 24,922 32,751(1) 14,335 18,836
Earnings per share........................ $ 0.80 $ 1.05(1) $ 0.46 $ 0.60
Weighted average common and
common equivalent shares............... 31,313 31,313 31,313 31,313
OTHER DATA:
EBITDA.................................... $ 83,109 $ 81,922(2) $ 45,785 $ 50,592
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 36,509
Total assets.............................................................. 531,883
Long-term debt, net of current portion.................................... 204,109
Stockholders' equity...................................................... 249,115
Book value per common share............................................... $ 7.96
</TABLE>
16
<PAGE> 28
<TABLE>
<CAPTION>
AS OF DECEMBER
31, AS OF JUNE 30,
----------------- -----------------
1994 1995 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
SUMMARY OPERATING DATA
NUMBER OF HOTELS:(3)
Owned Hotels.......................................... 21 21 21 22
Management Contracts.................................. 15 16 15 16
Leased Hotels......................................... 17 17 17 17
------ ------ ------ ------
Total.............................................. 53 54 53 55
====== ====== ====== ======
NUMBER OF ROOMS:(3)
Owned Hotels.......................................... 5,113 5,113 5,117 5,406
Management Contracts.................................. 4,777 5,148 4,777 5,145
Leased Hotels......................................... 3,991 3,989 3,989 3,989
------ ------ ------ ------
Total.............................................. 13,881 14,250 13,883 14,540
====== ====== ====== ======
REVPAR:(4)
Owned Hotels.......................................... $56.98 $60.52 $59.88 $63.20
Management Contracts.................................. 47.82 51.10 51.61 53.20
Leased Hotels......................................... 46.60 51.20 49.65 52.45
------ ------ ------ ------
Total.............................................. $50.85 $54.59 $54.10 $56.61
====== ====== ====== ======
</TABLE>
- ---------------
(1) Includes $14.7 million of non-recurring costs associated with the Red Lion
Formation. Excluding these costs, operating income and income before income
taxes and minority interest would have been $72.4 million and $55.5
million, respectively. Net income and earnings per share adjusted to
exclude the costs associated with the Red Lion Formation, to provide for
taxes at the statutory rate and to exclude $9.7 million of deferred tax
benefits related to the Red Lion Formation would have been $32.8 million
and $1.05, respectively.
(2) Includes $14.7 million of non-recurring costs associated with the Red Lion
Formation. Excluding these costs, EBITDA would have been $96.6 million for
the year ended December 31, 1995.
(3) The information reflects the 17 Red Lion Leased Hotels, which were owned
prior to August 1, 1995, as if the hotels were leased on each date
presented.
(4) For the years ended 1994 and 1995, and the six months ended June 30, 1995
and 1996, includes information for all hotels owned or operated under
management contracts and a lease agreement.
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<PAGE> 29
COMMON STOCK PRICE RANGE OF DOUBLETREE AND RED LION
The Doubletree Common Stock has been quoted on Nasdaq under the symbol
"TREE" since July 1, 1994. The Red Lion Common Stock has been listed on the New
York Stock Exchange (the "NYSE") under the symbol "RL" since July 26, 1995. The
table below sets forth, for the calendar quarters indicated, the high and low
bid prices as reported on Nasdaq and the high and low closing sales prices as
reported on the NYSE Composite Tape, respectively, for the Doubletree Common
Stock and the Red Lion Common Stock. The information with respect to Nasdaq
quotations was obtained from the National Association of Securities Dealers,
Inc. and reflects interdealer prices, without retail markup, markdown or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
DOUBLETREE RED LION
COMMON STOCK COMMON STOCK
----------------- ------------------
HIGH LOW HIGH LOW
------ ------ ------ -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Third Quarter................................ $19.75 $14.50 -- --
Fourth Quarter............................... 21.75 17.50 -- --
YEAR ENDED DECEMBER 31, 1995:
First Quarter................................ 19.75 16.25 -- --
Second Quarter............................... 21.50 19.00 -- --
Third Quarter................................ 24.25 18.75 $24.38 $ 20.63
Fourth Quarter............................... 25.88 20.50 21.13 15.75
YEAR ENDED DECEMBER 31, 1996:
First Quarter................................ 27.88 23.25 19.38 16.25
Second Quarter............................... 35.38 26.50 23.63 19.25
Third Quarter................................ 39.50 31.25 29.63 20.63
Fourth Quarter (through October 4, 1996)..... 45.00 40.50 30.50 29.75
</TABLE>
The closing sale prices of Doubletree Common Stock and Red Lion Common
Stock on September 12, 1996, the last trading day preceding public announcement
of the Merger Agreement, were $37.00 and $28.75, respectively. On October 4,
1996 the closing sale price of Doubletree Common Stock was $45.00 and the
closing sale price of Red Lion Common Stock was $30.375.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE
DOUBLETREE COMMON STOCK AND THE RED LION COMMON STOCK.
DIVIDENDS
No dividends have been declared or paid on either Doubletree Common Stock
or Red Lion Common Stock since the incorporation of Doubletree and Red Lion,
respectively. After the consummation of the Merger, Doubletree currently intends
to retain any future earnings for reinvestment in the Combined Company and does
not anticipate paying any cash dividends on the Doubletree Common Stock in the
foreseeable future. Any payment of dividends in the future will be at the
discretion of the Board of Directors of Doubletree and will be dependent upon
the Combined Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
Doubletree will be prohibited from paying cash dividends or other distributions
due to certain covenants under the New Credit Facility.
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<PAGE> 30
RISK FACTORS
The stockholders of Red Lion are being asked to approve and adopt the
Merger Agreement and the Merger. If the Merger is consummated, the stockholders
of Red Lion will become stockholders of Doubletree and will be subject to
certain risks, including risks inherent in Doubletree's business, many of which
are also applicable to Red Lion's business. Red Lion stockholders should
carefully consider the following factors in addition to the other information
contained in this Proxy Statement/Prospectus in evaluating whether to vote for
the approval and adoption of the Merger Agreement and the Merger.
FINANCING OF THE MERGER; LEVERAGE
Following consummation of the Merger and the related transactions,
including the Financing Plan described in "The Merger -- Financing of the
Merger," Doubletree will have substantial indebtedness, and as a result
significant debt service obligations. After giving effect to the Merger and
assuming the Financing Plan is effectuated, on June 30, 1996 Doubletree would
have had $600.0 million of indebtedness and $728.4 million of stockholders'
equity, resulting in a debt to total capital ratio of 0.45 to 1.00. In addition,
depending on prevailing financial, economic and market conditions (including the
trading market for Doubletree Common Stock) and any other factors or
considerations the Board of Directors or management of Doubletree deems
relevant, Doubletree may finance the Merger through additional borrowings under
the New Credit Facility or the Bridge Loan, in lieu of the sale of Doubletree
Common Stock in the Equity Offering. Accordingly, following the Merger, the
amount of outstanding indebtedness may be greater than contemplated under the
Financing Plan and stockholders' equity may be lower than contemplated under the
Financing Plan, resulting in a debt to total capital ratio of up to 0.59 to
1.00. See "The Merger -- Financing of the Merger."
In the event that Doubletree finances the Merger through the Bridge Loan
and does not refinance the Bridge Loan in a timely manner, the interest rates
thereunder will increase six months from the date of issuance and, upon the
first anniversary of issuance, the notes thereunder will be exchanged for
certain rollover notes and warrants to purchase Doubletree Common Stock.
Although Doubletree intends to redeem any outstanding Bridge Loan notes as soon
as practicable after the issuance thereof, there can be no assurance that the
Company will be able to do so, if at all, in a timely manner. See "The
Merger -- Financing of the Merger -- The Bridge Loan."
The degree to which Doubletree is leveraged could have important
consequences to holders of Doubletree Common Stock, including the following: (i)
Doubletree's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired; (ii) a substantial portion of Doubletree's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to Doubletree for its
operations; (iii) certain of Doubletree's borrowings are and will continue to be
at variable rates of interest, which causes Doubletree to be vulnerable to
increases in interest rates; and (iv) such indebtedness contains or will contain
numerous financial and other restrictive covenants, including those restricting
the incurrence of indebtedness, the creation or existence of liens, the
declaration or payment of dividends, certain investments, the acquisition of
securities of Doubletree, and certain extraordinary corporate transactions.
Failure by Doubletree to comply with such covenants may result in an event of
default which, if not cured or waived, could have a material adverse effect on
Doubletree.
Doubletree's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness depends on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
There can be no assurance that Doubletree's cash flow from its operations will
be sufficient for payment of Doubletree's indebtedness in the future.
INTEGRATION OF THE TWO COMPANIES
In determining the terms of the proposed Merger, the Boards of Directors of
both Doubletree and Red Lion evaluated the companies' respective businesses
based in part on expectations concerning the future operations of the Combined
Company. The evaluations took into consideration the expectation that the
19
<PAGE> 31
combination of the two companies would produce the beneficial effects described
below in "The Merger -- Reasons for the Merger; Recommendation of Board of
Directors" and in "The Combined Company." In addition, Doubletree and Red Lion
believe that a key benefit to be realized from the Merger will be the
integration of their respective hotel portfolios. There can be no assurance that
these expectations will be fulfilled. The combination of Doubletree and Red Lion
presents certain risks with regard to the integration of the two organizations.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations; integrating different
strategies and integrating personnel with disparate business backgrounds and
corporate cultures. There can be no assurance that Doubletree and Red Lion will
be able to integrate effectively or in a timely manner. Nor can there be any
assurance that, even if integrated, the Combined Company's product and service
offerings will be successful. The integration and consolidation is intended to
realize cost savings. There can be no assurance of the extent to which such cost
savings will be achieved, if any. If the Combined Company is not successful in
integrating its strategies and hotel portfolios or if its integrated products
and services fail to achieve market acceptance, the Combined Company could be
adversely affected.
In addition, as a key benefit of the Merger, Doubletree currently intends
to convert most of the Red Lion hotels to one of the Doubletree brands. In some
cases, such hotel brand conversions are subject to the approval of unaffiliated
third parties. There can be no assurance that any such necessary third party
approvals will be obtained.
COMPETITION FOR AND DEPENDENCE ON MANAGEMENT CONTRACTS, LEASES AND FRANCHISE
AGREEMENTS;
COMPETITION FOR GUESTS
Competition for management contracts, leases and franchise agreements in
the lodging industry is intense. The Combined Company will compete with national
and regional brand franchisers and management companies, some of which have
greater name recognition than either Doubletree or Red Lion and greater
financial resources than the Combined Company. In addition, smaller hotel
management companies compete against the Combined Company. Doubletree believes
that the Combined Company's ability to secure management contracts, leases or
franchise agreements will be based principally upon the perceived value and
quality of the Combined Company's management services, brand name and the
potential economic advantages to the hotel owner of retaining the Combined
Company's management services or brand names. Doubletree believes that the
perceived value of a brand name to a hotel owner is in part a function of the
success of the hotels currently under management under that brand name.
Competitive factors also include relationships with hotel owners and investors,
marketing support, reservation system capacity and the willingness to make debt
and equity investments (collectively, "Investments") in connection with new
management contracts and leases. No assurance can be given that the Combined
Company will be successful in retaining current, or competing for additional,
management contracts, leases or franchise agreements.
Competition for guests in the lodging industry is also intense. Competitive
factors in the industry include room rates, quality of accommodations, name
recognition, service levels and convenience of location. The Combined Company's
hotels will be located in areas that generally contain numerous other
competitors, some of which have greater name recognition than either Doubletree
or Red Lion and greater financial resources than the Combined Company. There can
be no assurance that demographic, geographic or other changes in markets will
not adversely affect the convenience or desirability of the locales in which the
Combined Company's hotels are located. Further, there can be no assurance that
new or existing competitors will not significantly lower rates, offer greater
convenience, services or amenities, or significantly expand or improve
facilities in a market in which the Combined Company's hotels compete, thereby
adversely affecting the Combined Company's ability to attract guests.
RISK OF CONTRACT TURNOVER
Management contracts, leases and franchise agreements will be acquired,
terminated and renegotiated in the ordinary course of the Combined Company's
business. Many of the management contracts and leases to which Doubletree is a
party may be terminated by the owner of the hotel property if Doubletree fails
to meet certain performance standards, or in the event of a change in control of
the property through sale or
20
<PAGE> 32
foreclosure, or otherwise. Few of the management contracts and leases to which
Red Lion is a party are subject to the same types of risks. In the event of a
termination other than for performance, many contracts require the hotel owner
to pay a termination fee, which may be more or less than the book value, if any,
of the contract asset. If the Combined Company loses a capitalized management
contract, lease or franchise agreement, the Combined Company will record a
write-off of the remaining book value (less any termination fee received) of
such management contract, lease or franchise agreement, which could have a
material adverse effect on the Combined Company's results of operations and
financial condition.
Ownership of individual hotels and hotel portfolios change from time to
time, and management and hotel brands may be changed concurrently. Historically,
Doubletree and Red Lion have been successful in retaining management contracts,
leases or franchise agreements in the majority of cases, because of their
operating performance and competitive advantages. During 1995, four hotels
managed by Doubletree (all operated under non-Doubletree brands) and two
Doubletree franchised hotels were sold to new owners which did not retain
Doubletree's services. In the six months ended June 30, 1996, two Doubletree
managed hotels operated under the Doubletree brand and one Doubletree franchised
hotel were sold to new owners which did not retain Doubletree's services. None
of these terminations resulted in a material loss to Doubletree. In 1995 and the
six months ended June 30, 1996, Doubletree was able to add 12 and 13 new hotels
(net of the above terminations), excluding the RFS Acquisition, respectively,
and achieved a net growth in rooms of 4,077 and 3,638, respectively.
In 1995 and 1996, Starwood Lodging Trust, or its affiliates ("Starwood"), a
company that owns and manages hotels, has acquired an aggregate of nine
Doubletree brand hotels and one non-Doubletree brand hotel. Of such ten hotels,
five are subject to Doubletree brand franchise agreements, four are subject to
short-term management agreements convertible to Doubletree brand franchise
agreements and the non-Doubletree brand hotel has left the Doubletree system.
Doubletree has received notice from Starwood that it intends to convert the
short-term management agreements of the hotels to short-term Doubletree
franchise agreements, effective October 1, 1996. Starwood has indicated that
three of such franchise agreements will likely be converted to other brands in
early 1997. However, Doubletree currently anticipates that it would terminate
two of the three franchise agreements as a result of the Merger. See "Business
of Doubletree -- Recent Developments." In addition, in 1996, Starwood entered
into a franchise agreement with Doubletree covering a Doubletree brand hotel
that was not previously a part of the Doubletree system. There can be no
assurance that Doubletree will retain the long-term management or franchise of
the hotels that are owned by Starwood. There can be no assurance that the
Combined Company will be as successful in the future as Doubletree and Red Lion
have been in the past in retaining contracts, avoiding a material loss on
contract termination, replacing terminated contracts with favorable new
contracts or renegotiating and converting contracts.
DEPENDENCE ON CERTAIN HOTEL OWNERS
Doubletree manages hotels for, leases hotels from, and franchises its
brands to, (i) certain affiliates of two of its original stockholders, GE
Investment Hotel Partners I, Limited Partnership ("GEHOP") and Metropolitan Life
Insurance Company ("Metropolitan"), (ii) affiliates of certain of its directors
and (iii) other major hotel investors. At June 30, 1996, affiliates of GEHOP and
Metropolitan owned 12 and ten hotels, respectively, that were managed or leased
by Doubletree. On the same date, Doubletree managed four hotels for affiliates
of Norman B. Leventhal, a director of Doubletree. In 1995 Doubletree received in
the aggregate (including reimbursements) $11.8 million, $10.3 million and $3.4
million, respectively, under contracts with these parties. At June 30, 1996,
Doubletree also leased 49 hotels (45 of which it managed) from RFS Partnership,
L.P., a limited partnership (the "Landlord"), of which RFS Hotel Investors, Inc.
(the "REIT") is the sole general partner and 98.6% owner. For a description of
certain of the relationships between Doubletree and the REIT, see "Business of
Doubletree -- The RFS Acquisition." In addition, at June 30, 1996, there were
five unrelated hotel owners that each owned between three and six hotels which
are managed by or franchised from Doubletree.
In addition, Red Lion leases from the Partnership the Red Lion Leased
Hotels pursuant to a long-term lease (the "Partnership Lease"). The Partnership
will continue to own the Red Lion Leased Hotels following consummation of the
Merger. Michael Michelson, a director and stockholder of RLA-GP, Inc. ("RLA"),
the
21
<PAGE> 33
general partner of the Partnership, and Edward Gilhuly, a director and officer
of RLA, will be members of the Doubletree Board of Directors. While Red Lion
believes the terms of the Partnership Lease are fair to Red Lion and the
Partnership, those terms were not negotiated on an arms-length basis.
Although Doubletree and Red Lion each believe that it has satisfactory
relationships with these respective hotel owners, no assurance can be given that
the Combined Company's relationship with these owners will remain satisfactory.
In addition, the Combined Company's growth opportunities are dependent in part
on its ability to maintain satisfactory relationships with these and other
institutional hotel investors, and therefore the failure of the Combined Company
to maintain any of these relationships could have a material adverse effect on
the Combined Company's results of operation and financial condition or its
ability to expand its portfolio of hotels under management or franchise.
RISKS ASSOCIATED WITH EXPANSION
A major focus of the Combined Company's growth strategy will be to add
significantly to its portfolio of hotels through the acquisition of management
contracts, leases and franchise agreements, individually or in groups, including
through the acquisition of hotel management companies. There can be no assurance
that the Combined Company will be able to obtain new contracts, leases and
franchise agreements, that such contracts, leases and franchise agreements will
be profitable, or that the Combined Company's systems, procedures and controls
and management, financial and other resources, will be adequate to support such
expansion.
There can be no assurance that the Combined Company will be able to
integrate successfully new hotels, new hotel products or new hotel management
company acquisitions into its operations, that new hotels, new hotel products or
new hotel management company acquisitions will achieve revenue and profitability
levels comparable to Doubletree's or Red Lion's existing hotels or that the
combined business will be profitable. Hotels being operated under newly acquired
management contracts or lease agreements, including those of Red Lion, may begin
with lower occupancy and room rates. Furthermore, the Combined Company's
expansion within its existing markets could adversely affect the financial
performance of the Combined Company's existing hotels or its overall results of
operations. Expansion into new markets may present operating and marketing
challenges that are different from those currently encountered by Doubletree and
Red Lion in its existing markets. There can be no assurance that the Combined
Company will anticipate all of the changing demands, including those presented
by the Merger, that expanding operations will impose on its management or its
management information and reservation systems, and the failure to adapt its
systems and procedures could have a material adverse effect on the Combined
Company's business.
RISKS ASSOCIATED WITH OWNING AND LEASING REAL ESTATE
As of June 30, 1996, Doubletree leased 56 hotels and owned one hotel. At
the Effective Time, Doubletree's acquisition of Red Lion will result in
Doubletree leasing 17 additional hotels, owning 17 additional hotels and having
at least a 50% joint venture interest in seven hotels. As a result, the Combined
Company will be subject to varying degrees of risk generally related to leasing
and owning real estate. In addition to general risks related to the lodging
industry, these risks include, among others, liability for long-term lease
obligations, changes in national, regional and local economic conditions, local
real estate market conditions, changes in interest rates and in the
availability, cost and terms of financing, the potential for uninsured casualty
and other losses, the impact of present or future environmental legislation and
compliance with environmental laws, and adverse changes in zoning laws and other
regulations, many of which are beyond the control of the Combined Company.
Moreover, real estate investments are relatively illiquid, which means that the
ability of the Combined Company to vary its portfolio of hotels in response to
changes in economic and other conditions may be limited. Historically,
Doubletree has earned management fees based on a percentage of specified hotel
revenues and its risk has been limited to the extent of its management fee.
However, lease terms typically require the payment of a fixed monthly base rent
regardless of the performance of the hotel leased, in addition to a variable
rent based on a percentage of revenues.
22
<PAGE> 34
The majority of the hotels that will be leased by the Combined Company will
be leased from the REIT pursuant to the Percentage Leases (as defined in
"Business of Doubletree -- Hotel Operations: Non-Doubletree Brand
Hotels -- Lease and Management Agreements") and the Partnership pursuant to the
Partnership Lease. Each of the Percentage Leases and the Partnership Lease is a
"triple net" lease which requires the lessee to maintain the leased hotel in
good condition and repair and in conformity with all applicable legal
requirements and to make, or cause to be made, all items of maintenance, repair,
replacement and alteration to the leased hotel as necessary for such purpose.
The Percentage Leases, the Partnership Lease and any other leases pursuant to
which the Combined Company is the lessee will expose the Combined Company to the
risk that the hotels covered by such leases will not generate sufficient
revenues to meet the Combined Company's lease and other obligations. If such
obligations are not met, the lessor can terminate the lease.
In addition to provisions generally included in "triple net" leases, the
Percentage Leases contain, among other things, a cross-default provision for
events of default under any Percentage Lease acquired as part of the RFS
Acquisition. This cross-default provision could result in additional leverage in
favor of the REIT in the event of a dispute between RFS Management and the REIT.
The Percentage Leases also require RFS Management to continue to make rental
payments and to pay all other charges required under the lease for up to six
months if a hotel is substantially damaged or destroyed and to indemnify the
REIT from and against a number of liabilities, costs and expenses. The REIT has
retained the right to sell one or more of the hotels subject to the Percentage
Leases and to terminate the Percentage Leases relating to such hotels, provided
that in connection with any such termination the REIT pays RFS Management the
fair market value of such lease or offers to lease to RFS Management a
substitute hotel under a lease with a fair market value equal to that of the
lease being terminated. For a more detailed description of the Percentage
Leases, see "Business of Doubletree -- Hotel Operations: Non-Doubletree Brand
Hotels -- Lease and Management Agreements."
The Partnership Lease requires, among other things, Red Lion to pay
substantially all expenses associated with the operation of the Red Lion Leased
Hotels, including all ground lease expense, real estate taxes, insurance,
utilities and services. The Partnership has retained the right to sell one or
more of the Red Lion Leased Hotels, subject to the terms of the Partnership
Lease. Red Lion also 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 Red
Lion Leased Hotels prior to or during the term of the Partnership Lease,
including environmental matters. In connection with the Merger, Doubletree has
agreed to guaranty these indemnification obligations. For a more detailed
description of the Partnership Lease, see "Business of Red Lion -- The
Partnership Lease."
INVESTMENT LOSSES; RISKS ASSOCIATED WITH JOINT VENTURES; CONTINGENT LIABILITIES
Doubletree and Red Lion have made selective Investments in hotels and hotel
ventures in connection with acquiring or maintaining management of hotels and to
enhance the respective value or position of Doubletree and Red Lion in the
lodging industry. They have also made certain financial commitments for the same
purposes. See "Business of Doubletree -- Investments and Commitments" and
"Business of Red Lion -- Joint Ventures." These Investments and commitments may
involve risks of loss different in nature or amount from losses ordinarily
associated with hotel management alone, and losses arising from Investments or
commitments could have a material adverse effect on the Combined Company. There
can be no assurance that the Combined Company will not sustain material losses
on its Investments and commitments.
Investments in joint venture arrangements to acquire or develop additional
hotels may, under certain circumstances, involve risks such as the possibility
that the co-venturer in an investment might become bankrupt, or have economic or
business interests or goals that are inconsistent with the business interests or
goals of the Combined Company, or be in a position to take action contrary to
the instructions or requests of the Combined Company or contrary to the Combined
Company's policies or objectives. Consequently, actions by a co-venturer might
result in subjecting hotels owned by the joint venture to additional risk.
Although the Combined Company will seek to maintain sufficient control of any
joint venture to permit the Combined Company's objectives to be achieved, it may
be unable to take action without the approval of its joint venture partners or
its joint venture partners could take actions binding on the joint venture
without the Combined
23
<PAGE> 35
Company's consent. Additionally, should a joint venture partner become bankrupt,
the Combined Company could, in certain circumstances, become liable for such
partner's share of joint venture liabilities.
In addition, each corporate subsidiary of the Combined Company which serves
as a general partner will be liable for the obligations of the partnership or
joint venture it manages. Although Doubletree believes that it is not
responsible for the liabilities of these subsidiaries, no assurance can be given
that the Combined Company would not be found liable for its subsidiaries'
obligations nor that it would not be required to pay substantial sums to satisfy
its subsidiaries' obligations.
RISKS ASSOCIATED WITH NEW CONSTRUCTION
Doubletree, through joint ventures and partnerships, is involved in the
construction of several new hotels. Any construction project entails significant
construction risks, including cost overruns, shortages of materials or skilled
labor, labor disputes, unforeseen environmental or engineering problems, work
stoppages, fire and other natural disasters, construction scheduling problems
and weather interferences, any of which, if they occurred could delay
construction or result in a substantial increase in costs of the construction of
the new hotels.
The opening of newly constructed hotels is contingent upon, among other
things, receipt of all required licenses, permits and authorizations. The scope
of the approvals required for a new hotel is extensive, including, without
limitation, state and local land-use permits, building and zoning permits,
health and safety permits and liquor licenses. In addition, unexpected changes
or concessions required by local, regulatory and state authorities could involve
significant additional costs and could delay or prevent the completion of
construction or the opening of a new hotel. There can be no assurance that the
necessary permits, licenses and approvals for the construction and operation of
the new hotels will be obtained, or that such permits, licenses and approvals
will be obtained within the anticipated time frame.
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The lodging industry may be adversely affected by changes in economic
conditions, changes in local market conditions, oversupply of hotel space, a
reduction in demand for hotel space in an area, changes in travel patterns,
extreme weather conditions, changes in governmental regulations that influence
or determine wages, prices or construction costs, changes in interest rates, the
availability of financing for operating or capital needs, and changes in real
estate tax rates and other operating expenses. Room supply and demand
historically have been sensitive to shifts in GNP growth, which has resulted in
cyclical changes in average daily room and occupancy rates. Overbuilding in the
industry in the mid and late 1980s, when approximately 500,000 rooms were added,
resulted in an oversupply of rooms. This oversupply and the general downturn in
the economy led to depressed industry performance and a lack of capital
available to the industry in the late 1980s and early 1990s. Due in part to the
strong correlation between the lodging industry's performance and economic
conditions, the lodging industry is subject to cyclical changes in revenues.
FLUCTUATIONS IN OPERATING RESULTS
The lodging industry is seasonal in nature with the second and third
quarters generally accounting for a greater proportion of annual revenues than
the first and fourth quarters. Quarterly earnings may be adversely affected by
events beyond the Combined Company's control such as poor weather conditions,
economic factors and other considerations affecting travel. In addition, the
loss of one or several management contracts, leases or franchise agreements, the
timing of achieving incremental revenues from new contracts, leases or franchise
agreements and the realization of a gain or loss upon the sale of hotels in
which Doubletree has an equity interest may also adversely impact earnings
comparisons.
GOVERNMENT REGULATIONS
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and beverages (such as health and liquor license laws) and building and
zoning requirements. Also, the Combined Company and its customers are subject to
laws governing their
24
<PAGE> 36
relationships with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. The Combined Company will also
be subject to federal regulations and certain state laws that govern the offer
and sale of franchises. Many state franchise laws impose substantive
requirements on franchise agreements, including limitations on noncompetition
provisions and termination or nonrenewal of a franchise. Some states require
that certain materials be approved before franchises can be offered or sold in
that state. The failure to obtain or retain liquor licenses or approvals to sell
franchises, or an increase in the minimum wage rate, employee benefit costs or
other costs associated with employees, could adversely affect the Combined
Company. Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. Doubletree and Red Lion each believes
that the hotels under their respective management are substantially in
compliance with these requirements; however, a determination that such hotels
are not in compliance with the ADA could result in the imposition of fines, an
award of damages to private litigants or significant expense to the Combined
Company in bringing these hotels into compliance. These and other initiatives
could adversely affect the Combined Company as well as the hotel industry in
general. See "Business of Doubletree -- Government Regulation" and "Business of
Red Lion -- Government Regulation."
ENVIRONMENTAL REGULATIONS
Under various Federal, State, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. For example, liability may arise as a result of
the historical use of a site or from the migration of contamination from
adjacent or nearby properties. Any such contamination or liability may also
reduce the value of the property. In addition, certain environmental laws and
common law principles could be used to impose liability for release of
asbestos-containing materials ("ACMs") into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or businesses may be
operated, and these restrictions may require expenditures. In connection with
the ownership or operation of hotels, including properties managed, leased or
franchised by Doubletree or Red Lion, Doubletree or Red Lion, as the case may
be, may be potentially liable for any such costs.
The condition of a limited number of Red Lion's properties has been
affected by historical uses of such properties or activities in the vicinity of
such properties. There can be no assurance that the current condition of
Doubletree's or Red Lion's properties have not been or will not be further
affected by the historical or current uses of such properties or the activities
in the vicinity of Doubletree's or Red Lion's properties or that liability
resulting from non-compliance or other claims relating to environmental matters
will not have a material adverse effect on the Combined Company. See "Business
of Doubletree -- Environmental Matters" and "Business of Red
Lion -- Environmental Matters."
POTENTIAL CONFLICTS OF INTEREST
Certain affiliates of Doubletree are parties to management contracts,
leases and franchise agreements and other business arrangements with Doubletree.
These relationships, coupled with such parties' ownership of Doubletree Common
Stock and their representation on Doubletree's Board of Directors, could give
rise to conflicts of interest. See "Security Ownership of Certain Beneficial
Owners and Management of Doubletree." Doubletree believes that its contracts
with these persons are on terms no less favorable to Doubletree than those that
could have been obtained from unaffiliated third parties. There can be no
assurance that these parties will continue to transact business with the
Combined Company or that they will not attempt to utilize their ownership
positions and contractual rights with the Combined Company to influence the
terms on which they transact business with the Combined Company in the future.
The Combined Company expects to have a policy requiring any material transaction
or agreement with a related party be approved by a majority of the directors not
interested in such transaction or agreement.
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Mr. Michelson, a stockholder and a director of RLA, and Mr. Gilhuly, an
officer and director of RLA, will become members of the Board of Directors of
Doubletree upon consummation of the Merger. Their representation on the Board,
as well as the Partnership's ownership of Doubletree Common Stock, could give
rise to a conflict of interest regarding transactions between, or other matters
relating to, the Combined Company and the Partnership, including enforcing any
rights of the Combined Company under, or modifying or amending, the Partnership
Lease with respect to the Red Lion Leased Hotels. Circumstances might arise
where the Partnership will not consent to amendments or modifications of these
contractual arrangements, and the Partnership's lack of consent could adversely
affect the Combined Company's operations. While Red Lion believes the terms of
the Partnership Lease are fair to Red Lion and the Partnership, those terms were
not negotiated on an arms-length basis.
SIGNIFICANT STOCKHOLDERS
Following completion of the Merger and the Financing Plan, GEIM and GEPT
(collectively, the "GEI Entities") will beneficially own an aggregate of
approximately 23.8% and the Partnership will own approximately 12.9% of the
total outstanding shares of Doubletree Common Stock. In addition, two members of
the Board of Directors of Doubletree are associated with the GEI Entities, and
the Partnership will have the right to designate two persons to be nominated and
elected to the Board of Directors of Doubletree effective upon consummation of
the Merger. By virtue of their representation on the Board of Directors of
Doubletree and ownership of Doubletree Common Stock, such significant
stockholders can be expected to have substantial influence over the Combined
Company. See "Security Ownership of Certain Beneficial Owners and Management of
Doubletree" and "The Combined Company -- Directors and Executive Officers."
ANTI-TAKEOVER PROVISIONS
The Board of Directors of Doubletree has the authority to issue up to
5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares, without
any further vote or action by the stockholders. The rights of the holders of
Doubletree Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock could have the effect of entrenching
Doubletree's Board of Directors and making it more difficult for a third party
to acquire a majority of the outstanding voting stock of Doubletree. Doubletree
currently has no plans to issue shares of preferred stock. See "Description of
Capital Stock of Doubletree -- Preferred Stock." In addition, the provision in
the certificate of incorporation of Doubletree which requires the vote of at
least 80% of the outstanding shares of Doubletree Common Stock for certain
amendments to the certificate of incorporation could hinder a third party's
ability to acquire control of Doubletree. See "Comparative Rights of
Stockholders."
PRICE VOLATILITY
The market price of the Doubletree Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results and other factors. In addition, the securities markets have experienced
significant price and volume fluctuations from time to time in recent years that
have often been unrelated or disproportionate to the operating performance of
particular companies. These broad fluctuations may adversely affect the market
price of the Doubletree Common Stock. See "Summary -- Common Stock Price Range
of Doubletree and Red Lion."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Doubletree's Common Stock in the public market after the
implementation of the Merger and Financing Plan could adversely affect the
market price of Doubletree's Common Stock. Upon completion of the Merger and
Financing Plan, Doubletree will have 38,960,540 outstanding shares of Doubletree
Common Stock (39,777,416 if the underwriters' over-allotment option under the
terms of the Equity Offering is exercised in full), of which 18,590,650 shares
are "restricted securities" within the meaning of Rule 144 promulgated under the
Securities Act and may not be sold in the absence of registration under the
Securities
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Act unless an exemption from registration is available. Following completion of
the Merger, the Partnership and certain other principal stockholders are
entitled to certain demand and "piggyback" registration rights with respect to
registration of an aggregate of 16,354,278 shares for offer or sale to the
public. See "The Merger -- Interests of Certain Persons in the Merger" and
"Description of Capital Stock of Doubletree -- Registration Rights." The
Partnership, GEHOP, Mr. Ferris, Mr. Ueberroth and certain of Doubletree's
executive officers and directors have agreed, subject to certain exceptions, not
to offer or sell their shares of Doubletree Common Stock for a period of up to
180 days after the Effective Time.
THE SPECIAL MEETING
TIME AND PLACE; PURPOSES
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from the holders of Red Lion Common Stock by the Board
of Directors of Red Lion for use at a Special Meeting of Stockholders of Red
Lion (the "Special Meeting"), to be held at Le Parker Meridien Hotel, Salon
Concorde, 119 West 56th Street, New York, New York 10019 on Friday, November 8,
1996, starting at 8:00 a.m., local time. At the Special Meeting, holders of Red
Lion Common Stock will be asked to consider and vote upon a proposal to approve
and adopt the Merger Agreement and the Merger and such other business as may
properly come before the Special Meeting or any adjournments or postponements
thereof. A copy of the Merger Agreement is attached to this Proxy
Statement/Prospectus as Appendix A.
THE RED LION BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND ADOPTED THE
MERGER AGREEMENT AND THE MERGER, AND UNANIMOUSLY RECOMMENDS THAT RED LION
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
RECORD DATE; QUORUM
The Board of Directors of Red Lion has fixed October 9, 1996 as the record
date (the "Record Date") with respect to the Special Meeting. Accordingly, only
holders of record of Red Lion Common Stock at the close of business on the
Record Date will be entitled to receive notice of and to vote at the Special
Meeting. As of the Record Date, there were approximately 31,315,000 shares of
Red Lion Common Stock outstanding and entitled to vote at the Special Meeting,
which shares were held by approximately 93 holders of record. The presence, in
person or represented by proxy, of the holders of a majority of the outstanding
shares of Red Lion Common Stock entitled to vote at the Special Meeting is
necessary to constitute a quorum for the transaction of business at the Special
Meeting.
VOTES REQUIRED
Each holder of record, as of the Record Date, of Red Lion Common Stock is
entitled to cast one vote per share, exercisable in person or by properly
executed proxy. Under the DGCL, the affirmative vote, in person or by proxy, of
the holders of a majority of the shares of Red Lion Common Stock outstanding on
the Record Date is required to approve and adopt the Merger Agreement and the
Merger.
As of the Record Date, the directors and executive officers of Red Lion as
a group beneficially owned in the aggregate 929,730 shares (or approximately
3.0% of the then outstanding shares) of Red Lion Common Stock.
In addition, as of the Record Date, the Partnership beneficially owned
20,900,000 shares (or approximately 66.7% of the then outstanding shares) of Red
Lion Common Stock entitled to vote at the Special Meeting, and therefore THE
PARTNERSHIP HAS SUFFICIENT VOTING POWER TO CONSTITUTE A QUORUM AND TO APPROVE
AND ADOPT THE MERGER AGREEMENT AND THE MERGER, REGARDLESS OF THE VOTE OF ANY
OTHER STOCKHOLDER. PURSUANT TO THE RED LION SHAREHOLDER SUPPORT AGREEMENT, THE
PARTNERSHIP HAS AGREED TO VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER. AS A RESULT, UPON THE VOTE OF THE PARTNERSHIP IN
ACCORDANCE WITH SUCH AGREEMENT, APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER BY THE STOCKHOLDERS OF RED LION ARE ASSURED.
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PROXIES
All shares of Red Lion Common Stock represented by properly executed
proxies received at or prior to the Special Meeting, and not revoked, will be
voted at the Special Meeting in accordance with the instructions indicated in
such proxies. Properly executed proxies which do not contain voting instructions
will be voted FOR approval and adoption of the Merger Agreement and the Merger.
Abstention from voting on the proposal to approve and adopt the Merger Agreement
and the Merger or a broker non-vote on the proposal to approve and adopt the
Merger Agreement and the Merger will have the practical effect of voting against
approval and adoption of the Merger Agreement and the Merger.
If any other matters are properly presented at the Special Meeting for
consideration, the person or persons named in the relevant form of proxy
enclosed herewith and acting thereunder will have discretion to vote on such
matters in accordance with their best judgment, unless the proxy indicates
otherwise. Red Lion has no knowledge of any matters to be presented at the
Special Meeting other than those matters referred to and described herein.
The grant of a proxy on the form of proxy does not preclude a stockholder
from voting in person or otherwise revoking a proxy. Attendance at the Special
Meeting will not in and of itself constitute revocation of a proxy. A
stockholder may revoke a proxy at any time prior to its exercise by delivering
to Beth A. Ugoretz, Senior Vice President, General Counsel and Secretary of Red
Lion, a duly executed revocation or a proxy bearing a later date or by voting in
person at the Special Meeting.
Red Lion will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of Red Lion and its subsidiaries may solicit proxies from Red Lion
stockholders by telephone or facsimile or in person. Such persons will not be
additionally compensated, but will be reimbursed for reasonable out-of-pocket
expenses incurred in connection with such solicitation. Arrangements will also
be made with brokerage firms, nominees, fiduciaries and other custodians for the
forwarding of solicitation materials to the beneficial owners of shares held of
record by such persons, and Red Lion will reimburse such persons for their
reasonable out-of-pocket expenses in connection therewith.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS
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THE MERGER
BACKGROUND OF THE MERGER
In 1985, the Partnership acquired the business of Red Lion. At various
times since that acquisition, the Partnership has considered various
alternatives to realize the increased value of its investment in the Red Lion
business. In 1995, after exploring various alternatives, including the possible
sale of the Red Lion business, the Partnership decided to contribute
substantially all of the assets and liabilities of the Red Lion business to Red
Lion Hotels, Inc. and undertake an initial public offering. This public offering
was consummated on August 1, 1995, and the proceeds were used to retire a
portion of Red Lion's indebtedness.
Since the public offering, Red Lion has continued to evaluate opportunities
to maximize the value of the stockholders' investment in Red Lion. In the spring
of 1996, the directors of Red Lion consulted with investment bankers and
analyzed a list of various companies in the lodging and real estate industry to
determine who might be a potential candidate to acquire Red Lion. These
investment bankers and directors of Red Lion made contacts with these companies,
including the Second Lodging Company (as defined below), to determine if any of
these companies would be interested in exploring a possible acquisition of Red
Lion at a significant premium to Red Lion's stock price. Prior to consulting
with investment bankers, the Board received an unsolicited inquiry from the
First Lodging Company (as defined below) expressing an interest in engaging in a
transaction with Red Lion. Also in the spring of 1996, the Board received an
unsolicited inquiry from another lodging company expressing an interest in
engaging in a transaction with Red Lion, if such a transaction could be treated
as a pooling transaction. After a determination that pooling treatment would not
be available, that company indicated no further interest. None of the
discussions with any of these lodging companies progressed to the point where a
proposal was made to Red Lion.
During this same period, Peter V. Ueberroth, Co-Chairman of Doubletree, met
with George R. Roberts, founding partner of KKR, and Mr. Ueberroth expressed an
interest in acquiring Red Lion. A short time later, Mr. Ueberroth called Mr.
Michael W. Michelson, a general partner of KKR and a director of Red Lion.
During their conversation, Mr. Ueberroth again expressed an interest in
acquiring Red Lion and indicated that any transaction would include a
substantial amount of Doubletree Common Stock as consideration. Mr. Michelson
responded that the Board of Directors was open to receiving any proposal that
might be made, that there was substantial public information on which to base
such a proposal and that the Board of Directors would be most interested in a
transaction involving a significant amount of cash.
On June 7, 1996, Richard J. Ferris, Co-Chairman of Doubletree, Mr.
Ueberroth, Mr. Roberts, Mr. Michelson and Edward A. Gilhuly, a general partner
of KKR and a director of Red Lion, met, and Messrs. Ueberroth and Ferris
expressed an interest in acquiring Red Lion at a price in the range of $800 --
850 million in cash for all of the common equity of Red Lion and stated that
such a transaction would not be subject to a financing contingency.
On June 13, 1996, Messrs. Michelson and Gilhuly had a telephone
conversation with Mr. Ferris where they stated that any price below $900 million
would be inadequate and would fail to maximize value to the stockholders of Red
Lion. During a subsequent conversation, Mr. Ferris indicated that the price
would be at least $850 million in cash but that he could not commit to anything
more until Doubletree received additional information regarding Red Lion.
On June 25, 1996, after executing a confidentiality agreement, a meeting
among Richard M. Kelleher, a Director of Doubletree, William L. Perocchi, Chief
Financial Officer of Doubletree, a representative of Doubletree's independent
auditor, David J. Johnson, Chief Executive Officer and a director of Red Lion,
Mr. Gilhuly and Todd A. Fisher, an executive of KKR and director of Red Lion,
was held. At this meeting, Doubletree was provided non-public information on Red
Lion's 1996 forecast, recent acquisitions and various other financial, tax and
legal information. In addition, the Doubletree representatives reviewed with
Messrs. Johnson, Gilhuly and Fisher, their proposed structure.
On July 8, 1996, Messrs. Ferris and Ueberroth met with Messrs. Roberts,
Michelson, Gilhuly and Fisher to present Doubletree's offer. Messrs. Ferris and
Ueberroth indicated that Doubletree would be willing to
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make a firm offer of $850 million in cash for all of Red Lion's common equity,
subject to, among other things, due diligence, and that such offer would not be
subject to a financing contingency.
During the period from July 8 to July 22, 1996, Messrs. Michelson and
Gilhuly engaged in various telephone conversations with Mr. Ferris, during which
they provided additional information regarding Red Lion, reiterated that the
Board of Directors of Red Lion continued to believe that $850 million for all of
the common equity of Red Lion was inadequate and suggested that Doubletree
consider additional information regarding Red Lion that the Board had provided,
including the incremental cash flow from recently announced acquisitions.
On July 22, 1996, Messrs. Ferris and Perocchi had a meeting with Messrs.
Roberts, Michelson, Gilhuly and Fisher to discuss a revised proposal. In that
meeting, Mr. Ferris indicated that Doubletree would be prepared to offer $900
million for all of the common equity of Red Lion, but that such offer would
include $300 million in Doubletree stock and would be conditioned upon the
completion of financing and that the definitive agreements for such a
transaction would have to include a $25 million break-up fee.
During the period from July 22 to July 30, 1996, a series of phone
conversations ensued during which Messrs. Michelson and Gilhuly responded to
Doubletree's revised proposal by stressing Red Lion's inability to accept a
financing contingency and by agreeing to include up to $250 million in
Doubletree stock in the aggregate consideration of $900 million.
On July 30, 1996, Mr. Michelson spoke with Messrs. Ferris and Perocchi by
telephone during which the Doubletree offer was revised to remove the financing
contingency through a combination of bank commitment letters, an equity
commitment from one of its shareholders and a bridge commitment. However, they
indicated that they were not prepared to reduce the $300 million stock component
of the aggregate consideration. The parties also discussed the mechanics of a
collar to set an exchange ratio, severance programs for employees of Red Lion
and, given the amount of stock to be held by the Partnership, representation on
Doubletree's Board of Directors by the Partnership.
A further discussion took place on July 31, 1996, between Mr. Ferris and
Mr. Michelson where the mechanism of the collar, the break-up fee and certain
severance arrangements were discussed, but no agreement was reached. On August
1, 1996, in another telephone conversation between Mr. Ferris and Mr. Michelson,
Mr. Ferris indicated that Doubletree was willing to reduce the equity portion to
$250 million and to agree to Red Lion's proposed severance arrangements. A
break-up fee of $25 million was agreed, with a reciprocal fee if Doubletree's
stockholders did not approve the transaction.
On August 2, 1996, Mr. Ferris and Mr. Michelson refined the structure of
the collar and agreed to meet on August 6, 1996 to discuss the process for
completing Doubletree's confirmatory due diligence and definitive documentation.
Prior to the August 6 meeting, the parties translated the aggregate
consideration of $900 million to $28.106 per share, consisting of $20.30 in cash
and $7.81 of Doubletree Common Stock.
At the August 6 meeting, the process of confirmatory due diligence and
definitive documentation was discussed. In addition, Mr. Ferris requested a
lock-up option on the shares of Red Lion Common Stock held by the Partnership,
or an increase in the break-up fee or the right to meet any competing offers.
Messrs. Roberts, Gilhuly and Fisher rejected the request.
Between August 6 and September 4, 1996, the parties and their respective
advisors conducted due diligence and negotiated the terms of the proposed merger
agreement with the intention of Red Lion and Doubletree holding meetings of
their Boards of Directors to approve the transaction on September 5 and
executing a merger agreement shortly after those meetings.
On August 28, 1996, Red Lion issued a press release that stated that it was
in discussions concerning a possible acquisition by Doubletree. Both before and
after this announcement, the Board received inquiries from other lodging
industry companies regarding a possible transaction with Red Lion. The Board
responded to these inquiries by telling the interested parties to review the
publicly available information and submit proposals and expressed to each of
these companies that time was of the essence. In the meantime, the parties
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and their respective advisors continued to complete their due diligence and
negotiate the terms of the merger agreement and related documentation.
During the night of September 4, 1996, Red Lion received a letter from a
company in the lodging industry (the "First Lodging Company") which had
previously indicated to the Board that it was not interested in a transaction
with Red Lion, indicating that it was interested in acquiring Red Lion at a
price of at least $29.00 per share in cash and stock, of which at least 85%
would be cash, subject to a number of contingencies.
In the morning of September 5, 1996, the Board of Directors of Red Lion met
to discuss the Doubletree transaction and the letter received the previous
night. After discussions among the Board of Directors, representatives of Smith
Barney and representatives of Latham & Watkins, the Board of Directors
determined that they should defer approving the Doubletree transaction and
authorized Red Lion and its representatives to investigate further the
indication of interest from the First Lodging Company.
Shortly after the conclusion of Red Lion's Board of Directors meeting, Mr.
Michelson called Mr. Ferris to inform him of the receipt of the letter and that
Red Lion was not prepared to proceed with the Doubletree transaction at that
time. Mr. Ferris indicated that the Doubletree Board of Directors was about to
begin its meeting to approve the then current transaction and that he would
inform the Board of Directors of the developments.
Following the Doubletree Board of Directors meeting, Mr. Ferris called Mr.
Michelson and informed him that the Doubletree Board of Directors had approved
the proposed transaction and asked if Mr. Michelson had any update on the other
indication of interest. Mr. Michelson said that he had nothing new to report.
They agreed to speak the next day in the early afternoon. Mr. Ferris confirmed
the conversation in a letter to the Board of Directors of Red Lion and stated
that while Doubletree remained committed to the transaction, it did not
undertake to keep Doubletree's offer open indefinitely.
Also on September 5, 1996, Smith Barney had a number of discussions with
the First Lodging Company in which it clarified its original letter. The First
Lodging Company submitted a revised letter to the Board, in which the First
Lodging Company indicated that it was interested in acquiring Red Lion at a
price of "at least $30 per share" in cash. The letter stated that if a
definitive agreement was entered into, the transaction would not be subject to
any financing contingency.
On September 6, 1996, Mr. Michelson spoke by telephone with one of the
principals of the First Lodging Company to confirm its interest in a transaction
with Red Lion in view of its prior decision in the summer of 1996 not to pursue
a transaction with Red Lion.
Based upon those discussions it was determined by Red Lion that the First
Lodging Company should be given an opportunity to conduct preliminary due
diligence. On September 6, 1996, after executing a confidentiality agreement,
the First Lodging Company and its representatives began to review materials made
available to them by Red Lion.
In the afternoon of September 6, 1996, Mr. Michelson called Mr. Ferris to
reiterate that Red Lion was not in a position to approve the Doubletree
transaction on its then current terms and that Red Lion was evaluating the other
indication of interest as quickly as possible. Mr. Michelson suggested that they
next speak at noon on September 10, 1996. Several hours later, Mr. Ferris called
Mr. Michelson to inform him that Doubletree was not prepared to have its offer
remain outstanding until noon September 10, and that he would need to know by
noon on September 7, 1996, whether Red Lion was going to approve the Doubletree
transaction.
Throughout September 7, 1996, the First Lodging Company reviewed materials
made available by Red Lion, and employees of Red Lion and other Red Lion
representatives met with employees and representatives of the First Lodging
Company to assist them in their review of Red Lion and its operations.
On the morning of September 7, 1996, Red Lion received another letter from
a company in the lodging industry (the "Second Lodging Company"), also a company
which previously indicated that it had no interest in acquiring Red Lion,
expressing an interest in evaluating an acquisition of Red Lion and stating that
such an acquisition might be accomplished "for up to $30 per share" in cash.
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Red Lion's Board of Directors and its financial and legal advisors met on
the morning of September 7 to discuss the second indication of interest, the
status of the First Lodging Company's due diligence investigation and the
upcoming conversation between Mr. Michelson and Mr. Ferris. At the end of the
meeting, the Board of Directors determined that in light of the two other
indications of interest it should not at that time approve the Doubletree
transaction. Because of the uncertainty of either of the two transactions, it
authorized Mr. Michelson to offer to reimburse Doubletree's expenses up to $5
million if Doubletree agreed to keep its offer open for two weeks and if Red
Lion ultimately did a transaction in 1996 with someone other than Doubletree.
Mr. Michelson called Mr. Ferris, informed him that Red Lion was not prepared at
that time to approve the Doubletree transaction and presented the expense
reimbursement proposal. They agreed to speak early the next morning.
Early on September 8, 1996, Mr. Ferris informed Mr. Michelson that
Doubletree would not accept the expense reimbursement proposal but that
Doubletree was prepared to increase its offer to $29.11 per share of Red Lion
Common Stock, composed of $21.30 per share in cash and $7.81 per share in
Doubletree Common Stock. Mr. Ferris indicated that he would need to know by the
end of the day whether the improved offer was acceptable. After that call Mr.
Michelson reported the conversation to Red Lion's Board of Directors, financial
advisors and legal counsel. The Red Lion Board of Directors discussed the
alternatives and scheduled another meeting for later in the day.
During September 8, the First Lodging Company continued its evaluation of
Red Lion and a possible transaction. In the early evening, representatives of
the First Lodging Company and Red Lion held a telephone conference to discuss
structure, to comment on a draft merger agreement, to explain the financing of
the proposed transaction and to discuss valuation of Red Lion. During this
conversation, the First Lodging Company reiterated its ability to pay at least
$30 per share in cash and stated that its due diligence efforts had not revealed
any facts that would prevent the First Lodging Company from meeting that price
per share. Red Lion and the First Lodging Company agreed that the First Lodging
Company could take an additional 24 hours to examine the valuation of Red Lion
and financing for the transaction.
Red Lion's Board of Directors met after the telephone conversation with the
First Lodging Company to discuss the meeting and to discuss Mr. Michelson's
upcoming call with Mr. Ferris. At the conclusion of the meeting, Mr. Michelson
informed Mr. Ferris that he would call him the next morning to respond to Mr.
Ferris's improved offer. During that call, Mr. Ferris told Mr. Michelson that
the terms of any transaction involving Doubletree would have to be resolved by
the end of the next day, September 9.
On September 9, 1996, the Second Lodging Company which submitted the
indication of interest on September 7, executed a confidentiality agreement, and
representatives and employees of the lodging company commenced a review of the
materials made available to them by Red Lion.
In the morning of September 9, Mr. Michelson called Mr. Ferris and informed
him that Red Lion expected to receive significant information from the First
Lodging Company later that day and was not yet prepared to respond to
Doubletree's offer. Mr. Ferris reiterated that they must resolve these issues by
the end of that day, and they agreed to speak later in the day.
During the course of September 9, the First Lodging Company continued to
evaluate Red Lion, the structure of a possible transaction and the effects of
the transaction on its financial statements. Also during the day,
representatives of Red Lion had conversations with representatives of the First
Lodging Company to discuss financing for the transaction. In the afternoon of
September 9, the First Lodging Company called Messrs. Michelson and Gilhuly and
informed them that after analyzing the pro forma effects of the transaction on
its financial statements and certain tax consequences of the transaction,
although it was still interested in acquiring Red Lion, it would not be able to
meet its initial indication of value.
Following this conversation, the Red Lion Board met and resolved that Mr.
Michelson should speak to Mr. Ferris and obtain the best possible terms for a
transaction with Doubletree.
During the afternoon and night of September 9, Mr. Michelson and Mr. Ferris
had a series of conversations concerning the principal economic terms of
Doubletree's acquisition of Red Lion. At the end of those conversations,
Doubletree increased its offer to $21.30 in cash and $8.81 in Doubletree Common
Stock
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for each share of Red Lion Common Stock. From September 10 to September 12,
1996, Red Lion and its financial and legal advisors and Doubletree and its
financial and legal advisors completed the negotiation of the merger agreement
and related documents.
At a meeting of Red Lion's Board of Directors on the afternoon of September
11, 1996, the terms of the Merger Agreement were discussed. Representatives of
Smith Barney made a presentation to the Board of Directors and delivered its
oral opinion (which it subsequently confirmed by delivery of a written opinion
dated September 12, 1996) that, as of that date and based upon its review and
analysis and subject to the limitations set forth therein, the Merger
Consideration to be received by the holders of Red Lion Common Stock pursuant to
the Merger was fair to such stockholders from a financial point of view. By
unanimous vote of all directors of Red Lion, the Board determined that the
Merger was fair to and in the best interest of the stockholders of Red Lion. The
Board authorized execution of the Merger Agreement, subject to satisfactory
resolution of any remaining issues, and recommended that stockholders approve
and adopt the Merger Agreement and the Merger.
Following this meeting, the First Lodging Company's views as to valuation
were confirmed in a conversation between an officer of the First Lodging Company
and Mr. Gilhuly.
Also on September 11, a representative of Smith Barney told the Board that
the Second Lodging Company would not be in a position to confirm or modify its
indication of interest for at least a week.
During the evening of September 11, Mr. Michelson and Mr. Ferris had a
conversation to discuss a number of issues related to the terms of the Merger.
Following that conversation, the Merger Agreement and related documentation were
finalized, certain governmental entities which are limited partners of the
Partnership approved the transaction, and the Merger Agreement was executed in
the afternoon of September 12.
As of October 3, 1996, Red Lion had not heard from the Second Lodging
Company regarding its indication of interest in acquiring Red Lion.
REASONS FOR THE MERGER; RECOMMENDATION OF BOARD OF DIRECTORS
At a meeting held on September 11, 1996, the Board of Directors of Red Lion
unanimously determined that the terms of the Merger are fair to, and in the best
interests of, Red Lion and its stockholders. ACCORDINGLY, THE BOARD OF DIRECTORS
OF RED LION UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER, AND
RESOLVED UNANIMOUSLY TO RECOMMEND THAT THE STOCKHOLDERS OF RED LION VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
In reaching its determination, the Red Lion Board of Directors consulted
with Red Lion management, as well as its legal counsel and its financial
advisor, and considered a number of factors, including, without limitation, the
following:
(i) Red Lion's Business, Condition and Prospects. The Red Lion Board
considered information with respect to the financial condition, results of
operations and business of Red Lion, on both a historical and prospective
basis, and current industry, economic and market conditions. The Red Lion
Board considered Red Lion's historical growth strategies, including
selective hotel acquisitions and potential business combinations with
larger competitors. The Red Lion Board considered favorable to its
determination that a combination with Doubletree would allow Red Lion to
enjoy opportunities for operating efficiencies and synergies as a result of
the Merger, particularly through the integration of information systems and
support functions and the combined purchasing power of the two companies.
(ii) Doubletree's Business, Condition and Prospects. The Red Lion
Board considered information with respect to the financial condition,
results of operations and business of Doubletree, on both a historical and
prospective basis, and current industry, economic and market conditions.
Management and Red Lion's legal and financial representatives made
presentations to and provided the Red Lion Board with information regarding
Doubletree's financial condition and prospects after conducting business,
legal and financial due diligence. In evaluating Doubletree's prospects,
the Red Lion Board considered, among
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other things, the performance of its hotels, the strength of its management
team, the success of its recent hotel acquisitions and the reputation of
the Doubletree brand name in the hotel industry. The Red Lion Board also
considered Doubletree's geographical distribution of hotels and found it to
be complementary to the distribution of Red Lion hotels. The Red Lion Board
found favorable the fact that the Combined Company would enjoy increased
market capitalization and greater financial strength.
(iii) Termination Provisions and Termination Fee. The Red Lion Board
considered the provisions of the Merger Agreement that permit the Red Lion
Board to continue to receive unsolicited inquiries and proposals, negotiate
and give information to third parties and to terminate the Merger Agreement
upon payment to Doubletree of the $25.0 million termination fee if, by
reason of an alternative proposal being made, the Red Lion Board determines
that it will not recommend approval of the Merger, or withdraws such
recommendation, in the exercise of its fiduciary duties. The Board believed
that a 2.6% termination fee was within the range of fees payable in
comparable transactions and that the fee would not in and of itself
preclude alternative proposals.
(iv) Opinion of Smith Barney Inc. The Red Lion Board considered as
favorable to its determination the oral opinion delivered on September 11,
1996 by Smith Barney (which it subsequently confirmed by delivery of a
written opinion dated September 12, 1996) that as of the date of such
opinion, and based upon and subject to certain matters stated therein, the
Merger Consideration to be received by holders of Red Lion Common Stock
(pursuant to the Merger Agreement draft of September 11, 1996) was fair,
from a financial point of view, to such holders. The Red Lion Board also
considered the oral and written presentations made to it by Smith Barney.
See "--Opinions of Financial Advisors -- Red Lion Financial Advisor." A
copy of Smith Barney's written opinion to the Red Lion Board, dated as of
September 12, 1996, which sets forth the assumptions made, matters
considered and limitations on the review undertaken, is attached as
Appendix B to this Proxy Statement/Prospectus and is incorporated herein by
reference.
(v) Ability of Stockholders of Red Lion to Obtain a Continuing Equity
Interest in Doubletree. The Red Lion Board regarded as favorable to its
determination the fact that the terms of the Merger permit holders of Red
Lion Common Stock to continue to hold an equity interest in Doubletree
following the Merger, thus enabling Red Lion stockholders to participate in
the synergies expected to result from the combination of the two companies.
(vi) Historical and Recent Market Prices Compared to Consideration to
be Received by Holders of Red Lion Common Stock. The Red Lion Board
reviewed the historical market prices and recent trading activity of Red
Lion Common Stock. The Red Lion Board considered as favorable to its
determination the fact that the value to be received per share of Red Lion
Common Stock represented a premium of 27.43% over the closing sale price of
$23.625 for Red Lion Common Stock on August 28, 1996, the last trading day
preceding Red Lion's announcement that Red Lion and Doubletree were in
preliminary merger discussions. The Red Lion Board took into account that
the value to be received by holders of Red Lion Common Stock pursuant to
the Merger Agreement was within the equity reference ranges in Smith
Barney's analysis of selected companies, selected merger and acquisition
transactions and discounted cash flow. The Board also considered the
mechanism contained in the Merger Agreement that limits the effect of
changes in the price of Doubletree Common Stock on the value of the
consideration to be received by Red Lion stockholders in the Merger. While
the Exchange Ratio is not affected so long as the Final Doubletree Stock
Price is greater than $34.89 or less than $38.56, the Exchange Ratio will
be adjusted in the event of price declines in the Doubletree Common Stock
below $34.89. The Red Lion Board recognized that this "collar" limits the
ability of Red Lion stockholders to benefit from appreciation in the
Doubletree Common Stock at prices above $38.56 but determined that this
limitation was offset by the protection afforded by the limitation on risk
associated with price declines.
(vii) Other Indications of Interest. The Red Lion Board reviewed its
numerous discussions over time with other lodging companies regarding a
potential transaction with Red Lion, including time periods prior to and
following Red Lion's initial public offering, as described in "--Background
of the Merger." In addition, the Red Lion Board discussed the indications
of interest it had received during its
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discussions with Doubletree. The Board regarded as favorable to its
determination that the First Lodging Company was unable to meet its initial
indication of value, that the Second Lodging Company's indication of value
had not been confirmed and that the Board's discussions over time with
other lodging industry participants had failed to yield a transaction on
terms as favorable as those presented by the Merger. The Red Lion Board
also determined that, due to the preliminary stages of the indications of
interest from the First Lodging Company and the Second Lodging Company,
there would be a substantial risk of non-consummation if the Board pursued
a transaction with either the First Lodging Company or the Second Lodging
Company.
(viii) Conflicts of Interest. The Red Lion Board reviewed the
conflicts of interest discussed below in "-- Interests of Certain Persons
in the Merger" and determined that such conflicts did not affect the
Board's assessment of the Merger Agreement and the value which it presented
to Red Lion stockholders.
The Board of Directors of Red Lion believes that the Merger offers the
opportunity to create a combined company with greater financial resources and
flexibility, competitive strengths and business opportunities than would be
possessed by Red Lion alone.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger, the Red Lion Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
OPINIONS OF FINANCIAL ADVISORS
Red Lion Financial Advisor.
Smith Barney was retained by Red Lion to act as its financial advisor in
connection with the Merger. In connection with such engagement, Red Lion
requested that Smith Barney evaluate the fairness, from a financial point of
view, to the holders of Red Lion Common Stock of the consideration to be
received by such holders in the Merger. On September 11, 1996, at a special
meeting of the Board of Directors of Red Lion held to evaluate the proposed
Merger, Smith Barney rendered to the Board of Directors of Red Lion an oral
opinion (subsequently confirmed by delivery of a written opinion dated September
12, 1996) to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the Merger Consideration was fair,
from a financial point of view, to the holders of Red Lion Common Stock.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
held discussions with certain senior officers, directors and other
representatives and advisors of Red Lion and certain senior officers and other
representatives and advisors of Doubletree concerning the businesses, operations
and prospects of Red Lion and Doubletree. Smith Barney examined certain publicly
available business and financial information relating to Red Lion and Doubletree
as well as certain financial forecasts and other data for Red Lion and
Doubletree which were provided to or otherwise discussed with Smith Barney by
the respective managements of Red Lion and Doubletree, including information
relating to certain strategic implications and operational benefits anticipated
to result from the Merger. Smith Barney reviewed the financial terms of the
Merger as set forth in the Merger Agreement in relation to, among other things:
current and historical market prices and trading volumes of Red Lion Common
Stock and Doubletree Common Stock; the respective companies' historical and
projected earnings and operating data; and the capitalization and financial
condition of Red Lion and Doubletree. Smith Barney considered, to the extent
publicly available, the financial terms of certain other transactions effected
which Smith Barney considered relevant in evaluating the Merger and analyzed
certain financial, stock market and other publicly available information
relating to the businesses of other companies whose operations Smith Barney
considered relevant in evaluating those of Red Lion and Doubletree. Smith Barney
also evaluated the potential pro forma financial impact of the Merger on
Doubletree. In addition to the foregoing, Smith Barney conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Smith Barney deemed appropriate in arriving at its opinion.
Smith Barney noted that its opinion was necessarily based upon information
available, and financial, stock market and other conditions and circumstances
existing and disclosed, to Smith Barney as of the date of its opinion.
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In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or discussed
with Smith Barney, the managements of Red Lion and Doubletree advised Smith
Barney that such forecasts and other information and data were prepared on bases
reflecting reasonable estimates and judgments as to the future financial
performance of Red Lion and Doubletree and the strategic implications and
operational benefits anticipated to result from the Merger. Smith Barney did not
express any opinion as to what the value of Doubletree Common Stock actually
will be when issued to Red Lion stockholders pursuant to the Merger or the
prices at which Doubletree Common Stock will trade subsequent to the Merger.
Smith Barney did not make and was not provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Red Lion or
Doubletree nor did Smith Barney make any physical inspection of the properties
or assets of Red Lion or Doubletree. In arriving at its opinion, Smith Barney
did consider unsolicited proposals received by Red Lion, but Smith Barney was
not authorized to solicit, and did not solicit, interest from any other party
with respect to any alternative business strategies or transaction involving Red
Lion. Although Smith Barney evaluated the Merger Consideration from a financial
point of view, Smith Barney was not asked to and did not recommend the specific
consideration payable in the Merger. No other limitations were imposed by Red
Lion on Smith Barney with respect to the investigations made or procedures
followed by Smith Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED SEPTEMBER 12,
1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED
HEREIN BY REFERENCE. HOLDERS OF RED LION COMMON STOCK ARE URGED TO READ THIS
OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY TO
THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW, DOES
NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF SMITH BARNEY SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the Board of Directors of Red Lion, Smith
Barney performed a variety of financial and comparative analyses, including
those described below. The summary of such analyses does not purport to be a
complete description of the analyses underlying Smith Barney's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its analyses,
Smith Barney made numerous assumptions with respect to Red Lion, Doubletree,
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Red Lion
and Doubletree. The estimates contained in such analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Smith Barney's opinion and
financial analyses were only one of many factors considered by the Board of
Directors of Red Lion in its evaluation of the Merger and should not be viewed
as determinative of the views of Red Lion's Board of Directors or management
with respect to the Merger Consideration or the proposed Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
Red Lion, Doubletree and the following selected companies in the lodging
industry: Bristol Hotel Company, Interstate Hotels Company, La Quinta Inns,
Inc., Marriott International Inc., Prime Hospitality Corp., Promus Hotels
Corporation, Renaissance Hotel Group N.V. and Wyndham Hotel Corporation (the
"Selected Companies"). Smith Barney compared market values as
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multiples of, among other things, projected calendar 1996 and 1997 earnings
before interest, taxes, depreciation and amortization ("EBITDA") and projected
calendar 1996 and 1997 earnings per share ("EPS"). All multiples were based on
closing stock prices as of September 10, 1996. Applying multiples for the
Selected Companies of projected 1996 and 1997 EBITDA of 10.0x to 12.0x and 8.0x
to 10.0x, respectively, and projected 1996 and 1997 EPS of 23.0x to 27.0x and
18.0x to 22.0x, respectively, to corresponding financial data for Red Lion
resulted in an equity reference range for Red Lion of approximately $26.83 to
$34.93 per share, as compared to the per share value implied by the Merger
Consideration of approximately $30.11 based on a closing stock price of
Doubletree Common Stock on September 10, 1996.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the transaction value multiples
paid in the following selected transactions in the lodging industry occurring
during the 12-year period beginning in October 1984 (acquiror/target):
Doubletree Corp./RFS Inc. (12/95); TRT Holdings Inc./Omni Hotels Group (1/96);
FelCor Suite Hotels Inc./Crown Sterling Suites (11/94); Starwood Capital and
Goldman Sachs/Westin Hotels (Aoki Corp) (11/94); Hampstead/Harvey Hotels/United
Inns, Inc. (6/94); Saudi Prince Al-Waleed/Four Seasons Hotels Inc. (9/94);
Starwood Capital Group/Hotel Investors Trust & Corp. (6/94); Morgan Stanley Real
Estate Fund/Red Roof Inns (11/93); Guest Quarters Suites/Doubletree Hotels
(12/93); La Quinta Motor Inns, Inc./La Quinta Motor Inns, L.P. (10/93); New
World Development Ltd./Stouffer Hotels (3/93); Hospitality Franchise
Systems/Super 8 (2/93); Four Seasons Hotels/Regent (3/92); Hospitality Franchise
Systems/Days Inn (Tollman-Hundley) (5/91); Canadian Pacific Hotels
Corp./Methotels Inc. (Doubletree) (12/90); Manor Care/Econo Lodge & Friendship
Inn (8/90); Accor S.A./Motel 6 (7/90); Manor Care/Rodeway Inns (5/90);
Blackstone Capital/Howard Johnson & Ramada (5/90); Bass Plc/Holiday Inns (8/89);
Tollman-Hundley Hotels/Days Inn Corporation (8/89); Prime Motor Inns,
Inc./Ramada Franchise Business (4/89); New World Development/Ramada Hotel Group
(4/89); FCD Hospitality Inc./Servico, Inc. (Southmark) (4/89); Motel 6/Sixpence
Inns of America (12/88); Seibu/Saison Group/Intercontinental Hotel (Grand Met)
(9/88); World International Holdings/Omni Hotels (6/88); Prime Motor Inns/
Wellesley Inns (4/88); Robert M. Bass Group & Aoki Corp./Westin Hotel & Resorts
(Allegis) (10/87); Bass Plc/Holiday Inns International (9/87); Ladbroke Group
Plc/Hilton International (Allegis) (9/87); Marriott Corporation/Residence Inn
Corporation (4/87); UAL Inc./Hilton International (Transworld) (11/86); Prime
Motor Inns/Howard Johnson Company (9/85); and Kohlberg Kravis Roberts &
Co./Motel 6 (City Investing) (10/84) (the "Selected Transactions"). Smith Barney
compared the transaction values of the Selected Transactions as a multiple of,
among other things, latest 12 months EBITDA. Multiples for each Selected
Transaction were based on information available at the time of announcement of
the transaction. Applying a multiple for the Selected Transactions of latest 12
months EBITDA of 9.0x to 11.0x to corresponding financial data for Red Lion
resulted in an equity reference range for Red Lion of approximately $22.20 to
$28.35 per share, as compared to the per share value implied by the Merger
Consideration of approximately $30.11 based on a closing stock price of
Doubletree Common Stock on September 10, 1996.
No company, transaction or business used in the "Selected Company Analysis"
or the "Selected Merger and Acquisition Transactions Analysis" as a comparison
is identical to Red Lion, Doubletree or the Merger. Accordingly, an analysis of
the results of the foregoing is not entirely mathematical; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the Selected Companies, Selected Transactions
or the business segment, company or transaction to which they are being
compared.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of Red Lion for the fiscal years
1997 through 2000, based on estimates of selected investment banking firms and
assuming, among other things, discount rates of 12.5%, 14.0% and 15.5% and
terminal multiples of EBITDA of 9.0x to 10.0x. This analysis resulted in an
equity reference range for Red Lion of approximately $25.95 to $33.47 per share
(with a mean of $29.71).
Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the Merger, including, among other things, the impact of the
Merger on the projected EPS of Doubletree for the fiscal years ended 1996
through 2000 (with particular focus on fiscal years 1997 through 1999), based on
estimates provided by the management of Doubletree. The results of the pro forma
merger analysis suggested
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that the Merger could be dilutive to Doubletree's EPS in fiscal year 1996 and
accretive to Doubletree's EPS in fiscal years 1997 through 2000 (assuming
attainment of cost savings and other synergies anticipated by the management of
Doubletree to result from the Merger). The actual results achieved by the
Combined Company may vary from projected results and the variations may be
material.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain comparative
analyses, including, among other things, a review of (i) unsolicited indications
of interest received from third parties other than Doubletree; (ii) historical
and projected financial results of Red Lion and Doubletree; (iii) current and
historical market prices and trading volume of Red Lion Common Stock and
Doubletree Common Stock; (iv) selected analysts' reports relating to Red Lion,
including analysts' estimates as to the earnings growth potential of Red Lion;
and (v) the pro forma ownership of the Combined Company.
Pursuant to the terms of Smith Barney's engagement, Red Lion has agreed to
pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee of approximately $4 million upon the consummation of the
Merger. Red Lion also has agreed to reimburse Smith Barney for travel and other
out-of-pocket expenses incurred in performing its services, including the fees
and expenses of its legal counsel, and to indemnify Smith Barney and related
persons against certain liabilities, including liabilities under the federal
securities laws, arising out of Smith Barney's engagement.
Smith Barney has advised Red Lion that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of Red
Lion and Doubletree for their own account or for the account of customers and,
accordingly, may at any time hold a long or short portion in such securities.
Smith Barney has in the past provided financial advisory and investment banking
services to Red Lion unrelated to the Merger, for which Smith Barney has
received compensation. In addition, Smith Barney and its affiliates (including
Travelers Group Inc. and its affiliates) may maintain relationships with Red
Lion and Doubletree.
Smith Barney is a nationally recognized investment banking firm and was
selected by Red Lion based on Smith Barney's experience and expertise with
respect to merger and acquisition transactions (particularly in the lodging
industry) and familiarity with Red Lion and its business. Smith Barney regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
Doubletree Financial Advisor.
Doubletree retained Morgan Stanley to act as its financial advisor in
connection with the Merger. Morgan Stanley was selected by Doubletree to act as
Doubletree's financial advisor based on Morgan Stanley's qualifications,
expertise and reputation, as well as Morgan Stanley's investment banking
relationship and familiarity with Doubletree. In the past, Morgan Stanley and
its affiliates have provided financial advisory and financing services for both
Doubletree and Red Lion. In addition, Morgan Stanley will act as the lead
manager in the Equity Offering and lead syndication agent for the New Credit
Facility and has committed to provide the Bridge Loan, if required. The Merger
Consideration was determined as a result of negotiations between Doubletree and
Red Lion and was not determined or recommended by Morgan Stanley.
Morgan Stanley rendered its opinion to the Doubletree Board on September
12, 1996, that, based upon and subject to the various considerations set forth
in the opinion, as of such date, the Merger Consideration to be paid to the
holders of Red Lion Common Stock pursuant to the Merger Agreement was fair from
a financial point of view to Doubletree.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY DATED SEPTEMBER 12,
1996, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX C TO THIS
PROXY STATEMENT/PROSPECTUS. RED LION STOCKHOLDERS ARE URGED TO READ THE OPINION
CAREFULLY AND IN ITS ENTIRETY. MORGAN STANLEY'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE MERGER CONSIDERATION TO BE PAID TO THE HOLDERS OF RED LION
COMMON STOCK FROM A FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF RED LION AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT
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THE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF MORGAN STANLEY DATED
SEPTEMBER 12, 1996 SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, Morgan Stanley, among other things: (i) analyzed
certain publicly available financial statements and other information of Red
Lion and Doubletree, respectively; (ii) reviewed certain internal financial
statements and other financial and operating data concerning Red Lion prepared
by the management of Red Lion; (iii) reviewed 1996 budget information prepared
by the management of Red Lion; (iv) discussed the past and current operations
and financial condition and the prospects of Red Lion with senior executives of
Red Lion; (v) analyzed certain internal financial statements and other financial
operating data concerning Doubletree prepared by the management of Doubletree;
(vi) reviewed certain financial projections concerning Red Lion and Doubletree
prepared by the management of Doubletree; (vii) discussed the past and current
operations and financial condition and the prospects of Doubletree with senior
executives of Doubletree, and analyzed the pro forma impact of the Merger on
Doubletree's earnings per share, consolidated capitalization and financial
ratios; (viii) reviewed and discussed with the management of Doubletree and
their legal and other advisors their assessment of certain due diligence, legal
and other issues relating to the Merger; (ix) reviewed and discussed with the
management of Doubletree the synergies and other long-term benefits expected to
result from the Merger; (x) reviewed the reported prices and trading activity
for the Red Lion Common Stock and Doubletree Common Stock; (xi) compared the
financial performance of Red Lion and Doubletree and the prices and trading
activity of the Red Lion Common Stock and Doubletree Common Stock with that of
certain other comparable publicly-traded companies and their securities; (xii)
reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions; (xiii) participated in certain discussions
and negotiations among representatives of Red Lion and Doubletree and their
financial and legal advisors; (xiv) reviewed the Merger Agreement and certain
related documents; and (xv) performed such other analyses as Morgan Stanley has
deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Morgan Stanley for purposes of its opinion. Morgan Stanley assumed
that the financial projections and budget information, including the synergies
and other long-term benefits expected to result from the Merger, were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the future financial performance of Doubletree and Red Lion. Morgan
Stanley has not conducted a physical inspection of the properties or facilities
of Doubletree or Red Lion and did not make any independent valuation or
appraisal of the assets or liabilities of Doubletree or Red Lion, nor was it
furnished with any such appraisals. Morgan Stanley's opinion is necessarily
based on economic, market and other conditions as in effect on, and the
information made available to it as of, the date thereof. In addition, Morgan
Stanley assumed that the Merger will be consummated in accordance with the terms
set forth in the Merger Agreement. Morgan Stanley did not express any opinion as
to the price at which Doubletree Common Stock will actually trade following
consummation of the Merger.
The following is a brief summary of certain analyses performed by Morgan
Stanley and reviewed with the Board of Directors of Doubletree in connection
with the preparation of the Morgan Stanley opinion dated September 12, 1996.
Red Lion Common Stock Performance. Morgan Stanley's analysis of the
performance of Red Lion Common Stock consisted of an historical analysis of
closing prices and trading volumes from July 26, 1995, the time of the Red Lion
Offering, to September 10, 1996. During this period, based on closing prices on
the NYSE, Red Lion Common Stock achieved a high of $28.125 and a low of $16.250.
Red Lion Common Stock closed at a price of $23.625 on August 28, 1996 (the
"Unaffected Market Price"), the last trading day preceding Red Lion's
announcement that Red Lion and Doubletree were in preliminary merger
discussions. Red Lion Common Stock closed at a price of $28.750 on September 12,
1996. Morgan Stanley observed that an implied Merger Consideration of $30.106
("Implied Price") represented a 27.4% premium to the Unaffected Market Price.
Comparable Company Analysis. Comparable company analysis examines a
company's trading performance relative to a group of publicly traded peers.
Morgan Stanley analyzed the trading performance of Red
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Lion and companies in the hotel industry. Companies in the Real Estate
Owner/Operator group include: Wyndham Hotel Corp., Interstate Hotels Company, La
Quinta Ins., Inc., Promus Hotel Corp. and Bristol Hotel Company (the "Red Lion
Comparable Companies"). The Red Lion Comparable Companies were selected based on
general business, operating and financial characteristics representative of
companies in industries in which Red Lion operates. Historical financial
information used in connection with the ratios provided below with respect to
the Red Lion Comparable Companies is as of the most recent financial statements
publicly available for each company. Market information used in calculating the
ratios below was as of September 10, 1996. Earnings per share ("EPS") estimates
for Red Lion and the Red Lion Comparable Companies were estimates provided by
Institutional Brokers Estimate System ("IBES").
Morgan Stanley analyzed the relative performance and value for Red Lion by
comparing certain market trading statistics for Red Lion with the Red Lion
Comparable Companies. Among the market trading information considered in the
valuation analysis were the ratios of market price to EPS estimates for calendar
years 1996 and 1997. The ratios of the September 10, 1996 market price to EPS
estimates for Red Lion calendar years 1996 and 1997 were 21.0x and 18.1x,
respectively. The median ratios of market price to EPS estimates for calendar
years 1996 and 1997 for the Red Lion Comparable Companies were 26.8x and 21.5x,
respectively. Morgan Stanley observed that the implied Merger Consideration of
$30.16 (the "Implied Price") implied a ratio to EPS estimated for calendar year
1996 of 23.3x, and for calendar year 1997 of 20.1x, in each case for Red Lion.
No company utilized in the comparable companies analysis as a comparison is
identical to Red Lion. In evaluating the Comparable Companies, Morgan Stanley
made judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Red Lion, such as the impact of competition on
the business of Red Lion and the industry generally, industry growth and the
absence of any adverse material change in the financial condition and prospects
of Red Lion or Doubletree or the industry or in the financial markets in
general. Mathematical analysis (such as determining the average or median) is
not in itself a meaningful method of using comparable company data.
Comparable Transaction Analysis. Morgan Stanley performed an analysis of
precedent transactions involving certain hotel companies ("Comparable
Transactions") which, in Morgan Stanley's judgment, were deemed to be comparable
to the Merger for purposes of this analysis. Multiples of the aggregate value of
such transactions to the acquiree's prior twelve months fiscal year EBITDA were
analyzed for each comparable merger and acquisition transaction. The EBITDA
calculation for Red Lion was based upon the trailing twelve months EBITDA of Red
Lion. The Comparable Transactions comparison included the following transactions
(acquiree/acquiror), which were announced during the period from 1995 through
1996: Omni Hotels Corp./ TRT Holdings, Inc.; Crown Sterling Suites/FelCor Suite
Hotels, Inc.; Copthorne Hotels (Aer Lingus)/CDL Hotels International; Scott's
Hospitality (Hotel Division)/Whitbread plc; Westin Hotels (Aoki Corp.)/
Blackstone. For the Comparable Transactions the analysis showed that the
aggregate values of such transactions represented a median multiple of 13.4x
trailing twelve months EBITDA. Morgan Stanley observed that the Implied Price
implied a multiple of 11.2x Red Lion's trailing twelve months EBITDA.
No transaction utilized in the comparable transaction analysis is identical
to the Merger. In evaluating the precedent transactions, Morgan Stanley made
judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Red Lion, such as the impact of competition on the
business of Red Lion and the industry generally, industry growth and the absence
of any adverse material change in the financial condition and prospects of Red
Lion or the industry or in the financial markets in general. Mathematical
analysis (such as determining the average or median) is not in itself a
meaningful method of using comparable transaction data.
Discounted Cash Flow Analysis. Morgan Stanley performed a discounted cash
flow analysis to estimate the present value of the stand-alone unlevered free
cash flows that Red Lion is expected to generate if Red Lion performs in
accordance with the scenarios based upon certain financial forecasts for Red
Lion prepared by the managements of Red Lion and Doubletree (the "Management
Case") and an adjusted management
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case also prepared by Doubletree management (the "Adjusted Case"). Unlevered
free cash flow for Red Lion was calculated as net income plus depreciation and
amortization plus deferred taxes plus minority interest plus other non cash
expenses plus after-tax net interest expense less capital expenditures less
investment in working capital. Morgan Stanley calculated terminal values for Red
Lion by applying a range of EBITDA multiples ("Terminal Multiple Methodology")
to EBITDA in fiscal 2005 from 8.0x to 10.0x for the Adjusted Case and from 8.0x
to 10.0x for the Management Case, representing estimated trading ranges of
long-term EBITDA multiples. EBITDA was calculated as earnings before interest,
taxes, depreciation and amortization. The unlevered free cash flow stream and
terminal value were then discounted to their present values using a range of
discount rates from 11.5% to 12.5% for Red Lion. The discount rate range was
selected based upon a weighted average cost of capital analysis. Based on this
analysis, Morgan Stanley calculated per share equity values of Red Lion ranging
from $26 to $33 for the Management Case and $34 to $42 for the Adjusted Case on
a fully diluted share basis.
Doubletree Common Stock Performance. Morgan Stanley's analysis of the
performance of Doubletree Common Stock consisted of an historical analysis of
last reported sales prices and trading volumes from July 10, 1994, the time of
Doubletree's initial public offering, to September 10, 1996. During this period,
based on last reported sales prices on Nasdaq, Doubletree Common Stock achieved
a high of $38.625 and a low of $14.750. Doubletree Common Stock closed at a
price of $37.000 on September 12, 1996.
Exchange Ratio Analysis. Doubletree is offering a combination of cash and
stock for the shares of Red Lion Common Stock. The offering price is comprised
of $21.30 in cash and $8.806 in Doubletree Common Stock. Morgan Stanley observed
that the average historical exchange ratio of Red Lion's closing stock price to
Doubletree's closing stock price for the twelve month period from August 29,
1995 through August 28, 1996 ("Historical Exchange Ratio") was 0.7579. The
implied exchange ratio derived by dividing the $8.806 Doubletree Common Stock
consideration by the five-day weighted average price of Doubletree Common Stock
(calculated from September 5, 1996 through September 11, 1996) of $36.725 is
0.2398. Morgan Stanley also observed that the Historical Exchange Ratio
multiplied by approximately 29.23% (the percentage of the offer price paid in
stock) equals an adjusted exchange ratio of 0.2217.
Pro Forma Analysis of the Merger. Morgan Stanley analyzed the pro forma
impact of the Merger on Doubletree's earnings per share and cash flow (defined
as net income plus depreciation and amortization) per share for the fiscal years
ended 1996 through 2005. Such analysis was based on earnings and cash flow
estimates prepared by the managements of Red Lion and Doubletree. The impact of
the Transaction was measured based upon such managements' estimates and assumed
that the Merger was treated as a purchase for accounting purposes, goodwill was
amortized over 40 years on a straight-line basis and synergies were assumed. The
analysis also recognizes the issuance of Doubletree Common Stock in the Merger
and the issuance of new debt under the New Credit Facility. Morgan Stanley
observed that under the assumptions described above, the contribution of the Red
Lion earnings and cash flow would have an accretive effect on pro forma earnings
and cash flow per share to Doubletree in fiscal years 1997 and 1998.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting any
portions of Morgan Stanley's analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. In addition,
Morgan Stanley may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting for any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of Red Lion.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Doubletree or Red Lion.
The analyses performed by Morgan Stanley are not necessarily indicative of
actual values, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as a part of Morgan
Stanley's fairness opinion and were provided to Doubletree's Board of Directors
in connection with the delivery of Morgan Stanley's written opinion. The
analyses do not
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purport to be appraisals or to reflect the price at which Red Lion might
actually be sold. Because such estimates are inherently subject to uncertainty,
none of Doubletree, Red Lion, Morgan Stanley or any other person assumes
responsibility for their accuracy. In addition, as described above, Morgan
Stanley's opinion and presentation to Doubletree's Board of Directors was one of
many factors taken into consideration by Doubletree's Board of Directors in
making its determination to approve the Merger Agreement. Consequently, the
Morgan Stanley analyses described above should not be viewed as determinative of
the opinion of the Board of Directors of Doubletree with respect to the value of
Doubletree or Red Lion.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the past, Morgan Stanley and
its affiliates have provided financial advisory and financing services for
Doubletree, Red Lion and KKR and have received fees for the rendering of such
services. Morgan Stanley is a full service securities firm engaged in securities
trading and brokerage activities, as well as providing investment banking,
financing and financial advisory services. From time to time, Morgan Stanley has
provided and continues to provide investment banking and financial advisory
services to Doubletree as underwriters and financial advisors. In the ordinary
course of Morgan Stanley's trading and brokerage activities, Morgan Stanley or
its affiliates may at any time hold long or short positions and may trade or
otherwise effect transactions, for their own accounts or for the account of
customers, in debt or equity securities or senior loans of Doubletree or Red
Lion.
Pursuant to an engagement letter between Doubletree and Morgan Stanley,
Doubletree has agreed to pay Morgan Stanley a fee for rendering its opinion of
(i) $1.5 million in the event the Merger is consummated and, under certain
circumstances, if the Merger is not consummated, or (ii) $1.0 million in any
other event. In addition to the foregoing compensation, Doubletree has agreed to
reimburse Morgan Stanley for its expenses, including reasonable fees and
expenses of its counsel engaged with Doubletree's consent. Doubletree has agreed
to indemnify Morgan Stanley and its affiliates, their respective directors,
officers, agents and employees and each person, if any, controlling Morgan
Stanley, or any of its affiliates against certain liabilities, including
liabilities under Federal securities laws, and expenses, related to Morgan
Stanley's engagement as financial advisor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of Red Lion
with respect to the Merger Agreement and the transactions contemplated thereby,
stockholders should be aware that certain members of the management of Red Lion
and the Board of Directors of Red Lion have certain interests in the Merger that
are in addition to the interests of stockholders of Red Lion generally.
Severance and Bonus Arrangements. As described in "The Merger
Agreement -- Certain Covenants -- Employee Benefit Matters," Red Lion is
required to establish and maintain various severance and bonus arrangements in
connection with the Merger. All of the members of the management of Red Lion
will be eligible for severance benefits under the severance arrangements if they
are not retained by the Combined Company. In addition, all headquarters
employees will be entitled to enhanced severance benefits through December 31,
1997. All members of management will be entitled to bonuses under the Management
Bonus Plan maintained by Red Lion based on achieving certain performance
objectives in 1996. In addition, Red Lion will create a bonus pool, out of which
payments aggregating $2.0 million will be made upon the closing of the Merger to
certain management employees.
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The following table indicates for each person who is an executive officer
of Red Lion and eligible for a bonus from the $2.0 million bonus pool, the
amount of bonus payable to such person upon the closing of the Merger.
<TABLE>
<CAPTION>
BONUS AMOUNT
------------
<S> <C>
C. Michael Vernon............................................. $100,000
Beth A. Ugoretz............................................... 100,000
Michael J. Crowley............................................ 250,000
Bradley E. Hutton............................................. 250,000
Jeffrey G. Angus.............................................. 200,000
Bruce T. Fery................................................. 50,000
Dan R. Jackson................................................ 300,000
Anupam Narayan................................................ 300,000
Jack G. Reiss................................................. 250,000
Paul R. Ryan.................................................. 200,000
</TABLE>
At the Effective Time, David J. Johnson, the President, Chief Executive
Officer and Chairman of the Board of Red Lion, will receive a payment of
approximately $2.0 million under his Nonqualified Supplemental Retirement
Benefit Agreement.
If an employee is a party to a Severance Agreement (as described in "The
Merger Agreement -- Certain Covenants -- Employee Benefit Matters") and receives
a payment in connection with the Merger (a "Payment") which constitutes an
excess parachute payment under Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), such employee will receive an additional payment
(the "Gross-Up Payment") in an amount such that the net amount retained by the
employee, after deduction of any excise tax on such Payment under Section 4999
of the Code and any Federal, State or local income tax and excise tax under
Section 4999 of the Code on the Gross-Up Payment and any interest, penalties or
additions to tax payable by the employee with respect thereto shall equal the
amount of the Payment.
Employee Stock Options. As described in "The Merger Agreement -- Effect of
the Merger on Stock Options," at the Effective Time, holders of then outstanding
Red Lion Options will be entitled to cash and Doubletree Common Stock with
respect to such options.
The following table indicates, for each person who is an executive officer
or director of Red Lion and who will hold Red Lion Options at the Effective
Time, (a) the number of shares of Red Lion Common Stock subject to such options
that were vested at October 1, 1996 ("vested option"), (b) the number of shares
of Red Lion Common Stock subject to such options that were not vested at October
1, 1996 ("unvested options"), (c) the exercise price per share of Red Lion
Common Stock of all vested and unvested options, (d) the aggregate amount of
Cash Consideration that would be payable to such holder (excluding any
interest), (e) the aggregate number of shares of Doubletree Common Stock that
would be payable to such holder and (f) the total value of the option
consideration that would be payable to such holder with respect to such vested
and unvested options (based on an assumed price of $36.73 per share of
Doubletree Common Stock).
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<TABLE>
<CAPTION>
(B)
(A) RED LION (C)
RED LION COMMON STOCK EXERCISE (E) (F)
COMMON STOCK SUBJECT TO PRICE OF (D) AGGREGATE NUMBER OF AGGREGATE
SUBJECT TO UNVESTED RED LION AGGREGATE CASH SHARES OF DOUBLETREE OPTION
OPTION HOLDER VESTED OPTIONS OPTIONS(1) OPTIONS CONSIDERATION(2) COMMON STOCK(2) CONSIDERATION(2)
- ------------------------------------- ------------------ ------------- -------------- -------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
David J. Johnson....... 870,833 -- $ 19.00 $ 6,842,600 77,018 $ 9,671,471
C. Michael Vernon...... 15,000 45,000 21.50 365,326 4,112 516,360
Beth A. Ugoretz........ 12,500 37,500 19.00 392,880 4,422 555,300
Thomas W. Henry........ 11,250 33,750 19.00 353,621 3,979 499,770
Steven L. Hubbard...... 11,250 33,750 19.00 353,621 3,979 499,770
Michael J. Crowley..... 11,250 33,750 19.00 353,621 3,979 499,770
Bradley E. Hutton...... 11,250 33,750 19.00 353,621 3,979 499,770
Jack G. Reiss.......... 11,250 33,750 19.00 353,621 3,979 499,770
George H. Schweitzer... 11,250 33,750 19.00 353,621 3,979 499,770
Jeffrey G. Angus....... 8,750 26,250 19.00 275,031 3,095 388,710
Bruce T. Fery.......... 8,750 26,250 19.00 275,031 3,095 388,710
Dan R. Jackson......... 8,750 26,250 19.00 275,031 3,095 388,710
Anupam Narayan......... 8,750 26,250 19.00 275,031 3,095 388,710
Paul R. Ryan........... 8,750 26,250 19.00 275,031 3,095 388,710
-------------- ---------- -------------- ---------- ----------------
1,009,583 416,250 $ 11,097,687 124,901 $ 15,685,301
============ =============== ============ ================ =============
</TABLE>
- ---------------
(1) All Red Lion Options will become vested immediately prior to consummation of
the Merger.
(2) Amounts presented do not reflect any reduction for withholding taxes.
Persons Associated with the Partnership. The Partnership beneficially owns
66.7% of the outstanding shares of Red Lion Common Stock. RLA is the general
partner of the Partnership, and has sole voting and investment power with
respect to the shares of Red Lion 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 Red Lion, is a stockholder, director and an executive
vice president of RLA. Edward A. Gilhuly, a director of Red Lion, 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. Doubletree will appoint Mr.
Gilhuly and Mr. Michelson to the Board of Directors of Doubletree, effective
upon consummation of the Merger.
Mr. Johnson, the Chief Executive Officer and Chairman of the Board of Red
Lion, is party to an incentive compensation agreement with the Partnership which
provides for the payment of compensation to Mr. Johnson in connection with
distributions by the Partnership to its partners. Following consummation of the
Merger, the Partnership may make a distribution to its partners. After such
distribution exceeds a threshold amount, Mr. Johnson will be entitled to receive
the compensation provided by the agreement with the Partnership.
At the Effective Time, pursuant to the Merger Agreement, the 1993
Registration Rights Agreement will be amended to grant to the Partnership
certain demand and "piggyback" registration rights with respect to the shares of
Doubletree Common Stock to be issued to the Partnership in exchange for its
shares of Red Lion Common Stock pursuant to the Merger. See "The Merger
Agreement -- Registration Rights Agreement; Lock-Up."
At the Effective Time, Doubletree, Red Lion, the Partnership and certain
affiliates of Red Lion will enter into a Partnership Services Agreement (the
"Partnership Services Agreement") pursuant to which Doubletree will, upon
request from the Partnership, provide certain support services to the
Partnership in return for a fee. In addition, pursuant to the Partnership
Services Agreement, Doubletree will agree to guaranty, subject to defenses
available to Red Lion, the liabilities and obligations of Red Lion owed to the
Partnership and its affiliates arising out of or related to Red Lion's business.
See "The Merger Agreement -- Partnership Services Agreement."
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Indemnification. For a discussion of certain agreements by Doubletree with
respect to indemnification of and insurance for directors and officers of Red
Lion, see "The Merger Agreement -- Certain Covenants -- Indemnification and
Insurance."
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting,
in accordance with generally accepted accounting principles ("GAAP"). Under this
method of accounting, the purchase price will be allocated to assets acquired
and liabilities assumed based on their estimated fair values at the Effective
Time. Income of the Combined Company will not include income (or loss) of Red
Lion prior to the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the material Federal income tax
consequences to a holder of Red Lion Common Stock associated with the Merger,
assuming that the Merger is consummated as contemplated herein. Because the
following discussion does not describe all the potentially relevant tax
considerations, each holder of Red Lion Common Stock should consult his or her
own tax advisor regarding the tax consequences of the Merger in the light of
such holder's own situation, including the application and effect of any state,
local or foreign income and other tax laws. In particular, the discussion set
forth below may not be applicable to special classes of taxpayers including,
without limitation, foreign persons, tax-exempt entities and holders who
acquired their Red Lion Common Stock pursuant to the exercise of an employee
stock option or otherwise as compensation. Holders of Red Lion Common Stock
should be aware that the Federal income tax rate for certain individuals on
long-term capital gains would be significantly lower than the rate imposed on
ordinary income or short-term capital gain. The discussion is based upon the
Federal income tax laws as in effect on the date hereof, and there can be no
assurance that future legislation, regulations, administrative rulings or court
decisions will not adversely affect the accuracy of the statements contained
herein. The discussion assumes that any Red Lion Common Stock exchanged in the
Merger is held as a capital asset.
Tax Treatment of Holders of Red Lion Common Stock. THE EXCHANGE OF RED
LION COMMON STOCK IN THE MERGER WILL BE FULLY TAXABLE TO HOLDERS OF SUCH STOCK.
Consequently, a holder of Red Lion Common Stock who, pursuant to the Merger,
exchanges such holder's Red Lion Common Stock for cash and Doubletree Common
Stock will realize a gain or loss measured by the difference between (i) the sum
of the amount of cash and the fair market value of the Doubletree Common Stock
(based on its trading price on the effective date of the Merger) received in the
Merger and (ii) such holder's tax basis in the Red Lion Common Stock. Any gain
or loss with respect to Red Lion Common Stock exchanged in the Merger will
constitute a long- or short-term capital gain or loss (depending on whether the
holder held such Red Lion Common Stock for more than one year). Such holder's
adjusted basis for the Doubletree Common Stock received generally will be the
fair market value of such stock on the effective date of the Merger, and such
holder's holding period for Doubletree Common Stock received will begin on the
day after the Effective Time of the Merger and will not include the holding
period of Red Lion Common Stock exchanged in the Merger.
Pursuant to the Merger Agreement, Red Lion will pay any real property
transfer taxes ("Transfer Taxes") imposed on its stockholders by reason of the
Merger and prepare and file any tax returns required with respect to those
Transfer Taxes. The Merger Agreement provides that the stockholders of Red Lion
shall be deemed to have agreed to be bound by the allocations established in the
preparation of any such tax returns. Red Lion's payment of Transfer Taxes on
behalf of a stockholder may constitute a taxable distribution to such
stockholder in the amount of such payment.
Backup Withholding. In order to avoid "backup withholding" of Federal
income tax on payments of cash to a holder who exchanges his or her Red Lion
Common Stock in the Merger, a holder must, unless an exception applies under the
applicable law and regulations, provide the payor of such cash with such
holder's correct taxpayer identification number ("TIN") on a Form W-9 and
certify under penalties of perjury that such number is correct and that such
holder is not subject to backup withholding. A Form W-9 is included as
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part of the letter of transmittal to be sent to holders of Red Lion Common Stock
by the Exchange Agent. If the correct TIN and certifications are not provided a
penalty may be imposed on a holder by the Internal Revenue Service (the "IRS")
and the cash payments received by a holder in exchange for shares of Red Lion
Common Stock in the Merger may be subject to backup withholding tax at a rate of
31%.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER, IT IS RECOMMENDED THAT RED LION
STOCKHOLDERS CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL (AND ANY STATE,
LOCAL AND FOREIGN) TAX CONSEQUENCES OF THE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
REGULATORY APPROVAL
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated unless notification
has been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division"), and
specified waiting period requirements have been satisfied. Doubletree and Red
Lion each filed notification and report forms with the FTC and the Antitrust
Division under the HSR Act with respect to the Merger on September 17, 1996. The
required waiting period under the HSR Act was terminated by the FTC and the
Antitrust Division as of September 30, 1996 (prior to its originally scheduled
expiration on October 17, 1996). However, at any time before or after the
consummation of the Merger, and notwithstanding that the HSR Act waiting period
has been terminated, any federal or state antitrust authorities could take
action under the antitrust laws as they deem necessary or desirable in the
public interest. Such action could include seeking to enjoin the consummation of
the Merger or seeking divestiture of all or part of the assets of Red Lion.
Private parties may also seek to take legal action under the antitrust laws
under certain circumstances.
Doubletree and Red Lion do not believe that any other material governmental
or regulatory approvals or actions will be required for consummation of the
Merger. See "The Merger Agreement -- Conditions."
NASDAQ QUOTATION
The obligations of the parties to consummate the Merger are subject to the
condition that the shares of Doubletree Common Stock to be issued pursuant to
the Merger have been approved for quotation on Nasdaq, subject only to official
notice of issuance. Doubletree will file an application for such approval. The
shares of Doubletree Common Stock are traded on Nasdaq under the symbol "TREE."
See "The Merger Agreement -- Conditions."
FEDERAL SECURITIES LAW CONSEQUENCES
The shares of Doubletree Common Stock to be issued to the stockholders of
Red Lion in connection with the Merger have been registered under the Securities
Act. All shares of Doubletree Common Stock received by Red Lion stockholders in
the Merger will be freely transferable, except that shares of Doubletree Common
Stock received by persons who are deemed to be "affiliates" (as such term is
defined under the Securities Act) of Red Lion at the time of the Special Meeting
may be resold by them only in compliance with the resale provisions of Rule 145
promulgated under the Securities Act (or Rule 144 in the case of such persons
who become affiliates of Doubletree) or pursuant to an effective registration
statement under the Securities Act covering such shares. Persons who may be
deemed to be affiliates of Red Lion or Doubletree generally include individuals
or entities that control, are controlled by, or are under common control with,
such party and may include certain officers and directors of such party as well
as principal stockholders of such party.
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The Merger Agreement requires Red Lion to use commercially reasonable
efforts to cause each of its affiliates to execute a written agreement,
substantially in the form attached as an exhibit to the Merger Agreement, to the
effect that such person will not offer to sell, sell, transfer or otherwise
dispose of any of the shares of Doubletree Common Stock issued to such person in
or pursuant to the Merger unless (a) such sale, transfer or other disposition
has been registered under the Securities Act, (b) such sale, transfer or other
disposition is made in conformity with Rule 145 under the Securities Act or (c)
in the opinion of counsel or pursuant to a "no-action" letter obtained from the
Commission by such person, such sale, transfer or other disposition is exempt
from registration under the Securities Act (the "Affiliate Letters"). Under the
Merger Agreement, persons who are affiliates of Red Lion will not be entitled to
exchange their certificates formerly representing Red Lion Common Stock for any
consideration payable in connection with the Merger until Doubletree has
received such written agreement from such person.
APPRAISAL RIGHTS
Any person who is a holder of record of shares of Red Lion Common Stock and
who objects to the terms of the Merger may seek appraisal of the "fair value" of
such holder's Red Lion Common stock under and in compliance with the
requirements of Section 262 of the DGCL (the Red Lion Common Stock as to which
such appraisal rights have been asserted being referred to herein as the
"Dissenting Shares"). Section 262 provides a procedure by which persons who are
holders of Red Lion Common Stock at the Effective Time of the Merger may seek an
appraisal of part of or all their Red Lion Common Stock in lieu of accepting
shares of Doubletree Common Stock in exchange therefor as described below under
"The Merger Agreement -- Merger Consideration." In any such appraisal
proceeding, the Delaware Court of Chancery (the "Chancery Court") would
determine the "fair value" of the Dissenting Shares. Holders of Red Lion Common
Stock should recognize that such an appraisal could result in a determination of
a value higher or lower than, or equivalent to, the Merger Consideration. The
following is a summary of the principal provisions of Section 262 and does not
purport to be a complete description. A copy of Section 262 is attached hereto
as Appendix D and is incorporated herein by reference.
FAILURE TO TAKE ANY NECESSARY STEPS FULLY AND PRECISELY TO SATISFY THE
REQUIREMENTS OF SECTION 262 OF THE DGCL WILL RESULT IN A TERMINATION OR WAIVER
OF THE APPRAISAL RIGHTS OF THE RED LION COMMON STOCKHOLDER UNDER SUCH SECTION.
IN THAT CASE, EACH SHARE OF RED LION COMMON STOCK OWNED BY SUCH STOCKHOLDER
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME WILL BE CONVERTED INTO THE RIGHT TO
RECEIVE THE MERGER CONSIDERATION, AS FURTHER DESCRIBED HEREIN, PURSUANT TO THE
MERGER AGREEMENT.
Under Section 262, a corporation, not less than 20 days prior to the
meeting at which a proposed merger is to be voted on, must notify each of its
stockholders entitled to appraisal rights as of the record date of the meeting
that such appraisal rights are available and include in such notice a copy of
Section 262. This Proxy Statement/Prospectus constitutes such notice to the
holders of Red Lion Common Stock. Stockholders wishing to exercise appraisal
rights are urged to review carefully the complete text of Section 262.
A holder of Red Lion Common Stock, electing to exercise appraisal rights
under Section 262 must (a) deliver to Red Lion, before the taking of the vote on
the Merger Agreement, a written demand for appraisal that is made by or on
behalf of the person who is the holder of record of the Dissenting Shares and
(b) not vote in favor of adoption of the Merger Agreement. A proxy or vote
against approval and adoption of the Merger Agreement does not constitute such a
demand. In addition, mere failure, after the completion of the Merger, to
execute and return a letter of transmittal to the Exchange Agent (as defined
below) does not constitute a demand. A holder of Red Lion Common Stock electing
to demand appraisal must do so before the taking of the vote on the Merger
Agreement by a separate written demand that reasonably informs Red Lion of the
identity of the holder of Red Lion Common Stock of record and of such holder's
intention thereby to demand the appraisal of such holder's Red Lion Common
Stock. Written demands for appraisal should be directed to Red Lion, 4001 Main
Street, Vancouver, Washington 98663, Attention: Beth A. Ugoretz, Senior Vice
President, General Counsel and Secretary.
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Only the holder of record of Red Lion Common Stock is entitled to assert
appraisal rights for the Red Lion Common Stock registered in that holder's name.
The holder of Red Lion Common Stock asserting appraisal rights must hold Red
Lion Common Stock of record on the date of making the demand and continuously
through the Effective Time. The demand should be executed by or for the holder
of record, fully and correctly, as the holder's name appears on the holder's
stock certificates. If the stock is owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, execution of the demand should be
made in that capacity, and if the stock is owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all owners. An authorized agent, including one of two or more
joint owners, may execute the demand for appraisal for a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is acting as agent
for the record owner or owners.
A record holder who holds Red Lion Common Stock as nominee for beneficial
owners may exercise the holder's right of appraisal with respect to the Red Lion
Common Stock held for all or less than all of such beneficial owners. In such
case, the written demand should set forth the number of shares of Red Lion
Common stock covered by it. Where no number of shares of Red Lion Common Stock
is expressly mentioned, the demand will be presumed to cover all Red Lion Common
stock held in the name of the record holder.
Within ten days after the Effective Time, the Surviving Corporation (as
defined below) will send notice as to the effectiveness of the Merger to each
person who, prior to the Effective Time of the Merger, made proper written
demand for appraisal and who did not vote in favor of, or consent to, the
Merger.
Within 120 days after the Effective Time, the Surviving Corporation or any
holder of Dissenting Shares may file a petition in the Chancery Court demanding
a determination of the fair value of all of the Dissenting Shares. Holders of
Dissenting Shares should not assume that (i) the Surviving Corporation will file
a petition with respect to the appraisal value of their Dissenting Shares, (ii)
the Surviving Corporation will initiate any negotiations with respect to the
"fair value" of such Dissenting Shares or (iii) the Surviving Corporation will
notify them of any act in connection with the Merger other than as required by
law. Accordingly, holders of Red Lion Common Stock should regard it as their
obligation to initiate all necessary action with respect to the perfection of
their appraisal rights within the time periods prescribed in Section 262.
Within 120 days after the Effective Time, any holder of Dissenting Shares
is entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of Dissenting Shares and the
aggregate number of holders of such Dissenting Shares. The Surviving Corporation
is required to mail such statement within ten days after it receives a written
request therefor.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Chancery Court will determine the holders of Red Lion Common Stock
entitled to appraisal rights and will appraise the Dissenting Shares owned by
such holders, determining their "fair value" exclusive of any element of value
arising from the accomplishment or expectation of the Merger and will determine
a fair rate of interest, if any, to be paid upon the "fair value." In
determining "fair value" of the Dissenting Shares, the Chancery Court shall take
into account all relevant factors. The Delaware Supreme Court has stated that
such factors include "market value, asset value, dividends, earnings prospects,
the nature of the enterprise and any other facts which were known or which could
be ascertained as of the date of merger which throw any light on future
prospects of the merged corporation." In Weinberger v. UOP, Inc., the Delaware
Supreme Court stated, among other things, that "proof of value by any techniques
or methods generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in an appraisal proceeding.
The value so determined for the Dissenting Shares could be more or less than, or
the same as, the Merger Consideration. The Chancery Court may also order that
all or a portion of the expenses incurred by any holder of Dissenting Shares in
connection with an appraisal proceeding, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, be charged pro rata against the value of all the
Dissenting Shares.
Any holder of Red Lion Common Stock who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote the Red Lion Common Stock subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on such Red Lion
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Common Stock (other than those payable or deemed to be payable to holders of Red
Lion Common Stock of record as of a date prior to the Effective Time) or on any
shares of Doubletree Common Stock otherwise issuable, but for such appraisal
demand, in substitution therefor.
A holder of Red Lion Common Stock will fail to perfect, or effectively
lose, such holder's right to appraisal if no petition for appraisal is filed
within 120 days after the Effective Time, or if the holder of Red Lion Common
Stock delivers to Red Lion a written withdrawal of such holder's demand for an
appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Effective Time requires the written
approval of the Surviving Corporation. Holders of Red Lion Common Stock should
also note that surrender to the designated exchange agent of certificates for
their Red Lion Common Stock may constitute a waiver of appraisal rights under
the DGCL.
If an appraisal proceeding is timely instituted, such proceeding may not be
dismissed as to any holder of Red Lion Common Stock who has perfected his right
of appraisal without the approval of the Chancery Court.
Under the DGCL, holders of Doubletree Common Stock will not be entitled to
any appraisal or dissenter's rights in connection with the Merger.
FINANCING OF THE MERGER
The total amount of funds required by Doubletree to consummate the Merger
and to pay related fees and expenses is expected to be approximately $918.8
million, including approximately $684.3 million to be paid as Cash Consideration
in the Merger, approximately $213.3 million which will be used to repay existing
outstanding indebtedness of Red Lion immediately following consummation of the
Merger and $21.2 million of estimated fees and expenses excluding underwriting
discounts and commissions in connection with the Equity Offering.
It is currently anticipated that such amounts will be financed (the
"Financing Plan") through (i) $600.0 million of borrowings under the New Credit
Facility, (ii) approximately $191.0 million in net proceeds from the Equity
Offering, (iii) $100.0 million in proceeds from the GEPT Equity Investment, and
(iv) cash on hand.
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN MILLIONS)
<S> <C>
Sources of Funds:
Borrowings under the New Credit Facility....................... $600.0
Net proceeds from the Equity Offering.......................... 191.0
Proceeds from the GEPT Equity Investment....................... 100.0
Cash on hand................................................... 27.8
----
Total sources of funds.................................... $918.8
====
Uses of Funds:
Cash Consideration in the Merger............................... $684.3
Repayment of existing indebtedness of Red Lion................. 213.3
Estimated fees and expenses, excluding underwriting discounts
and commissions in connection with the Equity Offering....... 21.2
----
Total uses of funds....................................... $918.8
====
</TABLE>
Depending on prevailing financial, economic and market conditions
(including the trading market for Doubletree Common Stock) and any other factors
or considerations the Board of Directors of Doubletree deems relevant,
Doubletree may decide to increase the size of the Equity Offering, and sell
additional shares of Doubletree Common Stock in lieu of a portion of such
borrowings under the New Credit Facility.
In the event that the Equity Offering is not consummated at or prior to the
Effective Time, Doubletree currently intends to obtain substitute financing, to
the extent necessary, through the Bridge Loan and
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additional borrowings under the New Credit Facility. In such event, subject to
prevailing financial, economic and market conditions (including the trading
market for Doubletree Common Stock) and any other factors or considerations the
Board of Directors or management of Doubletree deems relevant, Doubletree
intends to consummate the Equity Offering or the issuance of debt as soon as
practicable following the Effective Time if it is able to do so on satisfactory
terms, and to use the net proceeds therefrom to refinance the Bridge Loan and
redeem and retire the senior subordinated notes issued in connection therewith.
New Credit Facility. The New Credit Facility provides for a term loan
facility in the amount of $636.0 million and a revolving credit facility in the
amount of $100.0 million. As part of the Financing Plan, Doubletree intends to
borrow $600.0 million pursuant to the term loan facility. Principal amounts
under the term loan facility become due, commencing in 1997, in the amount of
$7.0 million in such year. Thereafter and through 2004, annual principal
payments under the term loan range from $57.0 million to a maximum of $146.0
million in 2003 with the term loan facility expiring, and the then outstanding
principal amount becoming due and repayable in full, in 2004. The revolving
credit facility expires, and is repayable in full, on the sixth anniversary
after the Effective Time. The term loan and the revolving credit facility each
bear interest payable quarterly at variable rates dependent upon applicable debt
coverage ratios.
The New Credit Facility will be guaranteed by all material direct and
indirectly owned subsidiaries of Doubletree, subject to customary exceptions.
The obligations of Doubletree and the guaranteeing entities shall be secured by
a first priority perfected security interest in (i) all stock owned by
Doubletree and the guaranteeing entities (except for the REIT Preferred Shares,
as defined below), (ii) all notes owned by Doubletree and the guaranteeing
entities with a principal amount of $1.0 million or more, and (iii) all other
beneficially-owned tangible and intangible assets of Doubletree and the
guaranteeing entities, to the extent assignable.
The New Credit Facility will contain customary financial covenants, which
may include fixed charge and interest coverage ratios and a maximum ratio of
debt to EBITDA (as defined therein). The New Credit Facility will contain
certain customary covenants which may include, without limitation, restrictions
on mergers, consolidations, acquisitions, sale of assets, payment of dividends,
transactions with affiliates, sale and lease-back transactions, liens, capital
expenditures, debt and investments. The New Credit Facility will include
customary events of default, including a change of control of Doubletree. The
New Credit Facility is subject to numerous conditions.
GEPT Equity Investment. Pursuant to the GEPT Equity Investment, at the
Effective Time, GEPT or an affiliate thereof will purchase a number of shares of
Doubletree Common Stock equal to the quotient of $100.0 million divided by a
share price, at GEPT's election (to be made not less than 20 trading days prior
to the Effective Time), of either (i) the implied price per share of Doubletree
Common Stock used for purposes of determining the final Exchange Ratio or (ii)
the market price, net of underwriting discounts, of shares of Doubletree Common
Stock sold in the Equity Offering (or, if the Equity Offering is not consummated
by the Effective Time, the Final Doubletree Stock Price under the Merger
Agreement). GEPT or an affiliate thereof will also be issued five-year Warrants
to purchase 10% of the number of shares of Doubletree Common Stock purchased by
GEPT or such affiliate at the Effective Time, at an exercise price per share
equal to the price at which GEPT or such affiliate elects to purchase such
shares at the Effective Time.
The Bridge Loan. Doubletree intends to utilize the Bridge Loan only to the
extent necessary to finance the Merger in the event that the Equity Offering is
not consummated at or prior to the Effective Time. The Bridge Loan provides for
the issuance of up to $150.0 million principal amount of senior subordinated
notes (the "Bridge Notes") by Doubletree. The Bridge Notes mature one year from
the date of issuance and will bear interest at a rate (the "Applicable Interest
Rate") equal to the highest of: (i) the prime rate plus 3%; (ii) three-month
U.S. LIBOR plus 5.75% and (iii) the highest yield on any of the one, three, five
and ten-year United States obligations plus 4.75%. If the Bridge Notes are not
repaid in full within six months of issuance, they will bear interest at the
Applicable Interest Rate plus 1% with an increase of 0.5% at the end of each
three-month period thereafter at which the Bridge Notes remain outstanding (the
"Incremental Spread").
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Doubletree intends to refinance any amounts borrowed under the Bridge Loan
as soon as practicable after the issuance of the Bridge Notes thereunder. If,
however, Doubletree is unable to repay the Bridge Notes in full prior to their
maturity, the Bridge Loan provides that Doubletree will refinance the Bridge
Notes through an issuance of senior subordinated rollover notes (the "Rollover
Notes") which mature eight years from their date of issuance and warrants, on a
pro rata basis, representing up to an aggregate of 3.5% of the total outstanding
Doubletree Common Stock to the holders of the Bridge Notes. The Rollover Notes
bear interest at the rate of the Applicable Interest Rate plus the Incremental
Spread with an increase of 0.5% at the end of each three-month period thereafter
at which the Rollover Notes are outstanding. The warrants will be exercisable at
a nominal price for a period of five years from the delivery of such warrants to
the holders thereof.
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full text of the Merger Agreement.
THE MERGER
Pursuant to the Merger Agreement, subject to the terms and conditions
thereof, at the Effective Time of the Merger, Merger Sub will be merged with and
into Red Lion. As a result of the Merger, the separate corporate existence of
Merger Sub will cease, and Red Lion will continue as the surviving corporation
of the Merger (the "Surviving Corporation").
As promptly as practicable after the satisfaction or waiver of the
conditions to the Merger, Doubletree and Red Lion will cause a certificate of
merger with respect to the Merger to be executed and filed with the Secretary of
State of the State of Delaware in accordance with the DGCL (the "Certificate of
Merger"). The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or such later time
as is specified in the Certificate of Merger (the "Effective Time"). Subject to
the satisfaction (or waiver) of the other conditions to the obligations of
Doubletree and Red Lion to consummate the Merger, it is presently expected that
the Merger will be consummated immediately following the Special Meeting or as
soon thereafter as such other conditions are satisfied.
MERGER CONSIDERATION
At the Effective Time, by virtue of the Merger and without any action on
the part of the holders thereof, each share of Red Lion Common Stock which is
outstanding immediately prior to the Effective Time (other than shares owned by
or held in treasury of Red Lion, shares owned by Doubletree or any direct or
indirect wholly owned subsidiary of Red Lion or Doubletree, and shares as to
which appraisal rights have been perfected, and not withdrawn or otherwise lost,
under the DGCL) will be converted into the right to receive (i) $21.30 in cash,
plus, if the Effective Time of the Merger does not occur on or prior to November
18, 1996, interest accruing at a fluctuating rate per annum equal to the prime
interest rate from time to time of Bankers Trust Company, compounded daily, on
$30.106 plus such accrued interest, for the period commencing on November 18,
1996 and ending on the day on which the Effective Time occurs (the "Cash
Consideration"), and (ii) 0.2398 shares (the "Exchange Ratio") of Doubletree
Common Stock (the "Stock Consideration" and, collectively together with the Cash
Consideration, the "Merger Consideration"); provided, however, that in the event
that the "volume-weighted average quote" of the reported sales prices per share
of the Doubletree Common Stock quoted on The Nasdaq Stock Market's National
Market ("Nasdaq"), as reported by Bloomberg L.P., for the 10 consecutive trading
days (on which shares of the Doubletree Common Stock are actually traded)
immediately preceding the second business day prior to the Effective Time (the
"Final Doubletree Stock Price"), is equal to or less than $34.89, or equal to or
greater than $38.56, the Exchange Ratio shall be subject to adjustment as
follows: (a) if the Final Doubletree Stock Price is equal to or less than
$31.22, then the Exchange Ratio shall be equal to the sum of 0.2398 plus the
quotient obtained by dividing $0.8806 by the Final Doubletree Stock Price; (b)
if the Final Doubletree Stock Price is greater than $31.22
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and equal to or less than $34.89, then the Exchange Ratio shall be equal to the
quotient obtained by dividing $8.3657 by the Final Doubletree Stock Price; (c)
if the Final Doubletree Stock Price is equal to or greater than $38.56 but less
than $42.23, then the Exchange Ratio shall be equal to the quotient obtained by
dividing $9.2463 by the Final Doubletree Stock Price; (d) if the Final
Doubletree Stock Price is equal to or greater than $42.23 but less than $44.07,
then the Exchange Ratio shall be equal to the difference of 0.2398 minus the
quotient obtained by dividing $0.8806 by the Final Doubletree Stock Price; and
(e) if the Final Doubletree Stock Price is equal to or greater than $44.07, then
the Exchange Ratio shall be equal to the quotient obtained by dividing $9.6866
by the Final Doubletree Stock Price. Appendix E to this Proxy
Statement/Prospectus sets forth the number of shares of Doubletree Common Stock
which would be issued in the Merger for each share of Red Lion Common Stock
based on various assumed Final Doubletree Stock Prices.
All shares of Red Lion Common Stock converted into the right to receive the
Merger Consideration shall no longer be outstanding and shall automatically be
cancelled, retired and extinguished and shall cease to exist, and each
certificate which previously represented any such shares shall thereafter
represent the right to receive, upon proper surrender of such certificate as
described below in "-- Exchange of Certificates," the Merger Consideration into
which such shares have been converted. At the Effective Time, the holders of
certificates previously representing shares of Red Lion Common Stock will cease
to have any rights with respect to such shares of Red Lion Common Stock, except
the right to receive the Merger Consideration, cash in lieu of any fractional
shares of Doubletree Common Stock and any unpaid dividends or distributions in
respect of Doubletree Common Stock payable upon surrender of certificates of Red
Lion Common Stock as described below. Except as specified in clause (i) of the
immediately preceding paragraph, no interest will be paid or will accrue on any
Merger Consideration or any cash in lieu of fractional shares or unpaid
dividends or distributions payable upon surrender of certificates of Red Lion
Common Stock for exchange. At or after the Effective Time, there will be no
transfers on the transfer books of Red Lion of shares of Red Lion Common Stock
which were outstanding immediately prior to the Effective Time.
The Merger Agreement provides that if Doubletree effects a stock dividend,
subdivision, reclassification, recapitalization, split, combination, conversion
or exchange of shares between the date of the Merger Agreement and the Effective
Time, the Exchange Ratio will be appropriately adjusted to reflect such stock
dividend, subdivision, reclassification, recapitalization, split, combination,
conversion or exchange of shares.
Each share of Red Lion Common Stock owned by or held in the treasury of Red
Lion and each share of Red Lion Common Stock owned by Doubletree or any direct
or indirect wholly owned subsidiary of Red Lion or Doubletree immediately prior
to the Effective Time will be automatically cancelled and extinguished at the
Effective Time, and no payment or consideration will be issued in exchange
therefor in the Merger.
EXCHANGE OF CERTIFICATES
As soon as practicable (and in any event within three business days) after
the Effective Time, Harris Trust Company of California (the "Exchange Agent")
will mail to each person who was, at the Effective Time, a holder of record of
shares of Red Lion Common Stock or Red Lion Options (as defined below), a letter
of transmittal to be used by such holders in forwarding their certificates
representing shares of Red Lion Common Stock ("Stock Certificates") or
certificates or instruments representing Red Lion Options ("Option Certificates"
and, collectively together with Stock Certificates, "Certificates"), and
instructions for effecting the surrender of the Certificates in exchange for the
Merger Consideration with respect to such shares of Red Lion Common Stock or
such Red Lion Options. See "-- Effect of the Merger on Stock Options." In
addition, commencing on the tenth calendar day immediately preceding the date of
the Special Meeting, the Exchange Agent will (in lieu of delivery following the
Effective Time as described above) promptly deliver such letter of transmittal
and related instructions to each holder of record of a Certificate from whom the
Exchange Agent receives a written request therefor prior to the date of the
Special Meeting, and each such holder of a Certificate shall be entitled
thereafter to surrender such Certificate in exchange for the Merger
Consideration with respect to the shares of Red Lion Common Stock or Red Lion
Options represented thereby in accordance with the procedures described herein.
Holders of record of shares of Red Lion Common Stock or Red Lion Options who
wish to receive the letter of transmittal and related instructions prior to the
Effective Time must deliver a written request therefor to the Exchange Agent at
Harris Trust Company of California, c/o Harris
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<PAGE> 64
Trust Company of New York, 77 Water Street, 4th Floor, New York, New York 10005,
Attention: Mr. Richard Campbell.
Upon surrender to the Exchange Agent of a Certificate for cancellation,
together with such letter of transmittal, and such other documents as may be
required pursuant to such instructions, the holder of such Certificate will be
entitled at or following the Effective Time to receive the aggregate Cash
Consideration, a certificate representing that number of whole shares of
Doubletree Common Stock, cash in lieu of any fractional shares (as described
below) and unpaid dividends and distributions, if any, which such holder has the
right to receive in respect of the Certificate surrendered (in each case less
any withholding taxes which may be required thereon), and the Certificate so
surrendered will be cancelled.
RED LION STOCKHOLDERS AND OPTIONHOLDERS SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING RED LION COMMON STOCK OR RED LION OPTIONS WITH THE ENCLOSED PROXY
CARD. A LETTER OF TRANSMITTAL WILL BE MAILED AFTER THE EFFECTIVE TIME TO EACH
PERSON WHO WAS A HOLDER OF OUTSTANDING SHARES OF RED LION COMMON STOCK OR RED
LION OPTIONS IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. ALTERNATIVELY, COMMENCING
ON THE TENTH CALENDAR DAY PRIOR TO THE DATE OF THE SPECIAL MEETING, A LETTER OF
TRANSMITTAL WILL BE MAILED TO EACH HOLDER OF RED LION COMMON STOCK OR RED LION
OPTIONS WHO SUBMITS A WRITTEN REQUEST THEREFOR PRIOR TO THE DATE OF THE SPECIAL
MEETING AND WHO COMPLIES WITH THE OTHER REQUIREMENTS SET FORTH ABOVE. RED LION
STOCKHOLDERS SHOULD SEND CERTIFICATES REPRESENTING RED LION COMMON STOCK OR RED
LION OPTIONS TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE
WITH, THE INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL.
No Fractional Shares. No certificates or scrip representing fractional
shares of Doubletree Common Stock will be issued in connection with the Merger,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights as a stockholder of Doubletree. In lieu of any such fractional
shares, each holder of Red Lion Common Stock upon surrender of a Certificate for
exchange in connection with the Merger will be paid an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying (i) the Final
Doubletree Stock Price by (ii) the fractional interest to which such holder
would otherwise be entitled (after taking into account all shares of Red Lion
Common Stock then held of record by such holder).
Dividends. No dividends or other distributions on shares of Doubletree
Common Stock will be paid with respect to any shares of Red Lion Common Stock or
other securities represented by a Certificate until such Certificate is
surrendered for exchange as provided in the Merger Agreement. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the holder of certificates representing whole shares of
Doubletree Common Stock issued in exchange therefor, without interest, (i) as
promptly as practicable following such surrender, the amount of any cash payable
in lieu of fractional shares of Doubletree Common Stock to which such holder is
entitled upon such surrender and the amount of any dividends or other
distributions with a record date after the Effective Time theretofore payable
(and not paid) with respect to such whole shares of Doubletree Common Stock,
less the amount of any withholding taxes which may be required thereon, and (ii)
at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender thereof and a
payment date subsequent to surrender thereof payable with respect to such whole
shares of Doubletree Common Stock, less the amount of any withholding taxes
which may be required thereon.
Failure to Exchange. Any portion of the monies from which Cash
Consideration, cash payments in lieu of fractional shares of Doubletree Common
Stock and any dividends or distributions on shares of Doubletree Common Stock
will be made and any shares of Doubletree Common Stock that are unclaimed by the
former stockholders of Red Lion 12 months after the Effective Time will be
delivered to Doubletree. Any former stockholders of Red Lion who have not
theretofore complied with the exchange procedures in the Merger Agreement may
thereafter look only to Doubletree for payment of their Merger Consideration,
cash in lieu of
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fractional shares, and any unpaid dividends and distributions on shares of
Doubletree Common Stock, deliverable in respect of each share of Red Lion Common
Stock such stockholder holds. Notwithstanding the foregoing, neither the
Surviving Corporation nor Doubletree nor any other person will be liable to any
former holder of shares of Red Lion Common Stock for any cash, stock or other
property properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
EFFECT OF THE MERGER ON STOCK OPTIONS
At the Effective Time, each option to purchase Red Lion Common Stock then
outstanding under Red Lion's 1995 Equity Participation Plan (each, a "Red Lion
Option") will be converted into and represent the right to receive (i) the
Merger Consideration into which the share or shares of Red Lion Common Stock
issuable upon exercise of such Red Lion Option would have been converted if such
Red Lion Option had been exercised immediately prior to the Effective Time,
reduced by (ii) the aggregate exercise price for the shares of Red Lion Common
Stock then issuable upon exercise of such Red Lion Option and the amount of any
withholding taxes which may be required thereon (such reductions to be applied
on a pro rata basis against the Cash Consideration and the Stock Consideration
comprising such Merger Consideration, in the respective proportions which such
Cash Consideration and Stock Consideration bear to such Merger Consideration).
All such Red Lion Options will no longer be outstanding and will automatically
be cancelled, retired and extinguished and will cease to exist, and each Option
Certificate will thereafter represent the right to receive, upon surrender of
such Option Certificate in accordance with the procedure described above in
"-- Exchange of Certificates," the Merger Consideration into which such Red Lion
Options have been converted in accordance with the Merger Agreement. The holders
of Option Certificates will cease to have any rights with respect thereto,
except the right to receive the consideration described above and as required by
law. No fractional share of Doubletree Common Stock will be issued and, in lieu
thereof, a cash payment will be made in the same manner as provided with respect
to exchanges of Stock Certificates. No interest will be paid or will accrue on
any Merger Consideration (except in certain circumstances described above in
"--Merger Consideration"), any cash in lieu of fractional shares of Doubletree
Common Stock or any unpaid dividends or distributions in respect of Doubletree
Common Stock payable upon surrender of Option Certificates.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of Red
Lion and Doubletree relating to, among other things: (a) the due organization,
power and good standing of Red Lion and Doubletree and similar corporate
matters; (b) authorization, execution, delivery and enforceability of the Merger
Agreement; (c) the capital structure of Red Lion and Doubletree; (d)
subsidiaries of Red Lion and Doubletree; (e) the absence of conflicts under
charters or bylaws and violations of any instruments or laws, and required
consents or approvals; (f) certain documents filed by each of Red Lion and
Doubletree with the Commission and the accuracy of information contained
therein; (g) conduct of business in the ordinary course and the absence of
material changes or events; (h) litigation and compliance with charters, bylaws,
laws and instruments; (i) employee benefit plans; (j) labor matters; (k) tax
matters; (l) properties and environmental matters; (m) material contracts and
commitments; (n) receipt of fairness opinions; and (o) brokers' and finders'
fees with respect to the Merger.
CERTAIN COVENANTS
Interim Operations. Under the Merger Agreement, Red Lion has agreed (and
has agreed to cause its subsidiaries), among other things, prior to the
Effective Time, unless Doubletree consents in writing or as otherwise expressly
contemplated by the Merger Agreement: (i) to conduct its business and operations
only in the ordinary course of business consistent with past practice; (ii) to
use its reasonable efforts to preserve intact the business organizations,
goodwill, rights, licenses, permits and franchises of Red Lion and its
subsidiaries, and maintain their existing relationships with customers,
suppliers and other persons having business dealings with them; (iii) to use its
commercially reasonable efforts to keep in full force and effect adequate
insurance coverages and maintain and keep its properties and assets in good
repair, working order and condition, normal wear and tear excepted; (iv) not to
amend or modify its certificate of incorporation, by-laws, partnership
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<PAGE> 66
agreement or other charter or organization documents; (v) not to issue or pledge
any capital stock or other voting security of Red Lion or any of its
subsidiaries, or any securities convertible into or exercisable or exchangeable
for any such capital stock or securities, or any options, warrants, calls,
commitments, subscriptions or rights to purchase or acquire any such capital
stock or securities (other than issuances of Red Lion Common Stock upon exercise
of outstanding Red Lion Options granted prior to the date of the Merger
Agreement); (vi) not to split, combine or reclassify any of its capital stock or
issue or authorize or propose the issuance of any other securities in respect of
or in substitution for shares of its capital stock, declare, set aside or pay
any dividends or distributions on any of Red Lion's capital stock, or
repurchase, redeem or otherwise acquire any capital stock or other securities of
Red Lion or any of its subsidiaries; (vii) not to amend or modify the terms of
any Red Lion Options or Red Lion's 1995 Equity Participation Plan, the effect of
which is to make such terms more favorable to holders thereof or persons
eligible for participation therein; (viii) other than in the ordinary course of
business consistent with past practice, not to increase the compensation payable
or to become payable to any directors, officers or employees of Red Lion or any
of its subsidiaries, or grant any severance or termination pay to, or enter into
any employment or severance agreement with any director or officer of Red Lion
or any of its subsidiaries, or adopt or amend in any material respect or
accelerate any rights or benefits under any collective bargaining agreement or
employee benefit plan or arrangement; (ix) not to acquire (including, without
limitation, by merger, consolidation, or acquisition of securities or assets)
any corporation, partnership, joint venture, association or other business
organization or division thereof or any assets of any other person outside the
ordinary course of business consistent with past practice or any interest in any
real properties (whether or not in the ordinary course of business); (x) not to
incur, assume or guarantee any indebtedness for borrowed money (including
draw-downs on letters or lines of credit) or issue or sell any notes, bonds or
other debt instruments, except for renewals of existing bonds and letters of
credit in the ordinary course of business not to exceed $10.0 million, and
advances, loans or other indebtedness in the ordinary course of business
consistent with past practice in an aggregate amount not to exceed $5.0 million;
(xi) not to sell, lease, license, encumber or otherwise dispose of any
properties or assets of Red Lion or any of its subsidiaries (other than in the
ordinary course of business consistent with past practice); (xii) not to
authorize or make any capital expenditures (including by lease) in excess of
$10.0 million in the aggregate through December 31, 1996 (and not in excess of
$2.5 million during January 1997) for Red Lion and all of its subsidiaries;
(xiii) not to make any material change in any of its accounting or financial
reporting methods or practices, except as may be required by GAAP; (xiv) not to
make any tax election or settle or compromise any tax liability either not in
accordance with prior practice or which could reasonably be expected to have a
material adverse effect on Red Lion; (xv) except in the ordinary course of
business consistent with past practice, not to amend, modify or terminate
certain material contracts or waive, release or assign any material rights or
claims thereunder, and (xvi) not to take any action that would, or would be
reasonably likely to, result in any of the representations and warranties set
forth in the Merger Agreement not being true and correct in any material respect
or any of the conditions to the obligations of the parties to effect the Merger
not being satisfied. The parties have further agreed that Red Lion will comply
with certain rights of first refusal held by third parties with respect to its
interests in joint ventures relating to the Red Lion La Posada and Village Motor
Inn, Missoula, Montana, hotels.
Doubletree has agreed (and has agreed to cause its subsidiaries), among
other things, prior to the Effective Time, unless Red Lion consents in writing
or as otherwise expressly contemplated by the Merger Agreement: (i) not to amend
or modify its certificate of incorporation, by-laws, or other charter or
organization documents in any manner which adversely affects the rights, powers
or privileges of holders of Doubletree Common Stock; (ii) not to split, combine
or reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of or in substitution of its capital
stock; (iii) not to declare, set aside or pay any dividends or distributions on
any of its capital stock; and (iv) not to take any action that would, or would
be reasonably likely to, result in any of the representations and warranties set
forth in the Merger Agreement not being true and correct in any material respect
or any of the conditions to the obligations of the parties to effect the Merger
not being satisfied.
Alternative Proposals. Red Lion has agreed that, prior to the Effective
Time, neither it nor any of its subsidiaries will, nor will it or any of its
subsidiaries authorize or permit their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, financial advisor,
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attorney, accountant, consultant or other expert retained by or acting on behalf
of it or any of its subsidiaries) (collectively, "Representatives") to, directly
or indirectly, initiate or solicit any inquiries or the making of any proposal
or offer (including, without limitation, any proposal or offer to any of its
stockholders) concerning, or that may reasonably be expected to lead to, an
Alternative Transaction (as defined below) (any such proposal or offer being
hereinafter referred to as an "Alternative Transaction Proposal"), and that it
will notify Doubletree as soon as practicable (and in any event within 48 hours)
if any such inquiries or proposals are received by, any information or documents
is requested from, or any negotiations or discussions are sought to be initiated
or continued with, Red Lion or any of its subsidiaries; provided, however, that,
to the extent applicable, the Board of Directors of Red Lion is permitted to
comply with Rule 14e-2 promulgated under the Exchange Act with regard to an
Alternative Transaction Proposal. Prior to furnishing any information to, or
entering into any discussions or negotiations with, any person or entity, Red
Lion has agreed that it shall (x) receive from such person or entity an executed
confidentiality agreement in customary form on terms not less favorable to Red
Lion than the terms of the confidentiality agreement dated June 25, 1996 between
Doubletree and Red Lion, providing for confidentiality of information furnished
by Red Lion to Doubletree and its representatives in connection with the
transactions contemplated by the Merger Agreement, and (y) provide written
notice to Doubletree to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity.
For purposes of the Merger Agreement, "Alternative Transaction" means any
of the following involving Red Lion or any of its subsidiaries: (i) any merger,
consolidation, share exchange, business combination or other similar
transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 15% or more of the assets of Red Lion and its subsidiaries,
determined on a consolidated basis in accordance with GAAP; (iii) any tender
offer or exchange offer for 15% of the outstanding shares of capital stock of
Red Lion or the filing of a registration statement under the Securities Act in
connection therewith; (iv) the acquisition by any person or entity of beneficial
ownership or the right to acquire beneficial ownership of, or the formation or
existence of any "group" (as such term is defined under Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) which
beneficially owns, or has the right to acquire beneficial ownership of, 15% or
more of the then outstanding shares of capital stock of Red Lion (other than
through the vesting of Red Lion Options granted to directors, officers,
employees and consultants of Red Lion in accordance with Red Lion's 1995 Equity
Participation Plan as currently in effect); or (v) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement or
commitment to engage in any of the foregoing.
Red Lion Stockholders Meeting. Pursuant to the Merger Agreement, Red Lion
has agreed to duly call and hold the Special Meeting and use all commercially
reasonable efforts to solicit from the stockholders of Red Lion proxies in favor
of approval and adoption of the Merger Agreement and the Merger and to secure
the vote or consent of stockholders required by the DGCL to effect the Merger.
Approval of Doubletree Stockholders. The approval of the Merger Agreement
and the Merger by the stockholders of Doubletree is not required by the DGCL. In
addition, since it is expected that an aggregate of not more than 8,800,000
shares of Doubletree Common Stock, or less than 50% of the issued and
outstanding shares of Doubletree Common Stock as of the Effective Time, will be
issued in the Merger, the approval by the stockholders of Doubletree of such
issuance is not required by the DGCL. However, the Issuer Designation
Requirements of Nasdaq, on which Doubletree Common Stock is listed, require
prior stockholder approval for issuances, in connection with the acquisition of
the stock or assets of another company, of common stock designated for trading
on Nasdaq if the common stock has or will have upon issuance voting power equal
to or in excess of 20% of the voting power outstanding before such issuance, or
if the number of shares of common stock to be issued is or will be equal to or
in excess of 20% of the number of shares of common stock outstanding before such
issuance. The number of shares of Doubletree Common Stock to be issued in
connection with the Merger may, depending on any adjustment to the Exchange
Ratio and the number of shares of Doubletree Common Stock issued in connection
with the Financing Plan, exceed 20% of the total number of all such outstanding
shares. In such event, the Issuer Designation Requirements of Nasdaq would
require Doubletree to obtain the approval of its stockholders for the issuance
of Doubletree Common Stock in the Merger ("Doubletree Stockholder Approval").
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Pursuant to Shareholder Support Agreements dated as of September 12, 1996
(the "Doubletree Shareholder Support Agreements"), GEHOP and certain directors
and officers of Doubletree, all of whom together own of record or beneficially
approximately 39.0% of the aggregate outstanding shares of Doubletree Common
Stock, have agreed to vote all of their Doubletree voting securities in favor of
the approval and adoption of the Merger Agreement and all transactions
contemplated thereby, including the issuance of Doubletree Common Stock in the
Merger. In addition, certain other large institutional holders of approximately
23.0% of the outstanding shares of Doubletree Common Stock have indicated in
writing that they would vote their shares in favor of any required Doubletree
Stockholder Approval. Thus, if Doubletree Stockholder Approval were required,
the affirmative vote by such holders (which, in the aggregate own approximately
62.0% of the total outstanding shares of Doubletree Common Stock) in accordance
with such agreements and written indications of support would assure approval of
such issuance.
Accordingly, at Doubletree's request, Nasdaq has confirmed that the
Doubletree Shareholder Support Agreements, considered together with the
foregoing written indications of support (and assuming the absence of a
"material controversy" involving stockholders with regard to the transaction),
will be regarded as meeting the Issuer Designation Requirements of Nasdaq with
respect to any required Doubletree Stockholder Approval.
Indemnification and Insurance. The Merger Agreement provides that, from
and after the Effective Time, Doubletree will, and will cause the Surviving
Corporation to, indemnify and hold harmless, and advance expenses to, each
person who is now, or has been at any time prior to the date of the Merger
Agreement, an officer or director of Red Lion or any of its subsidiaries (the
"Indemnified Parties") against any losses, claims, damages, judgments,
settlements, liabilities, costs or expenses (including, without limitation,
reasonable attorneys' fees and out-of-pocket expenses) incurred in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such occurring at or prior to the Effective Time (including,
without limitation, in connection with the Merger and the other transactions
contemplated by the Merger Agreement), to the fullest extent that Red Lion or
such subsidiaries would have been permitted, under applicable law and the
certificate of incorporation or by-laws of Red Lion or the organizational
documents of such subsidiaries each as in effect on the date of the Merger
Agreement, to indemnify such person. Unless otherwise required by law, the
Surviving Corporation will also maintain in effect provisions in its certificate
of incorporation and by-laws providing for exculpation of director and officer
liability and indemnification of the Indemnified Parties not less favorable to
the Indemnified Parties than those provisions providing for exculpation of
director and officer liability and indemnification by Red Lion of the
Indemnified Parties contained in the certificate of incorporation and by-laws of
Red Lion as in effect on the date of the Merger Agreement, and the Surviving
Corporation and Red Lion's subsidiaries will not amend, repeal or modify any
such provisions contained in their respective certificates of incorporation and
by-laws, or other organizational documents of such subsidiaries to reduce or
adversely affect the rights of Indemnified Parties thereunder in respect of
actions or omissions by them occurring at or prior to the Effective Time.
From and after the Effective Time until the sixth anniversary thereof,
Doubletree will cause the Surviving Corporation to maintain, without any gaps or
lapses in coverage, directors' and officers' liability insurance covering the
Indemnified Parties who are covered, in their capacities as directors and
officers of Red Lion, by the existing directors' and officers' liability
insurance of Red Lion in force on the date of the Merger Agreement, with respect
to losses or claims arising out of acts or omissions, or alleged acts or
omissions, by them in their capacities as such occurring at or prior to the
Effective Time, and upon terms no less favorable to the Indemnified Parties than
such existing directors' and officers' liability insurance; provided, however,
that the Surviving Corporation will not be required in order to maintain or
procure such coverage to pay an annual premium in excess of 150% of the current
annual premium of $474,000 paid by Red Lion for its existing coverage, and that
if equivalent coverage cannot be obtained, or can be obtained only by paying an
annual premium in excess of such limit, the Surviving Corporation will only be
required to obtain as much coverage as can be obtained by paying an annual
premium equal to such limit.
Employee Benefit Matters. The Merger Agreement provides that Red Lion will
establish and maintain transition severance agreements (the "Severance
Agreements"), to provide severance benefits to officers of Red Lion ("Tier I
Employees") and persons employed at director level positions or as general
managers of
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Red Lion ("Tier II Employees"). Pursuant to the Severance Agreements, if the
employment of a Tier I Employee is terminated (other than "for cause"), or if he
voluntarily terminates employment for "good reason" within two years after the
Effective Time, such Tier I Employee will be entitled to accrued compensation
owed to him and a severance payment equal to two years' "compensation". If the
employment of a Tier II Employee is terminated under the circumstances described
above within one year after the Effective Time, such Tier II Employee will be
entitled to accrued compensation owed to him and a severance payment equal to
one year's "compensation." In addition, Tier I and Tier II Employees will become
100% vested in their pension benefits and, to the extent that any payments to a
Tier I or Tier II Employee constitutes an excess parachute payment under Section
280G of the Code, such Employee will receive a Gross-Up Payment as described in
"The Merger-Interests of Certain Persons in the Merger." For purposes of the
Severance Agreement, "cause" is defined as the commission of a felony by an
employee; "good reason" is defined as (i) any limitation of the employee's
responsibilities or duties, or any demotion in the employee's position as
compared to his responsibilities, duties or position prior to the Effective
Time, (ii) any removal of the employee from, or failure to re-elect the employee
to, any of the positions with Red Lion held by the employee immediately prior to
the Effective Time, (iii) any failure by Red Lion to pay or any reduction by Red
Lion of the employee's salary or bonus as in effect prior to the Effective Time,
(iv) any reduction in employee or fringe benefit coverages below those in effect
prior to the Effective Time, (v) the relocation of the principal place of the
employee's employment to a location that is more than 35 miles further from the
employee's home than the employee's principal place of employment prior to the
Effective Time, or (vi) the imposition of a requirement that the employee travel
to a relocated corporate headquarters for extended periods of time; and
"compensation" is defined as the sum of (i) base compensation as in effect
immediately prior to the Effective Time, (ii) an amount equal to 25% of the
employee's base compensation (in lieu of fringe benefits) and (iii) 1996 target
bonus.
The Merger Agreement also provides that Red Lion will establish, and
continue to maintain through December 31, 1997, a Headquarters Severance Pay
Plan (the "Headquarters Plan") to provide severance benefits to employees who
are covered by Red Lion's corporate payroll who are terminated in connection
with the Merger. Under the Headquarters Plan, an employee will receive a
severance payment equal to 20 weeks' salary plus one additional week's salary
for each continuous year of service.
Pursuant to the Merger Agreement, Red Lion will continue to maintain, for a
one-year period following the Effective Time, for Red Lion employees who are not
eligible for severance payments under the Severance Agreements or the
Headquarters Plan described above, the severance policy maintained by Red Lion
immediately prior to the Effective Time (the "Severance Policy"). Pursuant to
the Red Lion Severance Policy, an employee is entitled to severance pay equal to
one week's salary per year of continuous service. Upon termination of the
Severance Policy, Doubletree shall require Red Lion to provide severance
benefits no less favorable than those provided from time to time to similarly
situated employees of Doubletree.
With respect to the Headquarters Plan and the Severance Policy, the Merger
Agreement provides that for a one-year period commencing with the one year
anniversary of the Effective Time, such plans will cover any layoff or
termination resulting from a reorganization or consolidation of Red Lion.
The Merger Agreement provides that Red Lion will continue to maintain for
1996 the Management Bonus Plan maintained by Red Lion immediately prior to the
Effective Time and will calculate and pay bonuses thereunder consistent with its
terms, including terms relating to proration of bonuses upon employee layoffs,
and the past practice of Red Lion.
At the Effective Time, David J. Johnson, Chief Executive Officer and
Chairman of the Board of Red Lion, will receive a payment of approximately $2.0
million under his Nonqualified Supplement Retirement Benefit Agreement as well
as a Gross-Up Payment as described in "The Merger-Interest of Certain Persons in
the Merger" to the extent such payment constitutes an excess parachute payment
under Section 280G of the Code.
The Merger Agreement requires that Red Lion establish and maintain a
transition bonus plan pursuant to which individuals identified in a schedule to
an exhibit to the Merger Agreement will be entitled to bonuses
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payable at the Effective Time if they continue in the employ of Red Lion until
the Effective Time. The aggregate amount of such bonuses may not exceed $2.0
million.
The Merger Agreement grants Red Lion the right to pay bonuses, after
consultation with Doubletree, in an amount not to exceed $100,000 in the
aggregate.
The Merger Agreement provides that, for purposes of determining eligibility
to participate, vesting, entitlement to benefits and in all other respects where
length of service is relevant under any employee benefit plan or arrangement of
Red Lion or its subsidiaries (including for severance but not for pension
benefit accruals, to the extent not permitted by law), employees of Red Lion and
its subsidiaries as of the Effective Time shall receive service credit for
service with Red Lion and any of its subsidiaries to the same extent such
service was credited under Red Lion's employee benefit plans immediately prior
to the Effective Time.
Certain Other Covenants. Both Doubletree and Red Lion have also agreed:
(i) to give (and to cause their respective subsidiaries to give) the other such
party and its Representatives (including financing sources of Doubletree)
reasonable access to the officers, employees, agents, books, records,
properties, offices, hotels and other facilities of it and its subsidiaries, and
to furnish related information reasonably requested by the other; (ii) to give
prompt notice to the other of any material breach, or event which would be
likely to cause any material breach, of any representation, warranty, covenant
or agreement, or any event which would be likely to cause any condition not to
be satisfied in all material respects; (iii) to use all commercially reasonable
good faith efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations, and to consult and fully cooperate with and provide
reasonable assistance to the other parties to the Merger Agreement and their
Representatives in order, to consummate the transactions contemplated by the
Merger Agreement as promptly as practicable, including making filings with, and
obtaining requisite consents and approvals from, governmental and regulatory
entities and other persons and contesting any action or injunction that delays,
prevents or restricts the Merger; (iv) to cooperate in the filing of the
registration statement on Form S-4 with respect to the issuance of Doubletree
Common Stock in the Merger (the "Registration Statement"), and obtain all
necessary state securities laws permits or approvals; (v) that Doubletree will
use all commercially reasonable efforts to cause the Doubletree Common Stock to
be issued in the Merger to be approved for quotation on Nasdaq, subject to
official notice of issuance, prior to the Effective Time; (vi) to use all
commercially reasonable efforts to obtain customary "comfort" letters of their
respective independent public accountants with respect to the financial
statements and information in the Registration Statement; (vii) that Red Lion
will use all commercially reasonable efforts to obtain and deliver to Doubletree
the Affiliate Letters; (viii) to consult with the other party before issuing any
press release concerning the Merger Agreement, Merger or any other transactions
contemplated by the Merger Agreement; and (ix) that Red Lion will pay, without
deduction or withholding from any amount payable to the holders of Red Lion
Common Stock, on behalf of its stockholders, any New York State real property
gains or transfer taxes or stock transfer taxes and any similar taxes imposed by
any other State (and any penalties and interest with respect to such taxes),
which become payable in connection with the transactions contemplated by the
Merger Agreement (and that such parties will cooperate in the determination of
the portion of the Merger Consideration allocable to the real property of Red
Lion and its subsidiaries in New York State and City, or in any other applicable
jurisdiction).
CONDITIONS
The obligations of Doubletree and Red Lion to consummate the Merger are
subject to the satisfaction of each of the following conditions: (i) the
effectiveness of the Registration Statement and the absence of any stop order
suspending the effectiveness thereof and no proceeding for that purpose having
been initiated or threatened by the Commission, and the receipt of all necessary
approvals under state securities laws relating to the issuance or trading of the
Doubletree Common Stock to be issued in the Merger; (ii) the approval and
adoption by the stockholders of Red Lion of the Merger Agreement and the Merger,
and the receipt of the Doubletree Stockholder Approval or an exemption from the
requirements of Nasdaq to obtain the Doubletree Stockholder Approval; (iii) the
expiration or termination of the waiting period applicable to the consummation
of the Merger under the HSR Act; (iv) the receipt of all consents, approvals,
authorizations, orders or permits required to be obtained prior to the Effective
Time from, or filings or registrations required to be made
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prior to the Effective Time with, any governmental or regulatory authority in
connection with the Merger Agreement (other than pursuant to any statutes, rules
or regulations regulating the consumption, sale or serving of alcoholic
beverages), except where the failure to obtain or make such consent, approval,
authorization, order, permit, filing or registration would not have a Red Lion
Material Adverse Effect or a Doubletree Material Adverse Effect (each as defined
below); (v) the shares of Doubletree Common Stock to be issued in the Merger
shall have been approved for quotation on Nasdaq, subject only to official
notice of issuance; and (vi) the absence of any statute, rule, regulation,
decree, injunction or other order of any governmental or regulatory authority or
any court prohibiting the consummation of the Merger or any other material
transaction pursuant to the Merger Agreement (the parties having used their best
efforts to cause any such decree, judgment or order to be vacated or lifted).
The obligation of Doubletree to consummate the Merger is also subject to
the satisfaction of each of the following conditions: (i) the representations
and warranties of Red Lion in the Merger Agreement (without giving effect to any
qualification contained therein as to materiality, including, without
limitation, the phrases "material," "in all material respects," "substantial" or
"substantially," and Red Lion Material Adverse Effect) shall be true and correct
as of the Effective Time, except for changes specifically permitted or required
by the Merger Agreement, and that those representations and warranties which
address matters only as of a particular date (other than the date of the Merger
Agreement) shall remain true and correct as of such particular date and where
the failure to be so true and correct would not, individually or in the
aggregate, have or be reasonably likely to have a Red Lion Material Adverse
Effect; (ii) Red Lion shall have performed and complied in all material respects
with all agreements and covenants required by the Merger Agreement to be
performed or complied with by it at or prior to the Effective Time; (iii) the
absence of any change, event, occurrence or circumstance in the business,
operations, properties, financial condition or results of operations of Red Lion
or any of its subsidiaries which, individually or in the aggregate, has had or
is reasonably likely to have a material adverse effect on the business,
operations, properties, financial condition or results of operations of Red Lion
and its subsidiaries, each taken as a whole (a "Red Lion Material Adverse
Effect") (except for changes, events, occurrences or circumstances with respect
to general economic or industry conditions or arising as a result of the
transactions contemplated by the Merger Agreement); (iv) the receipt by Red Lion
of the written consent, to the extent necessary, of the Partnership and/or RLH
Partnership L.P. to the change in the name under which the hotel properties,
which are subject to the Master Lease dated as of August 1, 1995 between Red
Lion, as tenant, and RLH Partnership, L.P., as landlord, are operated to
"Doubletree" or a variation thereof designated by Doubletree; (v) the receipt of
a customary "comfort" letter from the independent public accountants of Red Lion
with respect to the financial statements and information of Red Lion in the
Registration Statement; (vi) the Red Lion Shareholder Support Agreement shall be
in full force and effect in accordance with its terms, and the Partnership shall
have performed and complied with all covenants and agreements required to be
performed or complied with by the Partnership thereunder; and (vii) holders of
not more than 10% of the outstanding shares of Red Lion Common Stock shall have
demanded appraisal rights for their shares of Red Lion Common Stock in
accordance with the DGCL.
The obligation of Red Lion to consummate the Merger is also subject to the
satisfaction of each of the following conditions: (i) the representations and
warranties of Doubletree in the Merger Agreement (without giving effect to any
qualification contained therein as to materiality, including, without
limitation, the phrases "material," "in all material respects," "substantial" or
"substantially," and Doubletree Material Adverse Effect) shall be true and
correct as of the Effective Time, except for changes specifically permitted or
required by the Merger Agreement, and that those representations and warranties
which address matters only as of a particular date (other than the date of the
Merger Agreement) shall remain true and correct as of such particular date and
where the failure to be so true and correct would not, individually or in the
aggregate, have or be reasonably likely to have a Doubletree Material Adverse
Effect; (ii) Doubletree shall have performed and complied in all material
respects with all agreements and covenants required by the Merger Agreement to
be performed or complied with by it at or prior to the Effective Time; (iii) the
absence of any change, event, occurrence or circumstance in the business,
operations, properties, financial condition or results of operations of
Doubletree or any of its subsidiaries which, individually or in the aggregate,
has had or is reasonably likely to have a material adverse effect on the
business, operations, properties, financial condition or results of operations
of Doubletree and its subsidiaries, each taken as a whole (a "Doubletree
Material Adverse Effect")
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(except for changes, events, occurrences or circumstances with respect to
general economic or industry conditions or arising as a result of the
transactions contemplated by the Merger Agreement); (iv) the receipt of a
customary "comfort" letter from the independent public accountants of Doubletree
with respect to the financial statements and information of Doubletree in the
Registration Statement; (v) Doubletree shall have entered into the amendment to
the 1993 Registration Rights Agreement described in "-- Registration Rights
Agreement; Lock-up" and the Partnership Services Agreement; (vi) each of the
Doubletree Shareholder Support Agreements shall be in full force and effect in
accordance with its terms, and each stockholder of Doubletree party thereto
shall have performed and complied with all covenants and agreements required to
be performed or complied with by such stockholder thereunder; and (vii) holders
(other than the Partnership and all other directors, officers and affiliates of
Red Lion) of not more than 10% of the outstanding shares of Red Lion Common
Stock shall have demanded appraisal rights for their shares of Red Lion Common
Stock in accordance with the DGCL.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time of the Merger (i) by mutual consent of
Doubletree and Red Lion, (ii) by either Doubletree or Red Lion if (a) the Merger
shall not have been consummated by January 31, 1997, (b) Doubletree shall not
have received an exemption from the requirements of Nasdaq to obtain the
Doubletree Stockholder Approval, and the Doubletree Stockholder Approval shall
not have been obtained upon a vote at a Doubletree Stockholder Meeting duly
convened therefor or at any adjournment thereof, or (c) a court or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by the Merger Agreement and
such order, decree, ruling or other action shall have become final and
non-appealable (and the party seeking to terminate the Merger Agreement therefor
shall have used all reasonable efforts to remove such injunction, order or
decree), (iii) by the Board of Directors of Red Lion (a) if, by reason of an
Alternative Transaction Proposal being made, the Board of Directors of Red Lion
determines that it will not recommend approval of the Merger by the stockholders
of Red Lion, or withdraws such recommendation, whether before or after approval
and adoption of the Merger Agreement by the stockholders of Red Lion, or (b) the
Final Doubletree Stock Price is equal to or less than $29.38, or (iv) by the
Board of Directors of Doubletree if (a) the Board of Directors of Red Lion shall
have withdrawn or modified in a manner materially adverse to Doubletree its
approval or recommendation of the Merger Agreement or the Merger or shall have
recommended an Alternative Transaction Proposal to the stockholders of Red Lion
(together with the circumstances described in (iii)(a) immediately above, a
"Change of Recommendation"), or (b) all of the conditions to the obligations of
Doubletree to consummate the Merger shall have been satisfied, and Doubletree is
unable to consummate the Merger or to pay the Merger Consideration as a result
of its failure to obtain required financing due to the nonfulfillment of (x)
either of the following conditions precedent to the initial loans under the New
Credit Facility: (A) nothing shall have occurred (and the agent lenders and
other lenders thereunder shall not have become aware of any facts or conditions
not previously disclosed to them, and no information previously submitted by or
on behalf of Doubletree to such agent lenders (including, without limitation,
financial, accounting and tax information) is inaccurate, incomplete or
misleading) which could reasonably be expected to have a material adverse effect
on the Merger, the Financing Plan and any Bridge Loan or on the business,
property, assets, operations, liabilities or financial condition of Doubletree,
Red Lion and their respective subsidiaries taken as a whole or (B) there shall
not have occurred and be continuing a material disruption of or material adverse
change in financial, banking or capital markets that would have a material
adverse effect on the successful syndication of the New Credit Facility as
determined by the agent lenders thereunder in their reasonable discretion or (y)
to the extent the Bridge Loan is necessary for such financing, either of the
following conditions precedent to the Bridge Loan: (A) nothing shall have
occurred (and the lenders under the Bridge Loan shall not have become aware of
any facts or conditions not previously disclosed to them, and no information
previously submitted to such lenders by or on behalf of Doubletree (including,
without limitation, financial, accounting and tax information) is inaccurate,
incomplete or misleading) which (in any such case) could reasonably be expected
to have a material adverse effect on the Merger, the Financing Plan or the
Bridge Loan or on the business, property, assets, operations,
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liabilities or financial condition of Doubletree, Red Lion and their respective
subsidiaries taken as a whole and (B) there shall not have occurred any material
adverse change in or material disruption of financial, syndication or capital
markets, that would have a material adverse effect on any "permanent"
refinancing of the Bridge Loan as determined by the lenders under the Bridge
Loan in their reasonable discretion (each of (x) and (y), a "Financing
Contingency") or (c) if the Final Doubletree Stock Price is equal to or less
than $25.71.
TERMINATION FEES
In the event that the Merger Agreement is terminated due to a Change of
Recommendation, Red Lion is required to pay Doubletree a cash fee of $25.0
million simultaneously upon (or, in the case of any such termination by
Doubletree, no later than two business days after) such termination. In the
event that the Merger Agreement is terminated for failure to obtain the
Doubletree Stockholder Approval or an exemption from the requirements of Nasdaq
to obtain the Doubletree Stockholder Approval, Doubletree is required to pay Red
Lion a cash fee of $25.0 million. In the event that the Merger Agreement is
terminated due to a Financing Contingency, Doubletree is required to pay Red
Lion a cash fee of $12.0 million, which fee shall be the sole and exclusive
remedy of Red Lion for the failure of the parties to consummate the Merger. Any
such fees payable by Doubletree will be paid simultaneously with (or, in the
case of any such termination by Red Lion in connection with the failure of
Doubletree to obtain any required Doubletree Stockholder Approval, no later than
two business days after) such termination. Neither party is precluded from
seeking damages for any willful breaches of the Merger Agreement, including,
without limitation, attorneys' fees.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses, except as otherwise
provided in the Merger Agreement, and except that the following expenses will be
shared equally by Doubletree and Red Lion: (a) the filing fee in connection with
the HSR Act filings, (b) filing fees in connection with the Registration
Statement and (c) the out-of-pocket expenses incurred in connection with
printing, filing and mailing this Proxy Statement/Prospectus.
AMENDMENT AND WAIVER
The parties, by action taken by their respective Boards of Directors, may
modify or amend the Merger Agreement by written agreement at any time prior to
any requisite stockholder approval being obtained (and, thereafter, upon
obtaining any further stockholder approvals required by law). The conditions to
each party's obligation to consummate the Merger may be waived by such party in
whole or in part to the extent permitted by applicable law.
REGISTRATION RIGHTS AGREEMENT; LOCK-UP
Pursuant to the Merger Agreement, at the Effective Time, the 1993
Registration Rights Agreement (as defined below) will be amended to grant to the
Partnership four demand and unlimited "piggyback" registration rights with
respect to the shares of Doubletree Common Stock to be issued to the Partnership
in the Merger. In addition, the amendment will provide that the shares of
Doubletree Common Stock to be issued pursuant to the GEPT Equity Investment,
including any shares that are issued upon the exercise of the Warrants, will be
covered by the current demand and "piggyback" registration rights held by GEHOP
under the 1993 Registration Rights Agreement. See "Description of Capital Stock
of Doubletree -- Registration Rights." Pursuant to the Red Lion Shareholder
Support Agreement, the Partnership has agreed not to sell or otherwise dispose
of any such shares of Doubletree Common Stock for 180 days following the
Effective Time of the Merger, except for a distribution to a limited partner of
the Partnership (which shares will represent approximately 2.3% of Doubletree
Common Stock to be outstanding after giving effect to the Merger and the
Financing Plan). See "The Merger -- Interests of Certain Persons in the Merger."
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PARTNERSHIP SERVICES AGREEMENT
At the Effective Time, Doubletree, Red Lion and certain affiliates of Red
Lion will enter into the Partnership Services Agreement, pursuant to which
Doubletree will, upon request from the Partnership, provide certain support
services to the Partnership in return for a fee. In addition, pursuant to the
Partnership Services Agreement, Doubletree will agree to guaranty, subject to
defenses available to Red Lion, the liabilities and obligations of Red Lion owed
to the Partnership and its affiliates arising out of or related to Red Lion's
business.
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THE COMBINED COMPANY
After the consummation of the Merger, Red Lion will become a wholly owned
subsidiary of Doubletree, and its operations will be combined with those of
Doubletree. The Combined Company's corporate headquarters will be in Phoenix,
Arizona. It is expected that Doubletree's management team will continue to
manage the combined operations of the Combined Company after the completion of
the Merger. In addition, the acquisition of Red Lion presents Doubletree with
the opportunity to augment its successful management team with individuals from
Red Lion's experienced management team. The Board of Directors of Doubletree
will be expanded to include two additional members to be designated by the
Partnership, an entity affiliated with KKR. The Partnership is the majority
shareholder of Red Lion and will own approximately 12.9% of Doubletree's Common
Stock upon consummation of the Merger and the Financing Plan. The GEI Entities
will own in the aggregate approximately 23.8% of the Doubletree Common Stock
upon consummation of the Merger and the Financing Plan. See "The
Merger -- Financing of the Merger" and "Security Ownership of Certain Beneficial
Owners and Management of Doubletree."
Management of Doubletree will review its own operations and the operations
of Red Lion and, upon completion of such review, will develop plans or proposals
regarding, among other things, the integration or combination of the sales and
marketing efforts, administrative support functions and other operations of
Doubletree and Red Lion. Management of Doubletree believes that the Merger will
create a combined entity with the resources to compete more effectively on a
national basis; however, the Combined Company will continue to be subject to the
competitive and economic factors associated with the lodging industry.
BUSINESS AND STRATEGY
The Combined Company will be one of the largest full service hotel
operating companies in the United States. On a pro forma basis, as of June 30,
1996, the Combined Company would have had a portfolio of 234 hotels (197 of
which it would have managed and 37 of which it would have franchised) containing
55,770 rooms in the United States and Mexico. On a pro forma basis, the Combined
Company would have had revenues of $599.3 million for the year ended December
31, 1995 and $327.9 million for the six months ended June 30, 1996, with
operating income of $60.7 million and $46.1 million and net income of $21.0
million and $15.0 million, respectively.
Doubletree's principal business strategy is, and the Combined Company's
principal business strategy will be, to provide its hotel owners with high
quality, responsive hotel management and franchise services designed to improve
hotel profitability and to provide its hotel guests with a high level of
satisfaction. In executing this business strategy, Doubletree seeks to implement
policies and programs designed to increase revenues while minimizing operating
expenses. Doubletree seeks to grow hotel revenues by continuing to strengthen
the Doubletree brand and implementing national, regional and local sales and
marketing programs. Programs designed to reduce costs include providing
purchasing services at favorable prices to hotel owners, offering management
services and the Doubletree brand for one combined fee, minimizing the costs
associated with operating under the Doubletree brand name, and promoting
employee productivity and morale. As a result of these and other Doubletree
business strategies, net operating income for the 46 hotels managed by
Doubletree for the period from January 1, 1991 through December 31, 1995 has,
Doubletree believes, increased on average by approximately 20% per annum during
such period.
Doubletree's growth strategy is, and the Combined Company's growth strategy
will be, focused on four areas: (i) improving the revenue and operating
performance of its existing hotels; (ii) increasing the number of rooms under
its management or brand in its hotel portfolio; (iii) expanding the support
services it offers to hotel owners; and (iv) acquiring other hotel management
companies.
Doubletree believes that it has several competitive strengths that will
enable it to implement its growth strategy and continue to obtain additional
management contracts, leases and franchise agreements, including: (i) a proven
track record of generating profits for hotel owners; (ii) the strength of the
Doubletree brand; (iii) the ability to offer capital and flexible management
structures to hotel owners; (iv) established relationships with institutional
hotel investors; (v) the operation of multiple product lines and brands; and
(vi) the ability to increase penetration into Doubletree's existing markets.
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Doubletree has pursued its growth strategy in 1996 by completing the
following transactions:
- Acquisition of RFS, Inc. and Strategic Alliance with RFS Hotel Investors,
Inc. In February 1996, Doubletree significantly expanded its portfolio
of non-Doubletree brand hotels with the acquisition of RFS Management,
which operates 50 hotels with approximately 7,000 rooms under such
franchise brands as Holiday Inn, Holiday Inn Express, Residence Inn by
Marriott, Hampton Inn, and Comfort Inn. The RFS Acquisition allows the
Combined Company to further pursue non-Doubletree brand management
contract and lease opportunities. Doubletree also separately negotiated a
Right of First Refusal with RFS Hotel Investors, Inc., a leading hotel
real estate investment trust (the "REIT"), which provides a new source of
long-term hotel management and lease opportunities for additions to the
Combined Company's hotel portfolio.
- Formation of Candlewood. Doubletree has entered the mid-priced extended
stay segment of the hotel industry through the Candlewood joint venture
with entities controlled by Mr. Jack DeBoer, the founder of Residence
Inns, whom the industry credits with creating the extended stay concept.
Mr. DeBoer is primarily responsible for the development and day-to-day
operations of Candlewood. Candlewood's first hotel commenced operations
in May 1996. Doubletree believes that Candlewood provides an opportunity
to generate additional revenue and participate in a rapidly expanding and
high demand segment of the lodging industry.
- Formation of Joint Venture Strategic Alliance with Patriot. In August
1996, Doubletree and Patriot, one of the nation's leading hotel real
estate investment trusts, committed to invest $20.0 million and $200.0
million, respectively, of equity capital to acquire hotels that would be
managed, branded and leased by Doubletree. Management believes this
strategic alliance will provide the Combined Company with another source
of long-term hotel management and lease opportunities. The joint venture
has successfully completed the acquisition of four Doubletree hotels.
The Merger is consistent with, and is an important step in, Doubletree's
growth strategy. The Red Lion hotels complement Doubletree's current brand
portfolio and create critical mass for improved national brand awareness. While
there can be no assurance that the integration of Doubletree and Red Lion will
be successful or accomplished in a timely fashion or that the Combined Company
will successfully implement its growth strategy (see "Risk
Factors -- Integration of the Two Companies" and "Risk Factors -- Risk of
Contract Turnover"), Doubletree believes the Merger will generate several
benefits, including:
- Doubletree believes that the Combined Company's expanded size and diverse
geographic presence presents opportunities for enhancing Doubletree's
brand recognition. Subject to the receipt of necessary third party
approvals, Doubletree currently intends to convert most of the Red Lion
hotels to one of the Doubletree brands, thereby providing a major
increase in market coverage for Doubletree's full service product,
particularly in the western United States. Based on its examination of
Red Lion hotels, Doubletree believes that such properties are generally
in well maintained condition and of high quality. As a result, Doubletree
does not expect that such hotel brand conversions will require
significant capital expenditures. If the plans to convert the Red Lion
hotels to Doubletree brand hotels are successful, the Merger will nearly
double the number of upscale, non-suite Doubletree brand hotels, with
limited overlap in existing markets served. Notwithstanding the increased
size and presence of the Combined Company, Doubletree believes that there
will be a significant number of available markets offering expansion
potential for the Combined Company, including many of the markets in
which the Combined Company's hotels will be located.
- Doubletree believes that as a result of Doubletree's national brand
recognition, marketing strength, and higher ADR structure compared to Red
Lion's, the conversion of the Red Lion hotels to the Doubletree brand
presents opportunities for improvement in both ADR and occupancy rates.
- Doubletree believes that the majority of leases and management agreements
covering the Red Lion hotels are long-term, stable assets that do not
present a significant risk that they will be terminated or renegotiated
in the ordinary course of the Combined Company's business.
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<PAGE> 77
- Doubletree believes that the Combined Company will create economies of
scale in services provided to its hotel owners, such as centralized
reservations services, national sales and marketing departments,
centralized accounting, management information services and other
administrative departments. As a result of the Merger, Doubletree
believes that the Combined Company will achieve additional cost savings
in these centralized services departments over those that have been
experienced by Doubletree or Red Lion separately. In addition, Doubletree
believes that the opportunity to integrate Red Lion's and Doubletree's
corporate headquarters and services will result in cost savings that will
directly benefit the Combined Company.
- Doubletree believes that the combination of the experienced hotel
employees of each of Doubletree and Red Lion will result in the Combined
Company having a large pool of hotel employees with proven track records
that can further support the implementation of Doubletree's business
strategy and support the Combined Company's future growth. In addition,
the Merger presents Doubletree with the opportunity to augment its
successful corporate management team with individuals from Red Lion's
experienced corporate management team.
- Doubletree believes it can extend its purchasing power and leverage with
vendors to the Red Lion hotels. Doubletree offers purchasing services to
the hotels in its portfolio and uses its purchasing power, and, where
appropriate, the purchasing power of certain of its major stockholders,
to negotiate favorable contract terms with vendors, on both a regional
and national basis. Doubletree believes that the Combined Company's
increased size will further increase its purchasing power with such
vendors and any prospective vendors, which may therefore result in cost
savings to the hotel owners and may generate increased profits for the
Combined Company.
- Doubletree believes Red Lion's significant investments in upgrading its
reservation system will enhance the performance of its current
reservation system. Red Lion has invested approximately $11 million in
developing a new, state-of-the-art central reservations system, which
includes a direct interface with airline reservation systems, advanced
marketing database capabilities and improved revenue management tools,
including real-time room inventory, and is anticipated to be operational
throughout the Red Lion system in early 1997. Doubletree currently
intends to integrate its current reservation system with Red Lion's
reservation system, capitalizing on the best aspects of each system, for
use by the Combined Company's portfolio of hotels.
As a result of the Merger, Doubletree will acquire 100% ownership in 17 of
Red Lion's 56 hotel properties. Doubletree believes that these hotels can
benefit substantially from the implementation of the Combined Company's business
strategy. Doubletree, however, remains focused on managing hotels, and once such
operating improvements outlined above have been realized, will explore all of
its alternatives, including the sale of one or more of such properties while
retaining the right to manage the hotels sold.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the persons
who are expected to serve as directors and executive officers of Doubletree
following the Merger. The Partnership will designate two persons to be nominated
and elected to the Board of Directors of Doubletree effective upon consummation
of the Merger. The Partnership has designated as its Board members Michael W.
Michelson and Edward A. Gilhuly, each of whom is currently a director of Red
Lion.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- --------------------------------------------------
<S> <C> <C>
Richard J. Ferris........ 60 Co-Chairman of the Board
Peter V. Ueberroth....... 59 Co-Chairman of the Board
William R. Fatt.......... 45 Director
Dale F. Frey............. 64 Director
Ronald K. Gamey.......... 51 Director
Edward A. Gilhuly........ 37 Director
Norman B. Leventhal...... 79 Director
Michael W. Michelson..... 45 Director
John H. Myers............ 51 Director
Richard M. Kelleher...... 47 President and Chief Executive Officer of DHC and
Director of Doubletree
James P. Evans........... 49 Executive Vice President of Operations of DHC
William L. Perocchi...... 39 Executive Vice President, Chief Financial Officer
and Treasurer of Doubletree and DHC
Stephen D. Pletcher...... 52 Senior Vice President of DHC
Margaret Ann Rhoades..... 51 Executive Vice President of Human Resources of DHC
David L. Stivers......... 35 Senior Vice President, General Counsel and
Secretary of Doubletree and DHC and Senior Vice
President of New Business of DHC
Thomas W. Storey......... 40 Executive Vice President of Sales and Marketing of
DHC
Raymond Terry............ 47 President of RFS Management
</TABLE>
Richard J. Ferris, 60, has served as Co-Chairman of the Board of Doubletree
and Doubletree Partners since December 1993. From June 1992 to December 1993,
Mr. Ferris served as Co-Chairman of GQHP. From June 1987 to June 1992, Mr.
Ferris was a private investor. Mr. Ferris is the former Chairman and Chief
Executive Officer of UAL Corporation, a position he held from April 1976 to June
1987. Mr. Ferris serves as a director of The Procter & Gamble Company, Amoco
Corporation, Evanston Hospital Corporation and the PGA Tour Policy Board.
Peter V. Ueberroth, 59, has served as Co-Chairman of the Board of
Doubletree and Doubletree Partners since December 1993. From June 1992 to
December 1993, Mr. Ueberroth served as Co-Chairman of GQHP. From April 1989 to
the present, Mr. Ueberroth has been Managing Director and a principal of The
Contrarian Group, a business management company. From March 1984 to March 1989,
Mr. Ueberroth served as the sixth Commissioner of Major League Baseball. Mr.
Ueberroth serves as a director of Ambassadors International Inc., CB Commercial,
The Coca Cola Company and Transamerica Corporation.
William R. Fatt, 45, has served as a director of Doubletree and Doubletree
Partners since December 1993. Mr. Fatt is Executive Vice President and Chief
Financial Officer of Canadian Pacific Limited, a position he has held since
January 1994. From August 1990 to January 1994, Mr. Fatt was Vice President,
Finance and Accounting and Chief Financial Officer of Canadian Pacific Limited.
From August 1988 to August 1990, Mr. Fatt was its Vice President and Treasurer.
Mr. Fatt serves as a director of Canada Maritime Limited, Canadian Pacific
Hotels & Resorts, Inc., Pan Canadian Petroleum Limited and various direct and
indirect subsidiaries of Canadian Pacific Limited.
Dale F. Frey, 64, has served as a director of Doubletree and Doubletree
Partners since December 1993. From July 1992 to December 1993, Mr. Frey served
as a director of GQHP. Mr. Frey is President, Chief
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<PAGE> 79
Executive Officer and Chairman of the Board of Directors of GEIM, a position he
has held since February 1988. Mr. Frey is also President, Chief Executive
Officer and Chairman of General Electric Investment Corporation, a position he
has held since July 1984. Mr. Frey is also Vice President of General Electric
Company, a position he has held since June 1980. Mr. Frey serves as a Trustee of
GEPT. Mr. Frey also serves on the Board of Directors of GE Financial Services,
Inc., GE Capital Corporation, USF&G Corporation, Praxair, Inc. and the Damon
Runyon-Walter Winchell Cancer Research Fund and is a Trustee of Franklin and
Marshall College.
Ronald K. Gamey, 51, has served as a director of Doubletree and Doubletree
Partners since December 1993. Mr. Gamey is Executive Vice President of Canadian
Pacific Limited, a position he has held since July 1988. Mr. Gamey also serves
as a director of Laidlaw Inc., Canada Maritime Limited, Canadian Pacific Hotels
& Resorts, Inc. and various direct and indirect subsidiaries of Canadian Pacific
Limited.
Edward A. Gilhuly, 37, has been a director of Red Lion since March 1994.
Mr. Gilhuly has been a General Partner or an executive with KKR for more than
five years. Mr. Gilhuly is also a director of Layne-Christensen Company;
Owens-Illinois, Inc.; Owens-Illinois Group, Inc.; Red Lion Properties, Inc.;
Merit Behavioral Care Corporation; and Union Texas Petroleum Holdings, Inc. Mr.
Gilhuly will resign from the board of Red Lion Properties, Inc. at the Effective
Time.
Norman B. Leventhal, 79, has served as a director of Doubletree and
Doubletree Partners since December 1993. From September 1992 to December 1993,
Mr. Leventhal served as a director of GQHP. Mr. Leventhal is Chairman of The
Beacon Companies, a position he has held for more than ten years. Mr. Leventhal
co-founded The Beacon Companies, a major real estate developer, in 1946. Mr.
Leventhal serves as a director of Beacon Properties Corporation. Mr. Leventhal
is a Life Member Emeritus of The Corporation of The Massachusetts Institute of
Technology and a director of The Picower Institute for Medical Research and has
numerous community and civic involvements.
Michael W. Michelson, 45, has been a director of Red Lion since March 1994.
Mr. Michelson has been a General Partner 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. Mr. Michelson will resign from
the board of Red Lion Properties, Inc. at the Effective Time.
John H. Myers, 51, has served as a director of Doubletree and Doubletree
Partners since December 1993. From July 1992 to December 1993, Mr. Myers served
as a director of GQHP. Mr. Myers is a director and Executive Vice President of
GEIM, a position he has held since February 1988. Mr. Myers is also director and
Executive Vice President of General Electric Investment Corporation, a position
he has held since June 1986. Mr. Myers is a Trustee of GEPT and Wagner College
and also serves on the Board of Directors of Hispaland, S.A., the Butler Capital
Advisory Board and Grimes Aerospace Company.
Richard M. Kelleher, 47, has served as President and Chief Executive
Officer of DHC since December 1993 and as a director of Doubletree since July
28, 1995. From April 1993 to December 1993, Mr. Kelleher served as Chief
Executive Officer and President of GQHP. From December 1989 to April 1993, Mr.
Kelleher was President of Guest Quarters Suite Hotels. In 1983, Mr. Kelleher
co-founded Beacon Hotel Corporation, which merged with GQHP in 1986.
James P. Evans, 49, has served as Executive Vice President of Operations of
DHC since February 1996. From May 1993 through February 1996, Mr. Evans served
as the Senior Vice President Sales and Marketing with Hyatt Hotels Corporation.
From December 1987 through May 1993, Mr. Evans served as Senior Vice President
Sales with Hyatt Hotels Corporation. From May 1975 through December 1987, Mr.
Evans served in a variety of management positions with Hyatt Hotels Corporation.
From January 1972 through May 1975, Mr. Evans served in a variety of sales and
marketing management positions with ITT Sheraton Corporation.
William L. Perocchi, 39, has served as Executive Vice President, Chief
Financial Officer and Treasurer of Doubletree since its formation and DHC since
December 1993. From August 1992 to December 1993, Mr. Perocchi served as the
Executive Vice President and Chief Financial Officer of GQHP. From June 1989 to
July 1992, Mr. Perocchi served as the Vice President, Finance for AMETEK
Aerospace Products, Inc.
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From June 1979 to June 1989, Mr. Perocchi served in various financial management
capacities with The General Electric Company.
Stephen D. Pletcher, 52, has served as Senior Vice President of Technical
Services and Project Management of DHC since December 1993. From January 1988 to
December 1993, Mr. Pletcher served as Senior Vice President, Owner Relations,
Guest Quarters Suite Hotels.
Margaret Ann Rhoades, 51, has served as Executive Vice President of Human
Resources of DHC since February 1996. From January 1995 to February 1996, Ms.
Rhoades served as the Senior Vice President of Human Resources of DHC. From July
1989 through January 1995, Ms. Rhoades served as the Vice President, People
Department with Southwest Airlines. From March 1984 through June 1989, Ms.
Rhoades served as the Senior Vice President, Human Resources, Dallas Region for
Bank One.
David L. Stivers, 35, has served as Senior Vice President New Business of
DHC since January 1, 1996. Since October 1994 Mr. Stivers has served as Senior
Vice President, General Counsel and Secretary of Doubletree and DHC. From May
1988 to October 1994, Mr. Stivers was a corporate lawyer with the law firm of
Latham & Watkins.
Thomas W. Storey, 40, has served as Executive Vice President of Sales and
Marketing of DHC since August 1994. From August 1989 to July 1994, Mr. Storey
served as Executive Vice President of Sales and Marketing of Radisson Hotels
International. From August 1986 to August 1989, Mr. Storey served in a variety
of senior management positions with Marriott Hotels Corporation.
Raymond Terry, 47, has served as President of RFS Management since June
1994. From September 1991 to June 1994, Mr. Terry served as Vice President of
Operations with RFS Management. From December 1984 to September 1991, Mr. Terry
served as Vice President of Operations of Dominion Hospitality Management, Inc.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and the six month periods ended June 30, 1995
and June 30, 1996 present the results of operations of Doubletree assuming that
the Merger, the Financing Plan, the Red Lion Formation and the Red Lion 1996
Hotel Acquisitions had been completed as of January 1, 1995. All material
adjustments necessary to conform the financial statement presentation of the
results of operations for Red Lion to that of Doubletree and to reflect the
foregoing assumptions are presented in the Reclassification Adjustments and Pro
Forma Adjustments columns, respectively, which are further described in the
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information.
The unaudited pro forma consolidated balance sheet presents the historical
consolidated balance sheets of Doubletree and Red Lion adjusted to reflect the
Merger, the Financing Plan and the acquisition of two hotels subsequent to June
30, 1996 in connection with the Red Lion 1996 Hotel Acquisitions as if each had
occurred on June 30, 1996.
The following information is not necessarily indicative of the results of
operations of Doubletree as they may be in the future or as they might have been
had the Merger, the Financing Plan, the Red Lion Formation and the Red Lion 1996
Hotel Acquisitions been consummated at the beginning of the period shown. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations should be
read in conjunction with the audited historical Consolidated Financial
Statements of Doubletree and Red Lion included elsewhere herein and the notes
thereto.
For a discussion of the historical corporate organization of Doubletree and
Red Lion, see "Corporate Organization."
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DOUBLETREE CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RED LION DOUBLETREE
------------------------------------------------ -----------------------------------
RECLASSIFICATION PRO FORMA
PRO FORMA(1) ADJUSTMENTS(2) AS ADJUSTED ACTUAL ADJUSTMENTS TOTAL
------------ ------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Management and franchise fees.......... $ -- $ 11,389 $ 11,389 $ 30,082 $ (299)(a) $ 41,172
Owned hotel revenues................... -- 185,413 185,413 7,081 27,074(a) 219,568
Leased hotel revenues.................. -- 132,213 132,213 141,942 -- 274,155
Purchasing and service fees............ -- 44,634 44,634 16,487 -- 61,121
Other fees and income.................. -- 2,299 2,299 994 -- 3,293
Rooms revenues......................... 277,204 (277,204) -- -- -- --
Food and beverage revenues............. 165,281 (165,281) -- -- -- --
Other revenues......................... 49,884 (49,884) -- -- -- --
-------- --------- -------- -------- -------- --------
Total revenues....................... 492,369 (116,421) 375,948 196,586 26,775 599,309
-------- --------- -------- -------- -------- --------
Operating costs and expenses:
Corporate general and administrative
expenses............................. -- 10,470 10,470 14,413 -- 24,883
Owned hotel expenses................... -- 122,502 122,502 6,049 20,538(a) 149,089
Leased hotel expenses.................. -- 108,877 108,877 132,644 -- 241,521
Purchasing and service expenses........ -- 42,345 42,345 13,925 -- 56,270
Depreciation and amortization.......... 19,327 -- 19,327 4,686 25,610(a) 49,623
Business combination expenses.......... 14,662 -- 14,662 2,565 -- 17,227
Departmental direct expenses:
Rooms................................ 68,393 (68,393) -- -- -- --
Food and beverage.................... 127,450 (127,450) -- -- -- --
Other................................ 18,588 (18,588) -- -- -- --
Property indirect expenses............. 104,010 (104,010) -- -- -- --
Other costs............................ 36,445 (36,445) -- -- -- --
Payments due to owners of managed
hotels............................... 46,895 (46,895) -- -- -- --
-------- --------- -------- -------- -------- --------
Total operating costs and expenses... 435,770 (117,587) 318,183 174,282 46,148 538,613
-------- --------- -------- -------- -------- --------
Operating income......................... 56,599 1,166 57,765 22,304 (19,373) 60,696
Equity in earnings of unconsolidated
joint ventures....................... 2,299 (2,299) -- -- -- --
Interest income........................ 3,697 1,133 4,830 4,147 -- 8,977
Interest expense....................... (21,759) -- (21,759) (227) (24,041)(b) (46,027)
-------- --------- -------- -------- -------- --------
Income before income taxes and minority
interest............................... 40,836 -- 40,836 26,224 (43,414) 23,646
Minority interest share of (income)
loss................................. (758) -- (758) 35 -- (723)
-------- --------- -------- -------- -------- --------
Income before income taxes............... 40,078 -- 40,078 26,259 (43,414) 22,923
Income tax expense..................... (7,327) -- (7,327) (8,468) 13,842(c) (1,953)
-------- --------- -------- -------- -------- --------
Net income............................... $ 32,751 $ -- $ 32,751 $ 17,791 $ (29,572) $ 20,970(3)
======== ========= ======== ======== ======== ========
EARNINGS PER SHARE....................... $ 0.80 $ 0.55(3)
======== ========
Weighted average common and common
equivalent shares outstanding.......... 22,219 38,091
======== ========
</TABLE>
- ---------------
(1) Presents the pro forma operating results of Red Lion as if the Red Lion
Formation and the Red Lion Refinancing had occurred on January 1, 1995. The
pro forma operating results include the operating results of Historical Red
Lion for the seven months ended July 31, 1995, the operating results of Red
Lion for the ten months ended December 31, 1995 and the following pro forma
adjustments: (i) to record $8.5 million of net lease expenses on the Leased
Hotels, (ii) to decrease depreciation and amortization by $6.4 million
related to the Red Lion Leased Hotels, (iii) to decrease interest expense by
$10.4 million reflecting the Red Lion Refinancing, (iv) to decrease the
minority interest in income from joint venturer by $0.2 million, (v) to
increase income tax expense by $11.4 million and (vi) to eliminate $4.6
million of offsetting other revenues and payments due to owners of managed
hotels.
(2) Reclassifications to conform the financial statement presentations of Red
Lion to that of Doubletree.
(3) During 1995, Doubletree incurred $2.6 million of business combination
expenses related to the RFS Acquisition. The pro forma operating results of
Red Lion include non-recurring costs associated with the Red Lion Formation
of $14.7 million and $9.7 million of deferred tax benefits. Excluding these
items and adjusting income taxes to Doubletree's effective tax rate and the
statutory tax rate for Red Lion, net income and earnings per share on a pro
forma basis would have been $22.0 million and $0.58, respectively.
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
71
<PAGE> 83
DOUBLETREE CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RED LION DOUBLETREE
------------------------------------------------ ---------------------------------------
RECLASSIFICATION PRO FORMA
PRO FORMA(1) ADJUSTMENTS(2) AS ADJUSTED ACTUAL ADJUSTMENTS TOTAL
------------ ------------------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Management and franchise fees..... $ -- $ 5,441 $ 5,441 $ 14,536 $ (147)(a) $ 19,830
Owned hotel revenues.............. -- 90,171 90,171 3,308 13,658(a) 107,137
Leased hotel revenues............. -- 63,680 63,680 65,534 -- 129,214
Purchasing and service fees....... -- 20,829 20,829 7,478 -- 28,307
Other fees and income............. -- 1,689 1,689 493 -- 2,182
Rooms revenues.................... 135,918 (135,918) -- -- -- --
Food and beverage revenues........ 80,793 (80,793) -- -- -- --
Other revenues.................... 24,114 (24,114) -- -- -- --
-------- --------- -------- -------- -------- --------
Total revenues.................. 240,825 (59,015) 181,810 91,349 13,511 286,670
-------- --------- -------- -------- -------- --------
Operating costs and expenses:
Corporate general and
administrative expenses......... -- 3,954 3,954 7,106 -- 11,060
Owned hotel expenses.............. -- 61,198 61,198 2,936 10,271(a) 74,405
Leased hotel expenses............. -- 53,623 53,623 61,008 -- 114,631
Purchasing and service expenses... -- 19,605 19,605 6,346 -- 25,951
Depreciation and amortization..... 9,884 -- 9,884 2,056 12,584(a) 24,524
Departmental direct expenses:
Rooms........................... 33,534 (33,534) -- -- -- --
Food and beverage............... 63,473 (63,473) -- -- -- --
Other........................... 9,160 (9,160) -- -- -- --
Property indirect expenses........ 51,560 (51,560) -- -- -- --
Other costs....................... 16,954 (16,954) -- -- -- --
Payments due to owners of managed
hotels.......................... 23,858 (23,858) -- -- -- --
-------- --------- -------- -------- -------- --------
Total operating costs and
expenses...................... 208,423 (60,159) 148,264 79,452 22,855 250,571
-------- --------- -------- -------- -------- --------
Operating income.................... 32,402 1,144 33,546 11,897 (9,344) 36,099
Equity in earnings of
unconsolidated
joint ventures.................. 1,689 (1,689) -- -- -- --
Interest income................... 1,810 545 2,355 1,858 -- 4,213
Interest expense.................. (11,851) -- (11,851) (132) (11,049)(b) (23,032)
-------- --------- -------- -------- -------- --------
Income before income taxes and
minority interest................. 24,050 -- 24,050 13,623 (20,393) 17,280
Minority interest share of
(income)........................ (159) -- (159) (7) -- (166)
-------- --------- -------- -------- -------- --------
Income before income taxes.......... 23,891 -- 23,891 13,616 (20,393) 17,114
Income tax expense................ (9,556) -- (9,556) (4,229) 6,396(c) (7,389)
-------- --------- -------- -------- -------- --------
Net income.......................... $ 14,335 $ -- $ 14,335 $ 9,387 $ (13,997) $ 9,725(3)
======== ========= ======== ======== ======== ========
EARNINGS PER SHARE.................. $ 0.43 $ 0.26(3)
======== ========
Weighted average common and common
equivalent shares outstanding..... 21,984 37,856
======== ========
</TABLE>
- ---------------
(1) Presents the pro forma operating results of Red Lion as if the Red Lion
Formation and the Red Lion Refinancing had occurred on January 1, 1995. The
pro forma operating results include the operating results of Historical Red
Lion for the seven months ended July 31, 1995, the operating results of Red
Lion for the four months ended June 30, 1995 and the following pro forma
adjustments: (i) to record $7.3 million of net lease expenses on the Red
Lion Leased Hotels, (ii) to decrease depreciation and amortization by $5.4
million related to the Red Lion Leased Hotels, (iii) to decrease interest
expense by $8.7 million reflecting the Red Lion Refinancing, (iv) to
decrease the minority interest in income from joint venturer by $0.1
million, (v) to increase income tax expense by $10.6 million, and (vi) to
remove all revenues and expenses of Historical Red Lion for July 1995, which
decreased net income by $3.6 million.
(2) Reclassifications to conform the financial statement presentations of Red
Lion to that of Doubletree.
(3) RFS Management, as a Subchapter S corporation in 1995 for federal income tax
purposes, was generally not liable for federal income taxes. If income
taxes, at Doubletree's effective rate, are provided on RFS Management's
earnings then net income and earnings per share on a pro forma basis would
have been $9.2 million and $0.24, respectively.
See Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
72
<PAGE> 84
DOUBLETREE CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RED LION DOUBLETREE
-------------------------------------------- ------------------------------------
RECLASSIFICATION PRO FORMA
ACTUAL ADJUSTMENTS(1) AS ADJUSTED ACTUAL ADJUSTMENTS TOTAL
-------- ------------------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Management and franchise fees............ $ -- $ 6,138 $ 6,138 $ 18,519 $ (141)(a) $ 24,516
Owned hotel revenues..................... -- 95,337 95,337 3,979 12,237(a) 111,553
Leased hotel revenues.................... -- 67,501 67,501 86,321 -- 153,822
Purchasing and service fees.............. -- 28,017 28,017 7,585 -- 35,602
Other fees and income.................... -- 1,423 1,423 972 -- 2,395
Rooms revenues........................... 147,445 (147,445) -- -- -- --
Food and beverage revenues............... 81,389 (81,389) -- -- -- --
Other revenues........................... 29,133 (29,133) -- -- -- --
-------- --------- -------- -------- -------- --------
Total revenues......................... 257,967 (59,551) 198,416 117,376 12,096 327,888
-------- --------- -------- -------- -------- --------
Operating costs and expenses:
Corporate general and administrative
expenses............................... -- 4,851 4,851 8,641 -- 13,492
Owned hotel expenses..................... -- 63,263 63,263 3,217 9,166(a) 75,646
Leased hotel expenses.................... -- 55,232 55,232 79,735 -- 134,967
Purchasing and service expenses.......... -- 26,593 26,593 5,648 -- 32,241
Depreciation and amortization............ 9,167 -- 9,167 2,940 13,301(a) 25,408
Departmental direct expenses:
Rooms.................................. 36,991 (36,991) -- -- -- --
Food and beverage...................... 63,634 (63,634) -- -- -- --
Other.................................. 10,079 (10,079) -- -- -- --
Property indirect expenses............... 55,163 (55,163) -- -- -- --
Other costs.............................. 18,028 (18,028) -- -- -- --
Payments due to owners of managed
hotels................................. 26,178 (26,178) -- -- -- --
-------- --------- -------- -------- -------- --------
Total operating costs and expenses..... 219,240 (60,134) 159,106 100,181 22,467 281,754
-------- --------- -------- -------- -------- --------
Operating income........................... 38,727 583 39,310 17,195 (10,371) 46,134
Equity in earnings of unconsolidated
joint ventures......................... 1,423 (1,423) -- -- -- --
Interest income.......................... 1,275 840 2,115 2,090 -- 4,205
Interest expense......................... (9,054) -- (9,054) (143) (13,846)(b) (23,043)
-------- --------- -------- -------- -------- --------
Income before income taxes and minority
interest................................. 32,371 -- 32,371 19,142 (24,217) 27,296
Minority interest share of (income)...... (978) -- (978) (22) -- (1,000)
-------- --------- -------- -------- -------- --------
Income before income taxes................. 31,393 -- 31,393 19,120 (24,217) 26,296
Income tax expense....................... (12,557) -- (12,557) (6,693) 7,924(c) (11,326)
-------- --------- -------- -------- -------- --------
Net income................................. $ 18,836 $ -- $ 18,836 $ 12,427 $ (16,293) $ 14,970
======== ========= ======== ======== ======== ========
EARNINGS PER SHARE....................... $ 0.54 $ 0.39
======== ========
Weighted average common and common
equivalent shares outstanding.......... 22,849 38,721
======== ========
</TABLE>
- ---------------
(1) Reclassifications to conform the financial statement presentations of Red
Lion to that of Doubletree.
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
73
<PAGE> 85
DOUBLETREE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------------------------------
HISTORICAL PRO FORMA
DOUBLETREE ADJUSTMENTS(4) PRO FORMA
---------- -------------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 46,566 $ (7,445)(a) $ 39,121
Accounts receivable, net.......................... 20,596 18,400(b) 38,996
Other............................................. 3,421 7,200(b) 10,621
-------- ---------- ----------
Total current assets......................... 70,583 18,155 88,738
-------- ---------- ----------
Notes and other receivables....................... 30,949 1,800(b) 32,749
Investments....................................... 29,892 43,100(b) 72,992
Due from affiliates............................... -- 29,000(b) 29,000
Property and equipment, net....................... 13,815 636,350(b) 650,165
Management contracts, net......................... 48,275 422,300(b) 470,575
Deferred costs and other assets................... 3,231 21,470(b) 24,701
Goodwill, net..................................... 15,228 352,618(b) 367,846
-------- ---------- ----------
$ 211,973 $1,524,793 $1,736,766
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses............. $ 39,258 $ 93,834(b)(c) $ 133,092
Current portion of long-term debt................. -- 5,000(d) 5,000
-------- ---------- ----------
Total current liabilities.................... 39,258 98,834 138,092
-------- ---------- ----------
Long-term debt, net of current portion............ -- 595,000(d) 595,000
Other long-term liabilities....................... -- 11,776(b) 11,776
Minority interest in consolidated joint
ventures........................................ -- 1,290(b) 1,290
Deferred income taxes............................. 18,254 243,991(b) 262,245
-------- ---------- ----------
Total liabilities............................ 57,512 950,891 1,008,403
-------- ---------- ----------
Common stock...................................... 231 159(e) 390
Additional paid-in capital........................ 128,061 573,743(e) 701,804
Unearned employee compensation.................... (176) -- (176)
Unrealized gain on marketable securities.......... 26 -- 26
Retained earnings................................. 26,319 -- 26,319
-------- ---------- ----------
Total Stockholders' Equity................... 154,461 573,902 728,363
-------- ---------- ----------
$ 211,973 $1,524,793 $1,736,766
======== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
74
<PAGE> 86
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
DOUBLETREE CORPORATION
1. ASSUMPTIONS
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended December 31, 1995 and the six month periods ended June 30, 1995
and June 30, 1996 are presented as if each of the following events occurred on
January 1, 1995: (1) the Merger, including the issuance of approximately $282.9
million of Doubletree Common Stock as Stock Consideration, (2) the Red Lion 1996
Hotel Acquisitions, (3) the borrowing of $600.0 million under the New Credit
Facility, (4) the sale of $100.0 million of Doubletree Common Stock pursuant to
the GEPT Equity Investment, (5) the receipt of net proceeds of $191.0 million
from the Equity Offering, (6) the payment of approximately $684.3 million in
Cash Consideration to the shareholders and optionholders of Red Lion and (7) the
repayment of existing Red Lion indebtedness of approximately $213.3 million with
a portion of the proceeds obtained from the Financing Plan. See "The
Merger -- Financing of the Merger." The Merger has been accounted for as a
purchase transaction in accordance with generally accepted accounting principles
and, accordingly, the assets acquired and liabilities assumed were recorded at
their estimated fair values as of that date. The excess of the purchase price
over the fair value of the net assets acquired, goodwill, is being amortized
over 40 years.
2. RECLASSIFICATIONS
Reclassifications have been made to the pro forma statements of operations
and balance sheet for Red Lion to conform with the financial statement
presentation used by Doubletree as follows:
-- Red Lion has followed the practice of recording the operating revenues
and expenses and working capital of hotels managed but not owned by Red
Lion. The hotel owners' profit had been recorded as payments due to
owners. Reclassifications have been made to eliminate these amounts and
reflect the net management fee earned by Red Lion.
-- Revenues earned and expenses incurred in providing purchasing and other
services to hotels, previously reported at an amount equal to the net
profit resulting from the transactions, have been grossed up.
-- Reclassification of hotel revenues and expenses as managed, owned and
leased from departmental revenues and expenses
3. PRO FORMA ADJUSTMENTS -- STATEMENTS OF OPERATIONS
The following adjustments have been made to the Unaudited Pro Forma
Condensed Consolidated Statements of Operations:
(a) To record the change in depreciation and amortization resulting
from the application of purchase accounting and amortization of loan fees
related to the Financing Plan. Red Lion acquired one hotel in April of 1996
for $26.0 million and two hotels for $37.3 million (the "Red Lion 1996
Hotel Acquisitions") subsequent to June 30, 1996. The pro forma results of
operations include the operating results of these hotels as if they were
owned as of January 1, 1995. Hotel management fees from the hotel acquired
in September of 1996 (which was previously managed) have been eliminated.
(b) To eliminate actual interest expense of Red Lion and record
interest expense associated with the Financing Plan. An interest rate of
7.63% was assumed for all periods on borrowings under the New Credit
Facility. The effect of a 1/8 percent change in the interest rate would be
approximately $730,000 for the year ended December 31, 1995 and $365,000
for the six months ended June 30, 1995 and 1996, respectively. If an
additional $36.0 million is borrowed under the New Credit Facility and
$150.0 million is borrowed under the Bridge Loan (at an assumed interest
rate of 11.88%) in lieu of the sale of Doubletree Common Stock in the
Equity Offering, pro forma interest expense would have been $66.6 million,
$33.3 million and $33.3 million, pro forma net income would have been $8.6
million, $3.5 million
75
<PAGE> 87
and $8.8 million and pro forma earnings per share would have been $0.26,
$0.11 and $0.26 for the year ended December 31, 1995, the six month periods
ended June 30, 1995 and June 30, 1996, respectively. Pro forma debt would
increase to $786.0 million and total stockholders' equity would decrease to
$537.4 million at June 30, 1996.
(c) To reflect an effective tax rate of 40% on all pro forma
adjustments except for amortization of goodwill.
4. PRO FORMA ADJUSTMENTS -- BALANCE SHEET
The following adjustments have been made to the Unaudited Pro Forma
Condensed Consolidated Balance Sheet:
(a) Adjustments to reflect the net decrease in cash and cash
equivalents consisting of:
<TABLE>
<S> <C>
Existing Red Lion cash................................... $ 36,509
Acquisition of two hotels subsequent to June 30, 1996.... (37,350)
Proceeds from the GEPT Equity Investment................. 100,000
Net proceeds from the Equity Offering.................... 191,000
Proceeds from borrowings under the New Credit Facility... 600,000
Repayment of existing notes payable...................... (213,319)
Cash Consideration paid pursuant to the Merger........... (684,285)
---------
$ (7,445)
=========
</TABLE>
(b) Adjustment to reflect the allocation of the purchase price to the
assets acquired (including the two hotels of the Red Lion 1996 Hotel
Acquisitions acquired subsequent to June 30, 1996), liabilities assumed,
deferred tax liability on the step-up in the historical basis and the
excess of the purchase price over the net assets acquired.
(c) Adjustment to increase accounts payable and accrued expenses by
the estimated costs to be incurred to complete the transaction of $46.3
million including $14.5 million to be incurred in conjunction with the
Financing Plan.
(d) Adjustment to record debt to reflect the Financing Plan.
(e) Adjustment to record the estimated shares to be issued in
connection with the Merger, the Equity Offering and the GEPT Equity
Investment all assuming a selling price of approximately $36.73 per share
(the last reported sales price of Doubletree Common Stock on September 10,
1996).
76
<PAGE> 88
SELECTED CONSOLIDATED FINANCIAL DATA OF DOUBLETREE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present selected historical consolidated financial
information for Doubletree and its Predecessor, the entity which owned 92% of
GQHP prior to the Doubletree Combination Transaction. Prior to January 1, 1993
the historical financial information for the Predecessor includes only the
operations of GQHP. From January 1, 1993 to December 16, 1993, the historical
financial information for the Predecessor includes the operations of GQHP and
RFS Management and subsequent to such date, includes the combined operations of
GQHP, RFS Management and DHC. The following tables also present selected 1993
pro forma consolidated financial information for Doubletree, giving effect to
the Doubletree Combination Transaction and the Doubletree Reorganization as if
each had occurred on January 1, 1993. The selected historical consolidated
financial information presented below as of and for the years ended December 31,
1994 and 1995 has been derived from the audited financial statements of
Doubletree. The selected historical consolidated financial information presented
below as of and for the fiscal years ended December 31, 1991, 1992 and 1993 has
been derived from the audited financial statements of the Predecessor. The
selected historical consolidated financial information as of and for the six
months ended June 30, 1995 and 1996 has been derived from the unaudited
consolidated financial statements of Doubletree and include all adjustments
consisting only of normal recurring adjustments that management considers
necessary for a fair presentation of the financial information. The results of
operations for the six months ended June 30, 1996 are not necessarily indicative
of the results expected for the full year. For a discussion of the historical
corporate organization of Doubletree, see "Corporate Organization."
The financial information set forth below is qualified in its entirety by,
and should be read in conjunction with, "Management's Discussion and Analysis of
Results of Operations and Financial Condition of Doubletree," the consolidated
financial statements, the notes thereto and other financial and statistical
information appearing elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------------- --------------------
PRO
PREDECESSOR FORMA(2) DOUBLETREE DOUBLETREE
------------------------------ -------- --------------------- --------------------
1991(1) 1992(1) 1993 1993 1994 1995 1995 1996
-------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues:
Management and franchise fees.... $ 8,953 $8,556 $10,612 $24,659 $ 26,330 $ 30,082 $ 14,536 $ 18,519
Owned hotel revenues............. 1,728 3,786 9,943 -- 92 7,081 3,308 3,979
Leased hotel revenues............ 2,345 5,932 14,923 19,849 73,769 141,942 65,534 86,321
Purchasing and service fees...... 89 -- 329 8,539 10,746 16,487 7,478 7,585
Other fees and income............ 6,162 419 2,547 3,749 1,545 994 493 972
------- ------- ------- ------- -------- -------- -------- --------
Total revenues................. 19,277 18,693 38,354 56,796 112,482 196,586 91,349 117,376
------- ------- ------- ------- -------- -------- -------- --------
Operating expenses
Corporate general and
administrative expenses........ 5,696 5,683 7,485 11,584 11,879 14,413 7,106 8,641
Owned hotel expenses............. 1,694 2,810 6,400 -- 101 6,049 2,936 3,217
Leased hotel expenses............ 1,796 4,972 14,266 18,523 68,981 132,644 61,008 79,735
Purchasing and service
expenses....................... -- -- 620 8,234 9,807 13,925 6,346 5,648
Depreciation and amortization.... 2,373 599 1,572 2,830 2,943 4,686 2,056 2,940
Business combination expenses.... 17,065 -- 1,865 -- -- 2,565 -- --
------- ------- ------- ------- -------- -------- -------- --------
Total expenses................. 28,624 14,064 32,208 41,171 93,711 174,282 79,452 100,181
------- ------- ------- ------- -------- -------- -------- --------
Operating income................. (9,347) 4,629 6,146 15,625 18,771 22,304 11,897 17,195
Interest expense............... (4,109) -- (1,228) (1,907 ) (831) (227) (132) (143)
Interest income................ 260 159 254 660 1,630 4,147 1,858 2,090
------- ------- ------- ------- -------- -------- -------- --------
Income (loss) before income taxes
and minority
interest....................... (13,196) 4,788 5,172 14,378 19,570 26,224 13,623 19,142
Minority interest share of
(income) loss.................. 6,923 372 175 -- -- 35 (7) (22)
------- ------- ------- ------- -------- -------- -------- --------
Income (loss) before taxes....... (6,273) 4,416 5,347 14,378 19,570 26,259 13,616 19,120
Income tax expense............. 27 65 414 5,763 (3) 6,335(4) 8,468 4,229 6,693
------- ------- ------- ------- -------- -------- -------- --------
Net income (loss)................ $ (6,300) $(4,351) $ 4,933 $ 8,615 $ 13,325(4) $ 17,791 $ 9,387 $ 12,427
======= ======= ======= ======= ======== ======== ======== ========
Earnings per share................. $ 0.47 $ 0.66(4) $ 0.80 $ 0.43 $ 0.54
======= ======== ======== ======== ========
Pro forma net income(5)............ $ 18,736 $ 8,851
======== ========
Pro forma earnings per share(5).... $ 0.84 $ 0.40
======== ========
Weighted average common and common
equivalent
shares outstanding(6)............ 18,228 20,071 22,219 21,984 22,849
======= ======== ======== ======== ========
</TABLE>
77
<PAGE> 89
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------------- JUNE 30,
1991(1) 1992(1) 1993 1994 1995 1996
------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $3,621 $5,741 $6,826 $ 23,169 $ 32,652 $ 46,566
Total assets............................................. 12,104 22,368 89,072 134,701 163,107 211,973
Long-term debt, net of current portion................... -- 5,736 25,000 -- -- --
Stockholders' equity..................................... 3,542 9,773 13,645 91,587 114,386 154,461
</TABLE>
- ---------------
(1) Predecessor only.
(2) Gives effect to the Doubletree Combination Transaction and the Doubletree
Reorganization as if each of these events had occurred at January 1, 1993.
(3) The pro forma effective tax rate is higher than the actual effective tax
rate due to fewer than expected restrictions on Doubletree's ability to
utilize net operating loss carryforwards.
(4) Doubletree's effective tax rate for the year ended December 31, 1994 was
32.4% due to the organizational structure of Doubletree prior to its initial
public offering. Had a 35% rate been incurred, 1994 net income and earnings
per share would have been $12,720,000 and $0.63, respectively.
(5) During the fourth quarter of 1995, Doubletree and RFS Management incurred
$2,565,000 of business combination expenses related to the RFS Acquisition
which closed in February 1996. RFS Management, as a Subchapter S corporation
in 1995 for federal income tax purposes, was not generally liable for income
taxes. Accordingly, RFS Management did not provide for federal income taxes
in its 1995 financial statements. Pro forma adjustments have been made for
the year ended December 31, 1995 and the six months ended June 30, 1995 to
provide for income taxes on the earnings of RFS Management at Doubletree's
effective tax rate; also, for the year ended December 31, 1995 pro forma
adjustments have been made to exclude the business combination expenses and
provide for a related increase in income tax expense.
(6) Assumes that the 15,500,000 shares issued in connection with the Doubletree
Reorganization and the 2,727,811 shares issued to acquire RFS Management,
which was accounted for as a pooling of interests, were outstanding for all
periods presented.
78
<PAGE> 90
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF DOUBLETREE
OVERVIEW
As of June 30, 1996, Doubletree leased and/or managed 142 hotels and had 37
franchise agreements consisting of contracts for 60 full-service Doubletree
Hotels, 37 Doubletree Guest Suites all-suite hotels, 13 limited-service
Doubletree Club Hotels and 69 non-Doubletree brand hotels. As a manager of
hotels, Doubletree is typically responsible for supervising or operating the
hotel in exchange for base fees tied to revenues. In addition, Doubletree may
also earn revenues through incentive fees based on the performance of the hotel
and income from debt and equity investments in the underlying hotel. As a
franchisor, Doubletree licenses its brand name to the hotel operator in exchange
for a franchise fee based on revenues.
Hotel revenues consist of revenues from hotels owned or leased by
Doubletree. For these hotels, Doubletree includes as revenues the entire hotel's
revenues. As the lessee of hotels that Doubletree also manages, Doubletree
exercises similar control over the operation and supervision of the hotel as is
given to it as a manager, however, Doubletree recognizes all revenues and
substantially all expenses associated with the operation of the hotel.
Purchasing and service fees represent fees from purchasing agreements with
preferred vendors, sales of furniture, supplies and other frequently used items
to hotels for a profit, and fees from technical services provided to hotel
owners in connection with the construction/renovation of hotels.
Other fees and income primarily comprise contract termination fees and
equity in income/losses of hotel partnerships and similar ventures, including
gains/losses upon the sale of a hotel.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 (Actual) vs. Six Months Ended June 30, 1995
(Actual)
Total revenues increased $26.0 million or 28% to $117.4 million for the six
months ended June 30, 1996 compared to $91.3 million for the six months ended
June 30, 1995.
Revenues from management and franchise fees increased $4.0 million or 27%
in 1996 compared to the same period in 1995. The increase is attributable to
increased incentive fees of $2.0 million, fees from new contracts (net of
contracts lost) of $1.4 million, and increased fees from comparable hotels of
$0.9 million. The growth in revenue was offset by reduced fees of approximately
$0.3 million from renegotiated contracts and management contracts which
converted to franchise agreements.
Owned hotel revenues increased $0.7 million or 20% in the first six months
of 1996 compared to the same period in 1995 reflecting a significantly improved
occupancy rate at the one owned hotel in Southfield, Michigan.
Leased hotel revenues increased $20.8 million or 32% in the first six
months of 1996 reflecting improved average daily rates and occupancies and the
net addition of ten leased hotels as compared with the same period in 1995. The
margin on leased hotel operating results increased 46% from $4.5 million to $6.6
million, reflecting the net addition of these properties and an improvement in
the operating margin from 6.9% to 7.6%.
Purchasing and service fees increased by $0.1 million in the first six
months of 1996 compared to the same period in 1995. The margin increased by $0.8
million to $1.9 million reflecting a shift in mix from high volume, low margin
bulk purchasing programs (whereby Doubletree purchases goods and resells such
goods to its hotel owners) to preferred vendor programs (whereby Doubletree
earns program management fees only).
Other fees and income increased principally due to dividends from
Doubletree's investment in the convertible preferred stock of the REIT.
General and administrative expenses increased $1.5 million or 22% over the
first six months of 1995 primarily due to the addition of employees, the
formation of a franchise development team and an increase in legal and
professional fees, all of which is attributable to the Company's growth.
Depreciation and amortization increased $0.9 million over the comparable 1995
period primarily due to increased amortization
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associated with investments in management contracts. Net interest income
increased nominally by $0.2 million.
The provision for income taxes reflects a 35% effective tax rate for the
first six months of 1996 compared with a 31% effective tax rate for the
comparable 1995 period. The lower effective tax rate for 1995 reflects the
election of RFS Management to be taxed as a Subchapter S corporation for income
tax purposes and, therefore, it was generally not subject to federal income
taxes. Had RFS Management been included in the 1995 consolidated income tax
returns of Doubletree, the income tax provision for the first six months of 1995
would have increased by $0.5 million.
Net income and earnings per share for the six months ended June 30, 1996
were $12.4 million and $0.54, respectively, compared to $9.4 million and $0.43,
respectively, in 1995. With a normalized effective tax rate for RFS Management
in 1995 of 35%, net income would have increased from 1995 to 1996 by 40% from
$8.9 million to $12.4 million and per share earnings would have increased 35%
from $0.40 to $0.54.
Year Ended December 31, 1995 (Actual) vs. Year Ended December 31, 1994
(Actual)
Total revenues increased $84.1 million or 75% to $196.6 million for the
year ended December 31, 1995 compared to $112.5 million for the year ended
December 31, 1994.
Revenues from management and franchise fees increased $3.8 million or 14%
due to fees from new contracts (net of contracts lost) of $2.0 million,
increased fees from comparable hotels of $0.9 million and higher incentive fees
of $0.6 million. Fees from renegotiated contracts and fees from contracts which
converted from management to franchise contracts in connection with the sale of
the underlying hotels also increased $0.3 million.
Owned hotel revenues increased $7.0 million representing the full year of
results of the Southfield hotel acquired in December 1994.
Leased hotel revenues increased $68.2 million or 92% principally due to an
increase in the number of leased hotels in 1995 as compared to 1994. Leased
hotel revenues for 1995 reflect the net addition of nine leased hotels since
December 31, 1994 plus the full year of revenues from the 31 hotels RFS
Management began leasing during 1994. The margin on leased hotel results
increased $4.5 million to $9.3 million reflecting the net addition of these
properties since the prior year.
Purchasing and service fees increased $5.7 million or 53% primarily due to
increased purchasing volume and the net addition of new properties and increases
in revenues from existing properties. The margin from purchasing and service
fees increased $1.6 million to $2.6 million or 173% principally reflecting the
implementation of several purchasing agreements that lower the price of products
to the hotel owner while concurrently providing Doubletree with a fee in return
for negotiating and managing the program.
Other fees and income decreased $0.6 million or 36% resulting principally
from $0.8 million of termination fees received in 1994 in connection with the
termination of two management contracts. Doubletree subsequently entered into
management contracts with the new owners of these two hotels.
General and administrative expenses increased $2.5 million or 21%, $2.2
million of which was attributable to the growth of RFS Management, which added
31 hotels in 1994, and $0.3 million which was attributable to DHC's increased
legal costs and costs associated with the formation of the franchise development
team.
Depreciation and amortization increased $1.7 million in 1995 primarily due
to the acquisition of the Southfield, Michigan hotel in December 1994 and
increased amortization associated with investments in management contracts.
Business combination expenses of $2.6 million in 1995 are attributable to
legal, professional and accounting fees, due diligence and certain other
expenses incurred by RFS Management and Doubletree in connection with the
business combination.
Interest income increased $2.5 million due to an increase in interest
earned on loans to hotel owners in conjunction with obtaining management
contracts and higher interest income on invested cash balances. Interest expense
decreased $0.6 million due to the repayment in July 1994 of all of the
outstanding
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indebtedness under Doubletree's $30.0 million credit facility with a portion of
the proceeds from the initial public offering.
The provision for income taxes in 1994 reflects a 32.4% effective tax rate
principally due to the organizational structure of Doubletree prior to its
initial public offering in July 1994 offset by a slightly higher rate on the
earnings of RFS Management. The provision in 1995 reflects a combined 32.2%
effective tax rate which is lower than Doubletree's effective rate of 35% due to
the election by RFS Management to be taxed as a Subchapter S corporation
effective January 1, 1995. Accordingly, the earnings of RFS Management for 1995
were generally not subject to federal income taxes.
Net income and earnings per share for the year ended December 31, 1995 were
$17.8 million and $0.80, respectively, compared to $13.3 million and $0.66,
respectively, in 1994. Excluding the business combination expenses in 1995 and
with a normalized effective tax rate for both 1994 and 1995 of 35%, net income
would have increased 47% to $18.7 million from $12.7 million and per share
earnings would have increased 33% to $0.84 from $0.63.
Year Ended December 31, 1994 (Actual) vs. Year Ended December 31, 1993 (Pro
Forma)
Actual revenues increased $55.7 million or 98% to $112.5 million for the
year ended December 31, 1994 compared to $56.8 million during the pro forma 1993
period.
Revenues from management and franchise fees increased $1.7 million or 7% in
1994 due to a $1.1 million increase in fees from comparable hotels, higher
incentive fees of $1.7 million and fees from new contracts (net of contracts
lost) of $0.2 million. These increases were partially offset by $1.1 million of
fee reductions on certain contracts that were either renegotiated or converted
from managed to franchised hotels in connection with the sale of the underlying
hotels; 1993 results included $0.2 million of fees received that had been
written off in prior years.
Owned hotel revenues represent the revenues derived from the Southfield
hotel acquired in December 1994.
Leased hotel revenues increased $53.9 million in 1994 or 272% principally
due to an increase in the number of leased hotels in 1994 as compared to 1993.
Hotel revenues for 1994 reflect the net addition of 33 leased hotels since
December 31, 1993. The margin on hotel results increased $3.5 million to $4.8
million reflecting the net addition of these hotels since the prior year.
Purchasing and service fees increased $2.2 million in 1994 or 26%
principally due to increased purchasing volume and the addition of new hotels
since December 31, 1993 and an increase in technical service fees of $0.6
million. The margin increased $0.6 million to $0.9 million reflecting the
increased activity.
Other fees and income in the pro forma 1993 period included $3.9 million of
gains from the sale of hotels in which Doubletree and RFS Management had equity
interests. Excluding these items, other fees and income for 1994 would have
increased $1.7 million, due to $0.8 million of fees received in connection with
the termination of two management contracts, and increases in franchise
application fees and equity income. Doubletree subsequently entered into
management contracts with the new owners of these two hotels.
General and administrative expenses increased by $0.3 million or 3% in
1994. During 1993, Doubletree recognized as a reduction to general and
administrative expense $1.1 million resulting from an insurance refund.
Excluding the insurance refund, general and administrative expense would have
decreased $0.8 million. The decrease was attributable to $1.8 million in payroll
and other cost savings achieved from the consolidation of the formerly separate
operations of DHC and GQHP offset by $1.0 million of increased administrative
expenses associated with the growth in the number of hotels leased by RFS
Management.
Depreciation and amortization increased $0.1 million or 4% in 1994 due to
the amortization associated with investments in management contracts.
Interest income increased by $1.0 million principally due to income earned
on the remaining proceeds (after repayment of indebtedness) from Doubletree's
July 1994 initial public offering. Interest expense decreased $1.1 million to
$0.8 million due to the repayment in July 1994 of all of the outstanding
indebtedness under Doubletree's $30.0 million credit facility with a portion of
the proceeds from the initial public offering.
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The actual provision for income taxes in 1994 reflects a 32.4% effective
tax rate as compared to the 40% effective tax rate used in the 1993 pro forma
due to the organizational structure of Doubletree prior to its initial public
offering and fewer than expected restrictions on Doubletree's ability to utilize
net operating loss carryforwards. Doubletree's effective tax rate subsequent to
the completion of the initial public offering was 35%.
Net income and earnings per share for the year ended December 31, 1994 were
$13.2 million and $0.66, respectively, compared to $8.6 million and $0.47,
respectively, in the prior year. Excluding the noncomparable items discussed
above and adjusting the effective tax rate to 35% for both 1993 and 1994, net
income would have increased 109% to $12.7 million from $6.1 million and per
share earnings would have increased 91% to $0.63 from $0.33.
Year Ended December 31, 1994 (Actual) vs. Year Ended December 31, 1993
(Actual)
Operating results for the year ended December 31, 1994 reflect the
inclusion of the operating results of DHC which was acquired on December 16,
1993, the addition of new contracts acquired subsequent to the acquisition and
the addition of 33 leased properties during the year. As a result, management
believes that the historical results of operations for the year ended December
31, 1994 are not comparable to the prior year period.
Revenues were $112.5 million, an increase of $74.1 million or 193% for the
year ended December 31, 1994 compared to the same period of 1993. Operating
expenses were $93.7 million, an increase of $61.5 million or 191%. Income before
taxes was $19.6 million, an increase of $14.2 million or 266%. The above changes
are primarily attributable to the inclusion of DHC's operations in the 1994
period and the increase in the number of hotels leased by RFS Management. The
provision for income taxes increased and the minority interest share of net
income decreased reflecting the Doubletree Reorganization and the above
increases.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, Doubletree's balance sheet reflected $31.3 million of
working capital which represents an increase of $10.8 million from December 31,
1995. The increase is principally attributable to $27.4 million of net proceeds
generated by the public offering of Doubletree Common Stock in May 1996 and cash
generated from operations. Doubletree generated cash from operating activities
of $22.6 million during the six months ended June 1996 as compared to $11.3
million during the same period of 1995. The increase was due to increases in net
income, increases in expenses not requiring the use of cash, and an increase in
current liabilities principally due to the timing of hotel lease and income tax
payments.
Doubletree requires capital primarily for making selective investments in
the underlying hotels that it manages as a means of obtaining and enhancing the
profitability of management contracts. Doubletree used $35.6 million of cash for
investing activities in the first six months of 1996 of which $18.5 million was
contributed to RFS Management and subsequently invested in 973,684 shares of
convertible preferred stock in RFS Hotel Investors, Inc. (the "REIT Preferred
Shares"). Additionally, Doubletree made loans to owners of hotels in conjunction
with obtaining new management contracts of $6.4 million and invested $6.6
million in hotel partnerships and ventures, of which $6.2 million was
contributed to Candlewood. Doubletree has committed to contribute up to $15.0
million to Candlewood, of which $7.4 million had been funded as of June 30,
1996. The balance of $7.6 million is anticipated to be contributed during the
six months following June 30, 1996. Such contributions will be used for general
corporate purposes as well as funding a portion of the development/construction
costs of certain hotels.
In addition, in August 1996 Doubletree committed to provide credit support
for a loan facility that will be utilized by Candlewood to arrange to provide
construction and permanent financing to Candlewood franchisees on terms that, in
most cases, are much more attractive than those which the franchisees could
obtain on their own. The source of the loan facility will be General Motors
Acceptance Corporation Mortgage Group. In providing such credit support,
Doubletree's maximum exposure on any one Candlewood franchise will be
approximately $1.0 million, with the aggregate amount of exposure to Doubletree
for all such credit support capped at between $20.0 and $30.0 million, assuming
that the aggregate amount of loans made under the loan facility is between
$100.0 and $150.0 million.
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In August 1996, Doubletree and Patriot announced the formation of a joint
venture strategic alliance. Pursuant to the strategic alliance, Doubletree and
Patriot will work together to identify hotels potentially suitable for
acquisition by Patriot, which will then be operated as Doubletree brand hotels
or luxury non-Doubletree brand hotels, in each case to be leased and managed by
Doubletree. Patriot and Doubletree have committed to invest an aggregate of
$200.0 million and $20.0 million, respectively, into the purchase of hotels as
part of the strategic alliance.
Doubletree has guaranteed certain mortgages, leases and construction bonds
up to $6.5 million ($2.9 million of which is collateralized by letters of
credit).
Doubletree has committed to lend up to $9.0 million, $7.0 million of which
is to the owner of the Doubletree Hotel in Somerset, New Jersey, of which $0.7
million is for renovations and $6.3 million is to provide bridge financing, if
needed. The remaining loan commitments are to two other hotels for renovations.
Doubletree is committed, subject to certain conditions, to contributing an
additional $3.1 million to an investment partnership formed for the purposes of
acquiring hotels. Doubletree through its corporate subsidiaries serves as the
general partner of certain limited partnerships which own hotels. Debt of these
partnerships is typically secured by first mortgages on the properties and
generally is nonrecourse to the partners. However, such corporate subsidiaries
are liable, as a general partner, for the recourse obligations of the
partnerships they manage. No assurance can be given that Doubletree will not be
required to fund additional commitments.
Certain hotel management contracts provide that if a hotel does not achieve
agreed-upon performance levels, Doubletree may elect or may be required to fund
any performance shortfalls for a specified period of time. In general, if
Doubletree elects not to fund the shortfall, the hotel owner may elect to
terminate the management contract. If Doubletree elects to fund the shortfall,
but performance standards are not achieved at the expiration of the funding
period, the owner may elect to terminate the management contract at that time.
Doubletree funded $487,000 in June 1996 in connection with a shortfall at one
hotel. There were no shortfall funding payments in 1995 or 1994.
In connection with the acquisition of RFS Management, Doubletree's existing
credit facility was amended, allowing Doubletree to maintain borrowings
outstanding under the credit facility of up to $30.0 million through December
1997, and up to $12.5 million from December 1997 until scheduled maturity in
December 1998. Annually, Doubletree can request an extension of the maturity
date by one year. In May 1996, Doubletree requested an extension which was
granted by the lender. Accordingly, the initial reduction in the commitment has
been extended to 1998 and the maturity date is December 1999. In February 1996,
Doubletree borrowed $5.0 million under the credit facility and repaid the entire
amount by June 30, 1996. The credit facility provides for automatic reductions
in the amount of the facility by 100% of the net proceeds from the sale or other
disposition of certain types of loans or investments or the issuance of certain
debt obligations and by 50% of the new proceeds from the issuance of certain
equity securities. The lender has waived this required reduction with respect to
each of Doubletree's public offerings of common stock.
Following the consummation of the Merger and the related transactions
including the Financing Plan, Doubletree intends to terminate its existing
credit facility described above. After giving effect to the Merger and such
related transactions, Doubletree will have borrowed $600.0 million under the New
Credit Facility and will have $136.0 million available to borrow thereunder (of
which $36.0 million will be available only in certain circumstances).
Additionally, Doubletree intends to raise an additional $291.0 million of net
proceeds pursuant to the GEPT Equity Investment and the Equity Offering. In the
event that the Equity Offering is not consummated at or prior to the Effective
Time, Doubletree intends to obtain substitute financing through the Bridge Loan
and additional borrowings under the New Credit Facility. All of the net cash
proceeds from these financing transactions are anticipated to be used to
consummate the Merger. In each instance, management believes that a combination
of its existing cash and cash equivalents, net cash to be provided from
operations and its remaining borrowing ability under the New Credit Facility
will be sufficient to fund its current operations and capital expenditures after
the Merger. See "Risk Factors -- Financing of the Merger; Leverage."
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BUSINESS OF DOUBLETREE
Doubletree Corporation is one of the nation's leading hotel management
companies. At June 30, 1996, Doubletree managed, leased, or franchised 179
hotels with an aggregate of 41,232 rooms in 37 states, the District of Columbia
and Mexico. This represents a 63% and 43% increase in managed, leased or
franchised hotels and aggregate room count, respectively, during the 12 month
period ended June 30, 1996. Excluding the RFS Acquisition, this growth was 17%
and 19%, respectively. See "-- Recent Developments." Doubletree provides hotel
owners with management and franchise services under its Doubletree Hotels,
Doubletree Guest Suites, Doubletree Club Hotels and Club Hotels by Doubletree
brand names, as well as management services for non-Doubletree brand hotels. At
June 30, 1996, Doubletree's hotels included 60 Doubletree Hotels, 37 Doubletree
Guest Suites, 13 Doubletree Club Hotels, and 69 hotels operated by Doubletree
under third party brand names or as independent hotels.
RECENT DEVELOPMENTS
Doubletree has recently taken the following steps to help implement and
further its business and growth strategies:
Acquisition of RFS Management. In February 1996, Doubletree significantly
expanded its portfolio of non-Doubletree brand hotels with the RFS Acquisition.
At June 30, 1996, RFS Management operated 56 hotels, 44 of which were leased and
managed, four of which were leased only, and eight of which were managed for
owners other than the Landlord. The RFS Hotels principally operate in the
limited-service and the extended stay segments of the lodging industry, comprise
8,855 rooms and are operated under such franchise brands as Holiday Inn, Holiday
Inn Express, Residence Inn by Marriott, Hampton Inn and Comfort Inn. With the
RFS Acquisition, Doubletree acquired an independent hotel management company
with experienced hotel management personnel and an established infrastructure,
which will allow Doubletree to pursue further non-Doubletree brand management
contract and lease opportunities. In addition, in connection with the RFS
Acquisition, Doubletree entered into an arrangement with the REIT granting
Doubletree the right to lease and manage any hotels acquired or developed by the
REIT or the Landlord during the ten years following the RFS Acquisition, with
limited exceptions (the "Right of First Refusal"). The Right of First Refusal
provides Doubletree with an additional source of capital for additions to
Doubletree's hotel portfolio. In addition to its ongoing efforts to acquire
hotels, the REIT currently has seven hotels under development which will be
subject to the Right of First Refusal. See "-- The RFS Acquisition."
Formation of Candlewood. In November 1995, Doubletree announced its
entrance into the mid-priced ($40-50 per night) extended stay segment of the
hotel market with its investment in Candlewood, a joint venture with entities
controlled by Mr. Jack DeBoer, the founder of Residence Inns. Candlewood will
develop, own, manage and franchise hotels containing fully furnished studio
units designed to serve the value-oriented extended stay guest. Mr. DeBoer, whom
the industry credits with creating the extended stay concept, is primarily
responsible for the development and day-to-day operations of Candlewood.
Doubletree appoints two of Candlewood's four delegates, and approval of at least
a majority of the delegates is required for all material transactions.
Candlewood's first hotel commenced operations in May 1996. Doubletree has
committed to invest up to $15.0 million of equity capital in Candlewood, of
which $7.4 million was invested at June 30, 1996, and an additional $7.6 million
is to be invested over the next six months, for which it will receive, after a
preferred return of and on its capital, 50% of Candlewood's profits and losses.
In September 1996, Candlewood Hotel Company, Inc. filed a registration statement
with the Securities and Exchange Commission to register its common stock. In
connection with the offering, Doubletree's interest in Candlewood will be
converted into an equivalent interest in Candlewood Hotel Company, Inc. In
addition, in August 1996 Doubletree committed to provide credit support for a
loan facility that will be utilized by Candlewood to arrange to provide
construction and permanent financing to Candlewood franchisees on terms that, in
most cases, are much more attractive than those which the franchisees could
obtain on their own. The source of the loan facility will be General Motors
Acceptance Corporation Mortgage Group. In providing such credit support,
Doubletree's maximum exposure on any one Candlewood franchise will be
approximately $1.0 million, with the aggregate amount of exposure to Doubletree
for all such credit support capped at between $20.0 and $30.0 million, assuming
that the aggregate amount of loans made under the related loan facility is
between $100.0 and
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$150.0 million. Doubletree believes that the Candlewood joint venture provides
it with an opportunity to generate incremental revenues and participate in a
quickly expanding and high demand segment of the lodging industry. The
Candlewood joint venture is in the initial stages of development, and there can
be no assurance of its success. See "-- Investments and Commitments."
Formation of Joint Venture Strategic Alliance With Patriot American
Hospitality, Inc. In August 1996, Doubletree and Patriot announced the
formation of a joint venture strategic alliance. Pursuant to the strategic
alliance, Doubletree and Patriot will work together to identify hotels
potentially suitable for acquisition by Patriot, which will then be operated as
Doubletree brand hotels or luxury non-Doubletree brand hotels, in each case to
be leased and managed by Doubletree. Patriot and Doubletree have committed to
invest an aggregate of $200.0 million and $20.0 million, respectively, into the
purchase of hotels as part of the strategic alliance. The joint venture
strategic alliance provides Doubletree with another source of long-term hotel
management and lease opportunities. The joint venture has successfully completed
the acquisition of four Doubletree hotels. Despite these acquisitions, the joint
venture strategic alliance is in its initial stages, and there can be no
assurance of its success. There is no assurance that Doubletree's equity
investment in any hotel that is purchased as part of the strategic alliance will
be profitable and the leasing and ownership of hotels presents certain risks for
Doubletree. See "Risk Factors -- Investment Losses; Risks Associated with Joint
Ventures; Contingent Liabilities" and "Risk Factors -- Risks Associated with
Owning and Leasing Real Estate."
Introduction of Club Hotels by Doubletree. In January 1996, Doubletree
introduced "Club Hotels by Doubletree," a new hotel brand specifically targeted
at the frequent business traveler, which was developed by Doubletree in concert
with Steelcase, Au Bon Pain and Kinko's. Each hotel will feature a multi-purpose
Business Club ranging from 2,000 to 5,000 square feet in size. One portion of
the Business Club will be dedicated to the Kinko's self-service business center
and will contain business equipment, such as computer printers, fax machines,
photocopiers and office and shipping supplies. Each Business Club will also
feature private mini offices and small conference rooms designed by Steelcase,
and will feature an Au Bon Pain bakery cafe, where guests may enjoy breakfast,
lunch or dinner. Doubletree plans to grow its new brand through the acquisition
of management contracts of underperforming hotels in target locations, a focused
franchising program and the conversion of certain existing Doubletree Club
Hotels. The first two conversions of hotels to Club Hotels by Doubletree,
containing fully operational Business Clubs, recently opened in Jacksonville,
Florida and San Antonio, Texas.
Sale of TIAA Hotel Portfolio; Cash Distribution. In August 1996, Starwood,
a company that owns and manages hotels, acquired four managed Doubletree brand
hotels from their owner, Teachers Insurance Assurance Association of America.
These hotels are: the Doubletree Hotel Los Angeles (Airport), Doubletree Hotel
San Diego Horton Plaza, Doubletree Hotel Atlanta and Doubletree Hotel
Bloomington (Mall of America). These hotels comprise a part of, and are not in
addition to, the hotels acquired by Starwood discussed in "Risk Factors -- Risk
of Contract Turnover." As part of the purchase and sale transaction, Starwood
retained Doubletree as the manager of the hotels, subject to either party's
right to terminate each management agreement, without cause, on 30 days' prior
written notice. In the event that Doubletree's management or franchise of the
hotels is terminated for any reason, Starwood is required to pay Doubletree a
termination payment the amount of which will be sufficient to recover
Doubletree's asset. Doubletree has received notice from Starwood that it intends
to take over management of the hotels, effective October 1, 1996, and that it
intends to franchise the hotels on a short-term basis. Starwood has indicated
that three of such franchise agreements will likely be converted to other brands
in early 1997. However, Doubletree currently anticipates that it would terminate
two of the three franchise agreements as a result of the Merger.
Doubletree, through its subsidiaries, had a minority general partnership
interest in the general partnership that owned the Doubletree San Diego Horton
Plaza. As a result of the sale of the hotel and the liquidation of the general
partnership, Doubletree received a cash distribution of approximately $5.8
million.
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THE LODGING INDUSTRY
Overview
Doubletree believes that the lodging industry is benefiting from an
improved supply and demand balance, which has led to overall profitability of
the lodging industry. According to Hospitality Directions, 1995 marked the
lodging industry's third consecutive year of profitability. The report estimates
that the lodging industry earned pretax profits of $7.6 billion in 1995, a 38%
increase over the prior year. Room supply growth in the lodging industry,
particularly in the principal segments in which Doubletree competes, has slowed
dramatically in recent years as the industry has absorbed some of the oversupply
of rooms that resulted from an average annual room supply growth of
approximately 4% from 1987 to 1990. According to industry reports, this growth
slowed to 1.3% in 1992, 1.4% in 1993, 1.5% in 1994 and 1.6% in 1995. Increases
in occupancy rates (measured by occupied rooms) increased 3.3% in 1992, 3.1% in
1993, 4.0% in 1994 and 2.9% in 1995. Average daily room rates increased 1.4%,
2.8%, 4.8% and 4.9%, respectively, during the same periods. Due to the cyclical
nature of supply and demand in the lodging industry, there can be no assurance
that such increases will continue. See "Risk Factors -- Risks Associated with
the Lodging Industry."
Industry Segments
Industry segments within the lodging industry are principally based on
levels of service, guest amenities, room size, room configuration and price.
Doubletree's Doubletree brand hotels currently compete in three segments of the
lodging industry: full-service hotels, all-suite hotels, and limited-service
hotels. Full-service hotels typically include swimming pools, meeting and
banquet facilities, gift shops, restaurants, cocktail lounges, room service,
parking facilities and other services. All-suite hotels provide the guest with a
two room suite, including a bedroom and a living room. This segment can also be
further divided depending on the level of food and beverage services provided at
the hotel. Limited-service hotels are moderately priced and typically do not
include services such as extensive meeting and banquet facilities or extensive
food and beverage facilities.
Doubletree's non-Doubletree brand hotels compete in most segments, but
primarily in the limited-service and extended stay segments of the lodging
industry. Extended stay hotels are designed to combine the convenience of a
hotel with many of the comforts of an apartment, and generally contain a
furnished kitchen area and may include living areas separate from sleeping
areas.
HOTEL OPERATIONS: DOUBLETREE BRAND HOTELS
Doubletree Full-Service Hotels
Doubletree's full-service hotels are targeted at business travelers, group
meetings and leisure travelers. The total guest room revenue for the year ended
December 31, 1995 for Doubletree's full-service hotels was derived approximately
40% from business travelers, 41% from group meetings and 19% from leisure
travelers. Doubletree believes these percentages are consistent with other
full-service hotel brands in the industry.
At June 30, 1996, Doubletree's full-service hotel segment included 60
Doubletree hotels in 22 states, the District of Columbia and Mexico, with a
total of 19,334 guest rooms. Of these hotels, 44 are operated by Doubletree
under management contracts and 16 are operated by franchisees licensed to use
the Doubletree brand name. Four of the managed hotels are also leased by
Doubletree.
Doubletree full-service hotels range in size from 120 to 720 rooms. Room
rates generally range from $45 to $280 per night depending upon location, time
of year and day of the week. Doubletree full-service hotels typically include a
swimming pool, gift shop, meeting and banquet facilities, at least one
restaurant and cocktail lounge, room service, parking facilities and other
services. Three of Doubletree's full-service hotels are considered resort
hotels, with additional recreational facilities, such as tennis courts, and two
of these hotels have golf courses.
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The following table sets forth certain information regarding the Doubletree
full-service hotels managed or franchised by Doubletree at June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels........................................... 44 14,654
Franchised Hotels........................................ 16 4,680
--- ------
Total............................................... 60 19,334
=== ======
</TABLE>
Doubletree Guest Suites All-Suite Hotels
The Doubletree Guest Suites all-suite hotels comprise one of the largest
all-suite hotel chains in the United States as measured by number of suites and
system revenues. All-suite hotels are targeted at business travelers and
families who have a need or desire for greater space than typically is provided
at most traditional hotels. The total guest room revenue for the year ended
December 31, 1995 for Doubletree's all-suite hotels was derived approximately
50% from business travelers, 27% from group meetings and 23% from leisure
travelers.
At June 30, 1996, Doubletree's all-suite hotels included 37 Doubletree
Guest Suites hotels in 18 states and the District of Columbia, with a total of
8,033 guest rooms. Of these hotels, 26 are operated by Doubletree under
management contracts and 11 are operated by franchisees licensed to use the
Doubletree Guest Suites brand name. One of the managed hotels is also owned by
Doubletree.
Doubletree Guest Suites range in size from 55 to 460 guest suites. Suite
rates generally range from $60 to $250 per night. Each guest suite has a
separate living room and dining/work area, with a color television, refrigerator
and wet bar.
The following table sets forth certain information regarding the Doubletree
Guest Suites all-suite hotels managed or franchised by Doubletree at June 30,
1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels........................................... 26 5,985
Franchised Hotels........................................ 11 2,048
--- -----
Total............................................... 37 8,033
=== =====
</TABLE>
Limited-Service Doubletree Club Hotels
Doubletree Club Hotels and Club Hotels by Doubletree, moderately-priced,
limited-service hotels, are primarily targeted at individual business travelers.
The total guest room revenue for the year ended December 31, 1995 for
Doubletree's limited-service hotels was derived approximately 56% from business
travelers, 25% from group meetings and 19% from leisure travelers.
At June 30, 1996, the Doubletree Club Hotels included 13 hotels in nine
states, with a total of 2,364 guest rooms. Of these hotels, three are operated
by Doubletree under management contracts and 10 are operated by franchisees
licensed to use the Doubletree Club Hotels name.
Doubletree Club Hotels range in size from 158 to 215 rooms. Room rates
generally range from $50 to $135 per night. Doubletree Club Hotels typically
include a pool and a central lounge with open seating for serving meals and
evening cocktails.
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<PAGE> 99
The following table sets forth certain information regarding the Doubletree
Club Hotels managed or franchised by Doubletree at June 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
HOTELS ROOMS
--------- ---------
<S> <C> <C>
Managed Hotels........................................... 3 512
Franchised Hotels........................................ 10 1,852
--- -----
Total............................................... 13 2,364
=== =====
</TABLE>
Doubletree plans to grow its new limited-service hotel brand, Club Hotels
by Doubletree, through the acquisition of management contracts of unaffiliated
underperforming hotels, a focused franchising program and the conversion of
certain existing Doubletree Club Hotels. Since June 30, 1996, one Doubletree
Club Hotel in Jacksonville, Florida, has been converted to a Club Hotel by
Doubletree. See "-- Recent Developments -- Introduction of Club Hotels by
Doubletree."
Marketing and Sales
To enhance Doubletree's brand recognition and national presence, Doubletree
launched in February 1995 its multi-million dollar "Sweet Dreams" marketing
campaign. The "Sweet Dreams" campaign is intended to increase awareness among
business travelers of Doubletree's distinguishing characteristics and features
the Doubletree cookie -- a symbol of Doubletree's commitment to provide warm and
caring services to its guests. According to Nationwide Surveys, Inc., at
December 31, 1995, brand awareness of the Doubletree brand name in the business
travel segment was at 79%, an all-time Doubletree high.
Doubletree advertises nationally on network and cable TV and in major
newspapers and magazines. Doubletree has established marketing alliances with
major airlines, car rental and credit card companies to share customer lists and
build trade through joint promotions. Additionally, Doubletree is the official
hotel sponsor of the NFL and an official corporate partner of the NCAA. All
Doubletree brand hotels participate in national, regional and local advertising
and promotion programs designed by central marketing services.
Doubletree has a 24-hour central reservations office with an 800 number to
provide a simple and cost-effective means for making reservations and promotes
its branded hotels to reservation-makers, including all major airline
reservation systems and over 32,000 travel agencies in the United States.
Doubletree uses a centralized telemarketing group, is represented at major trade
shows in the United States and abroad, and specifically targets Fortune 500
companies and large national associations. In 1995 Doubletree established a
franchise sales organization and support infrastructure in order to capitalize
on the growth opportunities in franchising.
Management Contracts
Under each of Doubletree's management contracts, Doubletree operates or
supervises all aspects of the hotel's operations, including guest services,
hiring and training of hotel staff (who generally are employees of Doubletree),
sales and marketing, accounting functions, purchasing and budgeting. In exchange
for these services, Doubletree receives a base fee, typically tied to the
hotel's revenues. In addition, Doubletree may receive revenues from incentives
provided in Doubletree's management contracts based on achieving specified
operating performance goals or may earn income through Investments in the
underlying hotel properties. Doubletree's management contracts have average
terms of approximately 14 years, and there is an average of approximately 11
years remaining under existing management contracts. Under the contracts,
Doubletree also provides certain centralized corporate services for which it is
reimbursed at cost, including reservations, sales and marketing, public
relations, accounting, management information systems, internal audit and
specialized training. The hotel owner may purchase hotel supplies from
Doubletree, including brand-specific products, for cost plus a mark-up.
Additionally, Doubletree has implemented several purchasing agreements that
lower the cost of products to the hotel owner while concurrently providing
Doubletree with a fee in return for negotiating and managing the program.
Doubletree also provides design, construction and other technical services for a
fee. The hotel owner generally is responsible for all costs, expenses and
liabilities incurred in connection with
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<PAGE> 100
operating the hotel, including the expenses, salaries and benefits of all hotel
employees, and generally is required to provide a certain percentage of hotel
revenues for capital replacement. In addition, Doubletree may be responsible for
certain liabilities, such as workers compensation, environmental and general
tort liability, associated with a hotel's operations. Doubletree carries general
liability insurance to protect itself from most potential liability claims. See
"-- Insurance."
Upon assumption of the management of a hotel, Doubletree concentrates on
improving the value of the hotel while minimizing the impact of the transition
on employees, guests and the local marketplace. In addition, upon conversion of
a hotel to Doubletree management, Doubletree often works with the hotel owner to
renovate the hotel to improve its marketability and value and to meet the other
financial objectives of the owner. To facilitate the conversion, Doubletree
offers certain technical services for a fee, including recommending and
selecting architects and interior designers, as well as controlling the budget
process and supervising construction.
Management of Doubletree hotels is coordinated from Doubletree's
headquarters in Phoenix, with a regional operations office in Boston, regional
sales offices in Chicago, Los Angeles and Philadelphia and an accounting office
in Cincinnati.
Franchise Operations
Doubletree's franchised hotels are operated under the Doubletree,
Doubletree Guest Suites and Doubletree Club Hotels brands and include hotels in
the full-service, all-suite and limited-service segments of the hotel industry.
At June 30, 1996, Doubletree franchised 37 hotels with a total of 8,580 guest
rooms. Until 1995, Doubletree had franchised hotels primarily when a managed
hotel was sold to an owner/manager who chose to manage the hotel, while
maintaining the use of one of Doubletree's brand names. In 1995 Doubletree
created a franchise sales organization to capitalize on additional franchising
opportunities as the awareness of the Doubletree brand increased. Doubletree's
centralized corporate services for franchised hotels include centralized
reservations, sales and marketing, public relations and national media
advertising. While franchising remains secondary to hotel management contract
growth, Doubletree intends to take advantage of franchising opportunities on a
selective basis and expects that the percentage of franchised hotels in its
system will increase.
Doubletree's franchise agreements have varying terms and typically require,
among other things, franchisees to pay an initial application fee upon
acceptance of the property, annual franchise fees based upon revenues and
marketing/reservation fees for the costs associated with the use of Doubletree's
centralized corporate services. Doubletree's franchise agreements have average
terms of approximately 11 years, and there is an average of approximately nine
years remaining under existing franchise agreements. Many of Doubletree's
franchisees purchase hotel supplies from Doubletree, including brand-specific
products.
In addition to acting as a franchisor of the Doubletree hotel brands,
Doubletree operates additional hotels as a franchisee under a variety of hotel
brand names. See "-- Hotel Operations: Non-Doubletree Brand Hotels -- Franchise
Agreements."
HOTEL OPERATIONS: NON-DOUBLETREE BRAND HOTELS
Non-Doubletree Brand Hotels
At June 30, 1996, Doubletree managed or leased 69 hotels under
non-Doubletree brands with a total of 11,501 rooms in 27 states, including
luxury, full-service, limited-service and extended stay hotels. See "-- The RFS
Acquisition." These non-Doubletree brand hotels are operated under brand names
such as Hampton Inn, Residence Inn by Marriott, Holiday Inn, Holiday Inn Express
and Comfort Inn or as independent hotels.
Marketing and Sales
Doubletree's marketing and sales objective for its non-Doubletree brand
hotels is to increase the revenues and profitability of those hotels through a
direct sales program at each hotel. In addition to direct sales and
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<PAGE> 101
marketing efforts at each franchised hotel, each such hotel takes advantage of
the advertising and promotional strength of its particular franchise
organization.
Lease and Management Agreements
At June 30, 1996, of Doubletree's 69 non-Doubletree brand hotels, 46 were
leased and managed, 18 were managed only, four were leased only and one was
owned through the Candlewood joint venture. All of the leased and managed hotels
were leased and managed by Doubletree pursuant to lease agreements (the
"Percentage Leases") with the Landlord under similar terms. See "Risk
Factors -- Dependence on Certain Hotel Owners."
Each Percentage Lease has an initial term of not less than 15 years from
the date of inception (with expiration dates ranging from 2008 to 2015), is
subject to early termination upon the occurrence of certain contingencies and
requires the monthly payment of base rent and the quarterly payment of
percentage rent. During 1995, the base rent component of the Percentage Lease
expense was approximately 47% of total Percentage Lease expense. Top percentage
rents ranged from 50% to 76.5% of incremental room revenue. For the year ended
December 31, 1995, room revenue for each of the RFS Hotels exceeded the amount
required to trigger the top tier of percentage rent. Other than real estate
taxes, casualty insurance, maintenance of underground utilities and structural
elements, and furniture, fixtures and equipment and other capital improvements,
which are obligations of the Landlord, the Percentage Leases require Doubletree
to pay rent, personal property taxes, all costs and expenses and all utility and
other charges incurred in the operation of the hotels. Under each of the
Percentage Leases, Doubletree has agreed to indemnify the Landlord against
certain liabilities including (i) any injury to persons or property at the
hotels; (ii) any environmental liability resulting from conditions caused by
Doubletree; (iii) liability resulting from the sale or consumption of alcoholic
beverages at the hotel; and (iv) costs related to employees at the RFS Hotels.
In connection with the RFS Acquisition, RFS Stockholders have agreed to
indemnify Doubletree for undisclosed conditions existing prior to such
acquisition. If the Landlord enters into an agreement to sell a hotel, it may
terminate the Percentage Lease and either (i) pay Doubletree the fair market
value of Doubletree's leasehold interest or (ii) offer to lease to Doubletree a
substitute hotel on terms that would create an equivalent value. If the REIT
terminates its status, for federal tax purposes, as a real estate investment
trust, the Landlord may terminate the then Percentage Leases and the Right of
First Refusal by providing notice to Doubletree and causing the REIT to redeem
any REIT Preferred Shares then owned by Doubletree. If the termination occurs
within 10 years after the closing date of the RFS Acquisition, the Landlord will
pay to Doubletree a varying amount of liquidated damages plus the fair value of
the then existing Percentage Leases. If the Landlord fails to cure a breach by
it under a Percentage Lease, Doubletree may purchase the relevant hotel from the
Landlord for a purchase price equal to the hotel's then fair market value.
Events of default under the Percentage Leases, in addition to customary events
of default, include (i) the occurrence of an event of default under any other
lease between the Landlord and Doubletree or an affiliate of Doubletree (only
with respect to those leases that were in place at the time of the closing of
the RFS Acquisition), (ii) the failure of RFS Management to maintain a minimum
net worth of $15.0 million or a ratio of total debt to consolidated net worth
(as defined in the Percentage Leases) of 50% or less, exclusive of capitalized
leases, and (iii) the termination by the franchisor, as a result of any action
or failure to act by Doubletree, of the franchise agreement with respect to any
RFS Hotel. See "-- The RFS Acquisition." If an event of default occurs and
continues beyond any cure period, the Landlord may terminate the Percentage
Leases as well as the Right of First Refusal.
Management of the RFS Hotels is coordinated from Doubletree's office in
Memphis, Tennessee. Doubletree uses a centralized accounting and data processing
system for its leased hotels which facilitates financial statement and budget
preparation, payroll management, internal auditing and other support functions
for the on-site hotel management team. Doubletree also provides centralized
control over purchasing and project management.
Franchise Agreements
Of the 69 non-Doubletree brand hotels, 62 are licensed to operate under
franchise agreements, including 15 hotels licensed as Hampton Inn hotels, 12
hotels licensed as Residence Inn by Marriott hotels, six hotels
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<PAGE> 102
licensed as Comfort Inn hotels, nine hotels licensed as Holiday Inn Express
hotels, 11 hotels licensed as Holiday Inn hotels and nine hotels licensed under
other brands. Holiday Inn and Holiday Inn Express are registered trademarks of
Holiday Inn, Inc. Comfort Inn is a registered trademark of Choice Hotels
International, Inc. Residence Inn by Marriott is a registered trademark of
Marriott Corporation. Hampton Inn is a registered trademark of Promus Hotel
Corporation. Doubletree as lessee holds the franchise license for each hotel it
operates and is responsible for paying the franchise fees.
Generally, each franchise agreement gives Doubletree the right to operate
the particular hotel under a franchise for an initial term of between 10 and 20
years. The franchise agreements provide for termination at the franchisor's
option upon the occurrence of certain events. Doubletree is entitled to
terminate the franchise license by giving at least 12 months notice and paying a
specified amount of liquidated damages. Doubletree has no present intention to
terminate any of such franchises. The franchise agreements under which
Doubletree is a franchisee generally impose similar obligations on Doubletree as
those Doubletree imposes on its franchisees.
INVESTMENTS AND COMMITMENTS
Doubletree makes selective Investments in hotels and hotel ventures in
connection with acquiring or maintaining management or the lease of hotels and
to enhance the value or position of Doubletree in the lodging industry. It also
makes certain financial commitments for the same purposes. These Investments and
commitments may be material to Doubletree's financial position and results of
operations, and often are characterized, as compared to Doubletree's ordinary
course operations, by enhanced risk and by lack or attenuation of Company
control.
Doubletree makes Investments in hotels in order to acquire or maintain
management of the hotels in a variety of circumstances. Doubletree may make or
guarantee loans to hotel owners for renovations, acquisitions, conversions, or
working capital, among other things. Such loans or loan guarantees are typically
nonrecourse other than to the hotel property and if secured, are subordinate.
Doubletree may also make Investments in hotels in a variety of forms, including
through partnerships, corporations and limited liability companies, which
typically are minority and illiquid positions. Doubletree believes that such
Investments better align its interests with those of the hotel owners and
provide a competitive advantage in acquiring and maintaining management of
hotels over management companies which do not make investments.
At June 30, 1996, Doubletree had general and/or limited partnership
interests in 17 limited partnerships, 11 of which own hotels while the others
own retail or industrial properties, which interests ranged from less than 1% to
49.9% of the respective partnerships and had an aggregate book value of $10.8
million. At such date, Doubletree also had loans outstanding to certain hotel
owners with an aggregate book value of $31.4 million, and had guaranteed certain
mortgages, leases and construction bonds for hotel owners up to $6.5 million
($2.9 million of which were collateralized by letters of credit). In addition,
at June 30, 1996 Doubletree had committed to lend up to $9.0 million: $7.0
million to the owner of the Doubletree Hotel in Somerset, New Jersey, of which
$0.7 million is for renovations and $6.3 million of which is to provide bridge
financing, if needed; the remaining loan commitments are to two other hotels,
primarily for renovations. See Notes 7 and 16 of Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Results of Operations
and Financial Condition of Doubletree -- Liquidity and Capital Resources."
In connection with obtaining hotel management contracts or leases
Doubletree may also make guarantees of hotel performance to an owner, which
guarantees normally are limited in time or amount, and may make payments
directly to the hotel owner, normally in consideration of special financial or
other accommodations to Doubletree in management contract terms and conditions,
which payments are capitalized and amortized. In some circumstances, Doubletree
will acquire a hotel in order to manage it (Doubletree presently owns one
hotel), or agree to hotel lease terms which result in Doubletree assuming
greater operating risks than are associated with management contracts alone. See
"Risk Factors -- Risks Associated with Owning and Leasing Real Estate."
Doubletree's Investments in and commitments regarding hotels for the
purpose of acquiring or maintaining management or lease of a hotel normally do
not extend beyond the period of its management or
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lease of the hotels. Such Investments and commitments increase the potential
risks, and in some cases the potential rewards, of such relationships.
Doubletree may also make Investments in institutional hotel owners rather
than in particular hotels, with varying levels of assurance that such
Investments will lead to management arrangements. At June 30, 1996, Doubletree
had invested $18.5 million in the REIT Preferred Shares, and had the Right of
First Refusal with respect to certain future hotel leases from the Landlord.
Additionally, Doubletree had investments in the REIT's common stock and
partnership units of the Landlord with a net book value of $1.4 million. At such
date, Doubletree had Investments with an aggregate book value of $1.8 million,
and commitments to invest, subject to certain conditions, an additional $3.1
million, in Thayer Hotel Investors II ("Thayer"), a limited partnership which
invests in hotel properties and for which Doubletree manages certain hotels. The
terms of Doubletree's investment in Thayer do not assure that Doubletree will be
offered the opportunity to manage hotels acquired by Thayer, but Doubletree
anticipates that at least 50% of the properties acquired by Thayer will either
be managed or franchised by Doubletree.
Doubletree may also make Investments in other lodging industry companies
for strategic reasons and to enhance Doubletree's value. At June 30, 1996,
Doubletree had invested $7.4 million in Candlewood, and had committed to invest
up to an additional $7.6 million over the next 6 months thereafter. In addition,
in August 1996 Doubletree committed to provide credit support for a loan
facility that will be utilized by Candlewood to arrange to provide construction
and permanent financing to Candlewood franchisees on terms that, in most cases,
are much more attractive than those which the franchisees could obtain on their
own. Also in August 1996, Doubletree formed a joint venture strategic alliance
with Patriot, pursuant to which Doubletree and Patriot will seek to identify
hotels potentially suitable for acquisition and to be operated as Doubletree
brand hotels or luxury non-Doubletree brand hotels, in each case to be leased
and managed by Doubletree. Doubletree has agreed to invest approximately 10% of
the equity in each hotel that is purchased as part of the joint venture
strategic alliance up to an aggregate of $20.0 million. See "-- Recent
Developments" and "Management's Discussion and Analysis of Results of Operations
and Financial Condition of Doubletree -- Liquidity and Capital Resources" and
"Risk Factors -- Investment Losses; Risks Associated with Joint Ventures;
Contingent Liabilities."
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HOTEL PROPERTIES
The following table presents as of June 30, 1996 certain comparative
information with respect to Doubletree brand hotels and non-Doubletree brand
hotels:
<TABLE>
<CAPTION>
TOTAL NON-
DOUBLETREE DOUBLETREE
DOUBLETREE DOUBLETREE DOUBLETREE BRAND BRAND
FULL-SERVICE GUEST SUITES CLUB HOTELS HOTELS HOTELS TOTAL
------------ ------------ ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Number of Hotels(1)................... 60 37 13 110 69 179
Total Number of Rooms(1).............. 19,334 8,033 2,364 29,731 11,501 41,232
Average Number of Rooms Per
Hotel(1)............................ 322 217 182 270 167 230
Percentage of all Doubletree Rooms.... 46.9% 19.5% 5.7% 72.1% 27.9% 100.0 %
Occupancy Percentage(2)(3)
Year 1994........................... 70.2% 73.7% 65.9% 71.2% 69.9% 71.0 %
Year 1995........................... 70.8 74.6 66.2 71.9 71.4 71.8
Six Months Ended June 1995.......... 71.5 73.4 71.1 72.1 74.6 72.8
Six Months Ended June 1996.......... 73.0 75.9 71.0 73.9 76.1 74.5
Average Daily Rate(2)(3)
Year 1994........................... $80.44 $94.43 $ 63.10 $84.59 $70.18 $82.21
Year 1995........................... 84.87 98.84 66.42 88.99 73.56 86.41
Six Months Ended June 1995.......... 81.43 104.90 66.58 88.55 67.83 82.22
Six Months Ended June 1996.......... 88.06 110.84 71.46 94.99 71.86 87.93
REVPAR(2)
Year 1994........................... $56.48 $69.57 $ 41.59 $60.22 $49.02 $58.38
Year 1995........................... 60.08 73.74 43.99 63.96 52.51 62.03
Six Months Ended June 1995.......... 58.22 77.00 47.34 63.84 50.60 59.86
Six Months Ended June 1996.......... 64.28 84.13 50.74 70.20 54.69 65.51
</TABLE>
- ---------------
(1) Includes all managed and franchised properties as of June 30, 1996.
(2) For the years ended 1994 and 1995, includes only information for hotels
continuously managed by Doubletree (including RFS Management, but excluding
Red Lion) since January 1, 1994. For the six months ended June 30, 1995 and
1996, includes only information for hotels managed by Doubletree (including
RFS Management, but excluding Red Lion) since January 1, 1995. Doubletree
branded hotels include only those hotels managed by Doubletree under the
Doubletree brand. Total Doubletree includes all hotels (other than Red Lion
hotels) managed by Doubletree.
(3) Based upon rooms occupied, excluding complimentary rooms.
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The following table sets forth, at June 30, 1996, certain information with
respect to Doubletree hotels:
<TABLE>
<CAPTION>
MANAGED(M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- ----------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
DOUBLETREE FULL-SERVICE HOTELS:
Paradise Valley.............................. Arizona M 387
Phoenix...................................... Arizona F 242
Tucson....................................... Arizona M 295
Little Rock.................................. Arkansas F 290
Anaheim (Orange)............................. California M 454
Carmel Highland.............................. California M 172
Del Mar...................................... California L 220
Los Angeles (Airport)........................ California M 720
Monterey..................................... California F 374
Palm Springs................................. California F 289
Pasadena..................................... California M 350
San Diego (Horton Plaza)..................... California M 450
San Francisco................................ California M 291
San Pedro.................................... California M 226
Santa Rosa................................... California F 247
Ventura...................................... California M 284
Westwood..................................... California F 300
Colorado Springs............................. Colorado M 290
Denver....................................... Colorado F 224
Westminster/Boulder.......................... Colorado L 180
Washington (Park Terrace).................... Dist. of Columbia M 219
Clearwater Beach............................. Florida F 427
Ft. Lauderdale (Oceanfront).................. Florida M 230
Miami (Coconut Grove)........................ Florida L 192
Miami (Grand)................................ Florida M 152
Tampa (Airport).............................. Florida M 500
Atlanta...................................... Georgia M 370
Kansas City (Overland Park).................. Kansas M 357
Metairie (New Orleans Lakeside).............. Louisiana M 210
New Orleans.................................. Louisiana M 363
Baltimore.................................... Maryland M 125
Rockville.................................... Maryland M 315
Ixtapa....................................... Mexico F 120
Mazatlan..................................... Mexico F 280
Detroit (Downtown)........................... Michigan M 250
Bloomington (Mall of America)................ Minnesota M 321
Kansas City (Airport)........................ Missouri F 348
St. Louis (Conference Center)................ Missouri M 223
Somerset..................................... New Jersey M 360
Albuquerque.................................. New Mexico F 294
Santa Fe..................................... New Mexico F 210
Tulsa (Downtown)............................. Oklahoma M 417
Tulsa (Warren Place)......................... Oklahoma M 371
Philadelphia................................. Pennsylvania M 425
Pittsburgh................................... Pennsylvania M 616
Newport...................................... Rhode Island M 253
Nashville.................................... Tennessee M 337
Austin....................................... Texas M 350
Dallas (Campbell Center)..................... Texas M 302
Dallas (Lincoln Centre)...................... Texas M 500
Dallas (Park West)........................... Texas F 339
Houston (Post Oak)........................... Texas M 449
</TABLE>
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<PAGE> 106
<TABLE>
<CAPTION>
MANAGED(M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- ----------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
Houston (Allen Center)....................... Texas M 341
Houston (Intercontinental Airport)........... Texas F 315
Salt Lake City............................... Utah F 381
Arlington (National Airport)................. Virginia M 632
Roanoke...................................... Virginia M 332
Tysons Corner (Falls Church)................. Virginia L 404
Seattle (Inn)................................ Washington M 198
Seattle (Plaza).............................. Washington M 221
DOUBLETREE GUEST SUITES:
Tucson....................................... Arizona M 304
Santa Monica................................. California M 253
Washington (New Hampshire Ave)............... Dist. of Columbia M 101
Washington (Pennsylvania Ave)................ Dist. of Columbia F 123
Boca Raton................................... Florida M 182
Ft Lauderdale (Cypress Creek)................ Florida F 254
Ft Lauderdale (Galleria)..................... Florida M 229
Orlando (Airport)............................ Florida F 150
Orlando (Disney)............................. Florida M 229
Orlando (Maingate/Melia)..................... Florida M 150
Tampa Bay (Rocky Point)...................... Florida M 203
Tampa (Busch Gardens)........................ Florida M 129
Tampa (Westshore)............................ Florida F 260
Vero Beach................................... Florida F 55
Atlanta...................................... Georgia M 224
Chicago...................................... Illinois M 345
Glenview..................................... Illinois F 240
Indianapolis................................. Indiana M 137
Lexington.................................... Kentucky F 166
Baltimore (BWI Airport)...................... Maryland M 251
Boston (Cambridge)........................... Massachusetts M 310
Boston (Waltham)............................. Massachusetts M 275
Southfield................................... Michigan M (2) 239
Troy......................................... Michigan M 251
Mount Laurel................................. New Jersey F 129
New York (Times Square)...................... New York M 460
Raleigh (Durham)............................. North Carolina M 203
Cincinnati................................... Ohio M 151
Columbus..................................... Ohio M 194
Dayton....................................... Ohio F 138
Philadelphia (Airport)....................... Pennsylvania M 251
Plymouth Meeting............................. Pennsylvania M 252
Nashville.................................... Tennessee M 138
Austin....................................... Texas M 189
Houston...................................... Texas M 335
Irving (DFW Airport)......................... Texas F 308
Alexandria................................... Virginia F 225
DOUBLETREE CLUB HOTELS:
El Segundo................................... California F 215
Ontario...................................... California F 171
Rancho Bernardo.............................. California F 209
Santa Ana (Orange County Airport)............ California F 170
Lakewood..................................... Colorado F 170
Jacksonville................................. Florida M 167
Boise........................................ Idaho M 158
St. Louis (Riverport)........................ Missouri F 181
</TABLE>
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<PAGE> 107
<TABLE>
<CAPTION>
MANAGED(M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- ----------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
Charlotte.................................... North Carolina M 187
Harrisburg................................... Pennsylvania F 176
Philadelphia (Northeast)..................... Pennsylvania F 188
McAllen...................................... Texas F 164
Norfolk...................................... Virginia F 208
NON-DOUBLETREE BRAND HOTELS:
CANDLEWOOD
Wichita...................................... Kansas M (3) 107
COMFORT INN
Conyers...................................... Georgia L 83
Marietta..................................... Georgia L 185
Farmington Hills............................. Michigan L 135
Grand Rapids................................. Michigan L 109
Clemson...................................... South Carolina L 122
Ft. Mill..................................... South Carolina L 153
ECONOLODGE
Orlando (Hawaiian)........................... Florida M 445
DAYS INN
Philadelphia (Airport)....................... Pennsylvania M 177
HAMPTON INN
Denver....................................... Colorado L 138
Lakewood..................................... Colorado L 150
Ft. Lauderdale............................... Florida L 122
Indianapolis................................. Indiana L 131
Lansing...................................... Michigan L 109
Warren....................................... Michigan L 124
Bloomington.................................. Minnesota L 135
Minnetonka................................... Minnesota L 127
Hattiesburg.................................. Mississippi L 155
Lincoln...................................... Nebraska L 111
Omaha........................................ Nebraska L 129
Oklahoma City................................ Oklahoma L 134
Tulsa........................................ Oklahoma L 148
Memphis...................................... Tennessee L 120
Laredo....................................... Texas L 120
HAWTHORNE SUITES
Atlanta...................................... Georgia L 220
HOLIDAY INN
Windsor Locks (Bradley Airport).............. Connecticut M 200
Orlando (Maingate West)...................... Florida M 287
Crystal Lake................................. Illinois L 196
Louisville................................... Kentucky L 169
Lafayette.................................... Louisiana L 242
Flint........................................ Michigan L 171
Clayton...................................... Missouri L 253
Burlington................................... North Carolina M 132
Anderson..................................... South Carolina M 130
Columbia..................................... South Carolina L 175
San Antonio (Riverwalk)...................... Texas M 325
HOLIDAY INN EXPRESS
Orlando (International Drive)................ Florida M 217
Arlington Heights............................ Illinois L 125
Downers Grove................................ Illinois L 123
Bloomington.................................. Minnesota L 142
Tupelo....................................... Mississippi L 124
</TABLE>
96
<PAGE> 108
<TABLE>
<CAPTION>
MANAGED(M),
LEASED(L) OR NUMBER OF
HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS
- ----------------------------------------------- ------------------ ---------------- ---------
<S> <C> <C> <C>
Franklin..................................... Tennessee L 100
Austin....................................... Texas L 125
San Antonio.................................. Texas M 211
Wauwatosa.................................... Wisconsin L 122
HOWARD JOHNSON
Orlando (Fountain Park)...................... Florida M 400
Orlando (Universal Towers)................... Florida M 302
RAMADA INN
Orlando (Maingate)........................... Florida M 391
Harrisburg................................... Pennsylvania M 254
RESIDENCE INN BY MARRIOTT
Sacramento................................... California L 176
Torrance..................................... California L 247
Wilmington................................... Delaware L (4) 120
Orlando...................................... Florida L 176
Atlanta...................................... Georgia L 128
Ann Arbor.................................... Michigan L 72
Kansas City.................................. Missouri L 96
Fishkill..................................... New York L (4) 136
Charlotte.................................... North Carolina L (4) 80
Providence (Warwick)......................... Rhode Island L (4) 96
Ft. Worth.................................... Texas L 120
Tyler........................................ Texas L 128
SHERATON
Austin....................................... Texas M 249
INDEPENDENT HOTELS
Atlanta (Grand Hotel)........................ Georgia M 244
Portland (Budget Inn)........................ Maine M 112
Boston (Harbor Hotel)........................ Massachusetts M 230
Cambridge (Harvard Square Hotel)............. Massachusetts L 73
Cambridge (Inn at Harvard)................... Massachusetts L 113
Tupelo (Executive Inn)....................... Mississippi L 115
Chapel Hill (Carolina Inn)................... North Carolina M 185
</TABLE>
- ---------------
(1) All leased properties are also managed by Doubletree unless otherwise noted.
(2) Owned and managed by Doubletree.
(3) Owned and managed by the Candlewood joint venture.
(4) Managed by an unaffiliated third party hotel management company.
The principal executive offices of Doubletree are located in Phoenix and
are occupied pursuant to a lease that expires March 31, 1998. In addition to its
executive offices, Doubletree leases office space in Memphis, Boston, Chicago,
Cincinnati, Los Angeles and Philadelphia. Management believes that such
properties are sufficient to meet its present needs and does not anticipate any
difficulty in securing additional space, as needed, on terms acceptable to
Doubletree. See Note 8 of Notes to Consolidated Financial Statements of
Doubletree.
Additionally, Doubletree leases 54 hotels which are located in 24 different
states. Each lease expires between 1998 and 2015 and is subject to early
termination upon the occurrence of certain contingencies. See Note 4 of Notes to
Consolidated Financial Statements of Doubletree.
In addition to the leased hotels, Doubletree acquired on December 22, 1994,
a 239-room all-suite hotel, subject to a 70 year ground lease, in Southfield,
Michigan for approximately $11.0 million. Doubletree also opened the first
Candlewood hotel on May 9, 1996, a 107-room extended stay hotel in Wichita,
Kansas, the first of the Candlewood joint venture.
97
<PAGE> 109
THE RFS ACQUISITION
On February 27, 1996 Doubletree acquired all of the outstanding stock of
RFS Management in exchange for 2,727,811 shares (the "RFS Acquisition Shares")
of Doubletree Common Stock. At June 30, 1996, RFS Management leased 48 hotels
(44 of which it also managed) from the Landlord and managed an additional eight
hotels for third party owners. The sole general partner and approximately 98.7%
owner of the Landlord is the REIT. The 56 hotels, principally operating in the
limited-service and extended stay segments of the market, comprise approximately
9,000 rooms and are operated under such franchise brands as Holiday Inn, Holiday
Inn Express, Residence Inn by Marriott, Comfort Inn and Hampton Inn.
In connection with the RFS Acquisition, Doubletree and the REIT entered
into agreements, pursuant to which Doubletree purchased the REIT Preferred
Shares. There is no current market for the REIT Preferred Shares. The REIT
Preferred Shares pay an annual fixed dividend of $1.45 per share and are
convertible into shares of the REIT's common stock on a one-for-one basis at the
end of seven years. The REIT Preferred Shares are redeemable by the REIT after
seven years. Doubletree has also been granted the Right of First Refusal with
respect to the future lease and management of hotels to be acquired or developed
by the Landlord or the REIT during the ten year period following the RFS
Acquisition. Pursuant to these rights, RFS Management is entitled, for a minimum
of seven years, to written notice from the Landlord specifying the terms and
conditions upon which the Landlord would be willing to lease the hotel to
Doubletree. In the event that Doubletree does not initially agree to such terms
or declines to lease the hotel, Doubletree has the right to match the terms
proposed to an alternative lessee by the Landlord. In the event that the REIT
terminates its status, for federal tax purposes, as a real estate investment
trust, the Landlord may elect to terminate the then existing Percentage Leases
and the Right of First Refusal by providing notice to Doubletree and redeeming
any REIT Preferred Shares then owned by Doubletree; provided, however, if the
termination occurs within ten years after the RFS Closing Date, the Landlord
pays to Doubletree an amount equal to $5.0 million minus $41,667 for each
calendar month which has passed during such ten year period and the Landlord
pays to Doubletree the fair market value of the then existing Percentage Leases,
based upon the remaining length of their terms.
Until the earlier of the expiration of ten years following the closing of
the RFS Acquisition or the date of the redemption or conversion of the REIT
Preferred Shares, without the prior written approval of the Landlord, Doubletree
may not permit any merger or sale of RFS Management's stock or the transfer or
conveyance of all or substantially all of RFS Management's assets, if, as a
result thereof, RFS Management would cease to be controlled by Doubletree. The
foregoing restriction does not restrict any change in control or ownership of
Doubletree.
COMPETITION
Doubletree's managed, leased and franchised hotels compete for guests
against a wide range of lodging facilities offering full-service,
limited-service, all-suite and extended stay lodging options to the public.
Competitive factors in the lodging industry include room rates, quality of
accommodations, name recognition, service levels and convenience of location.
These factors may impact the operations of Candlewood.
Doubletree competes for management contracts, leases, franchise contracts,
acquisition opportunities and other expansion opportunities. See "Risk
Factors -- Competition for and Dependence on Management Contracts; Leases and
Franchise Agreements; Competition for Guests" and "Risk Factors -- Risks
Associated With Expansion."
GOVERNMENT REGULATION
The hotel industry in general, including Doubletree, is subject to numerous
federal, state and local government regulations. See "Risk Factors -- Government
Regulations."
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<PAGE> 110
ENVIRONMENTAL MATTERS
Doubletree is subject to various Federal, state and local environmental
laws, ordinances and regulations relating to the environment and the handling of
hazardous or toxic substances which may impose significant potential
environmental liabilities. See "Risk Factors -- Environmental Regulations." The
Landlord has indemnified RFS Management against undisclosed matters and certain
environmental liabilities, other than liabilities caused by RFS Management's
acts or grossly negligent failures to act, and the former stockholders of RFS
(the "RFS Stockholders") have, subject to certain limitations and exceptions,
indemnified Doubletree against any such acts or grossly negligent failure to act
by RFS Management prior to the closing of the RFS Acquisition. Based on
Doubletree's current assessment of expenses and actions which may be required,
Doubletree does not believe its liability (if any) with respect to environmental
matters, individually or in the aggregate, will be material to its financial
condition, results of operations, or liquidity. However, because of
uncertainties associated with environmental assessment, remediation and
liability determination, no assurance can be given that Doubletree will not
incur material environmental expense in the future.
INTELLECTUAL PROPERTY
The trademarks "Doubletree Hotels," "Doubletree Guest Suites," "Doubletree
Suites," "Doubletree Club Hotels," "Club Hotels by Doubletree," "Guest Quarters
Suite Hotels," "Guest Quarters Suites by Doubletree" and related marks and logos
are material to Doubletree's business. Doubletree, as well as its franchisees,
actively use these marks. All of Doubletree's material marks are registered, or
are on application for registration, with the United States Patent and Trademark
Office. See "-- Legal Proceedings."
INSURANCE
Doubletree currently has the types and amounts of insurance coverage,
including comprehensive general liability insurance with a coverage limit of
$2.0 million, and additional excess general liability insurance, that it
believes is appropriate for a company in the hotel management business. While
management believes that its insurance coverage is adequate, if Doubletree were
held liable for amounts exceeding the limits of its insurance coverage or for
claims outside of the scope of its insurance coverage, Doubletree's business,
results of operations and financial condition could be materially and adversely
affected.
EMPLOYEES
At June 30, 1996, Doubletree had approximately 14,195 full-time employees
and 3,715 part-time employees. Of these full-time employees, approximately 517
of these employees are employed at the corporate level and approximately 13,678
employees are employed at the hotel properties. The wages and salaries, health
insurance and other employee benefits of persons employed at Doubletree's hotels
are paid out of the operations of the hotel property. Corporate personnel are
paid directly by Doubletree. Employees at three of Doubletree's managed hotels
are members of labor unions. Doubletree has entered into formal negotiations
regarding a collective bargaining agreement at two of such hotels and an interim
recognition agreement was entered into at the third hotel. Doubletree's
management believes its ongoing labor relations are good.
LEGAL PROCEEDINGS
Doubletree is not party to any litigation, other than routine litigation
incidental to the business of Doubletree. Doubletree believes that such
litigation is not material to the business of Doubletree, either individually or
in the aggregate.
99
<PAGE> 111
SELECTED PRO FORMA FINANCIAL, HISTORICAL
FINANCIAL AND OTHER DATA OF RED LION
(IN THOUSANDS, EXCEPT SHARE AND STATISTICAL DATA)
The pro forma financial information provided below generally gives effect
to the Red Lion Formation and the Red Lion Refinancing as if they had occurred
on January 1, 1994 (see Note a below) and, in particular, combines the results
of operations of Historical Red Lion for the portion of 1995 prior to the Red
Lion Formation with Red Lion's results of operations for the portion of 1995
after the Red Lion Formation to show the results of the business for the entire
year. The historical financial data in the table do not reflect the Red Lion
Formation and the Red Lion Refinancing and, accordingly, the table presents data
for Historical Red Lion that (i) includes amounts, including historical
depreciation, attributable to the Red Lion Leased Hotels and other assets
retained by the Partnership and (ii) does not include the base lease expense in
respect of the Red Lion Leased Hotels which has been incurred by Red Lion
subsequent to the Red Lion Formation. The information set forth below should be
read in conjunction with the Consolidated Financial Statements and Notes of Red
Lion, and "Management's Discussion and Analysis of Results of Operations and
Financial Condition of Red Lion," as well as the Pro Forma Consolidated
Statements of Income of Red Lion included elsewhere in this Proxy
Statement/Prospectus. For a discussion of the historical corporate organization
of Red Lion, see "Corporate Organization."
<TABLE>
<CAPTION>
HISTORICAL RED LION RED LION
---------------------------------------------------- -------------------------------------------------------
SEVEN TEN YEARS ENDED SIX MONTHS ENDED
MONTHS MONTHS DECEMBER 31, JUNE 30,
YEARS ENDED DECEMBER 31, ENDED ENDED --------------------- --------------------
----------------------------------------- JULY 31, DEC. 31, PRO FORMA PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(B) 1994(A) 1995(A) 1995 1996
-------- -------- -------- -------- -------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING
STATEMENT DATA:
Revenues......... $412,574 $413,489 $440,017 $462,888 $282,206 $214,769 $462,888 $492,369 $240,825 $257,967
Gross operating
profit(c)...... 128,309 135,373 143,661 157,438 98,333 80,201 157,438 173,928 83,048 92,100
Depreciation and
amortization... 36,612 34,630 31,144 31,313 17,053 8,715 19,813 19,327 9,884 9,167
Operating
income(a)...... 35,009 42,307 52,449 63,714 38,420 20,285 60,564 56,599 32,402 38,727
Interest expense,
net............ 45,418 32,055 30,065 32,737 20,316 8,107 19,363 18,062 10,041 7,779
Income (loss)
before income
taxes and
cumulative
effect of
accounting
change......... (9,827) 12,793 21,573 30,983 20,129 11,498 41,536 40,078 23,891 31,393
Cumulative effect
of accounting
change(e)...... -- -- (29,878) -- -- -- -- -- -- --
Income tax
(benefit)
expense(f)..... -- -- -- -- -- (4,107) 16,614 7,327 9,556 12,557
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income
(loss)......... $ (9,827) $ 12,793 $ (8,305) $ 30,983 $ 20,129 $ 15,605 $ 24,922 $ 32,751 $ 14,335 $ 18,836
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Earnings per
common share... $ 1.00 $ 0.80 $ 1.05 $ 0.46 $ 0.60
OTHER DATA:
Gross operating
margin(c)...... 31.1% 32.7% 32.6% 34.0% 34.8% 37.3% 34.0% 35.3% 34.5% 35.7%
Occupancy
percentage(g)... 70.4% 70.7% 70.9% 72.1% 73.2% 71.9% 72.1% 72.7% 72.2% 71.0%
Average daily
room rate(h)... $ 66.39 $ 66.11 $ 67.88 $ 70.52 $ 75.14 $ 75.13 $ 70.52 $ 75.14 $ 74.88 $ 79.75
EBITDA(i)........ $ 72,076 $ 77,483 $ 84,806 $ 97,759 $ 59,184 $ 31,285 $ 83,109 $ 81,922 $ 45,785 $ 50,592
</TABLE>
100
<PAGE> 112
<TABLE>
<CAPTION>
HISTORICAL RED LION RED LION
---------------------------------------------------- -------------------------------------------------------
PRO FORMA PRO FORMA PRO FORMA
AS OF DECEMBER 31, AS OF AS OF AS OF AS OF AS OF AS OF
----------------------------------------- JULY 31, DEC. 31, DEC. 31, DEC. 31, JUNE 30, JUNE 30,
1991 1992 1993 1994 1995 1995(B) 1994(A) 1995(A) 1995 1996
-------- -------- -------- -------- -------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Cash and cash
equivalents and
short-term debt
securities..... $ 2,500 $ 1,404 $ 1,278 $ 68,695 -- $ 68,355 -- -- -- $ 36,509
Property and
equipment,
net............ 596,900 563,385 519,632 514,807 -- 336,269 -- -- -- 375,567
Total assets..... 674,231 667,181 626,961 693,344 -- 526,920 -- -- -- 531,883
Long-term debt,
including
current
portion........ 529,803 504,753 468,843 497,302 -- 223,367 -- -- -- 213,328
Partners'/Stockholders'
equity......... 99,687 112,480 104,175 135,158 -- 230,279 -- -- -- 249,115
</TABLE>
- ---------------
(a) The pro forma financial information gives effect to the Red Lion Formation
and the Red Lion Refinancing as if they had occurred on January 1, 1994,
except that certain expenses resulting from the Red Lion Formation and the
Red Lion Offering totaling $14,662 and the initial recording of estimated
deferred income tax benefits of $9,736 resulting from the Red Lion
Formation, all of which were included in Red Lion's actual financial results
for the 10 months ended December 31, 1995, are included in the 1995 pro
forma presentation. The expenses resulting from the Red Lion Formation and
Red Lion Offering include $13,348 for obligations under an incentive unit
plan and a supplemental income retirement agreement which were contingent
upon the completion of the Red Lion Offering. The expenses resulting from
the Red Lion Formation and Red Lion Offering also include the write-off of
previously recorded financing costs, debt discount and prepayment penalties
and expenses of $1,314 associated with the transfer of assets to Red Lion.
Excluding the nonrecurring expenses resulting from the Red Lion Formation
and Red Lion Offering, pro forma 1995 operating income would have been
$71,261.
Excluding the impact of the nonrecurring Red Lion Formation costs of $1,314,
obligations under an incentive unit plan and a supplemental retirement
agreement aggregating $13,348, and deferred income tax benefits of $9,736,
pro forma net income would have been $32,847 or $1.05 per common share for
1995.
(b) Results of operations include five months of actual operations subsequent to
the August 1, 1995 Red Lion Formation date as well as operations of one
joint venture for the period from March 1, 1995 through July 31, 1995.
(c) "Gross operating profit" represents revenues less departmental direct and
property indirect expenses. "Gross operating margin" represents gross
operating profit as a percentage of revenues. Gross operating profit and
gross operating margin are included herein because management uses them as a
measure of hotel operating performance and because management believes these
items are useful in making industry comparisons.
(d) Effective January 1, 1993, Historical Red Lion prospectively changed the
estimated useful lives of its hotels to 40 years from lives averaging 32
years. The effect of this change decreased depreciation expense in 1993 by
approximately $2,600. In addition, the 17 Red Lion Leased Hotels were
retained by the Partnership in the Red Lion Formation. Accordingly, the pro
forma data and Red Lion's results of operations for the ten months ended
December 31, 1995 do not include depreciation on the Red Lion Leased Hotels.
(e) Effective January 1, 1993, Historical Red Lion changed its accounting method
for measuring impairment of individual hotel properties from using
undiscounted future cash flows to discounted future cash flows. As a result
of this change, 1993 net income includes a reduction in the carrying value
of one hotel of $29,878, which is reflected in the 1993 financial statements
as the cumulative effect of an accounting change.
(f) Historical Red Lion made no provision for income taxes since taxes on income
were the responsibility of the individual partners. Pro forma and Red Lion
income taxes are calculated at an estimated tax rate of 40%. Income taxes
for 1995 pro forma and Red Lion's ten-month period ended December 31, 1995
include a deferred income tax benefit of $9,736 resulting from the tax
effect of the differences between the book and tax bases of the assets and
liabilities transferred to Red Lion by Historical Red Lion.
(g) Calculated on a per available room per year basis.
(h) Based on rooms occupied.
(i) EBITDA represents earnings before interest expense, income taxes, income
(loss) attributable to joint venturers' interest, depreciation and
amortization and certain other non-cash charges. EBITDA is not intended to
represent cash flow from operations as defined by GAAP, and such information
should not be considered as an alternative to net income, cash flow from
operations or any other measure of performance prescribed by GAAP. EBITDA is
included herein because management believes that certain investors find it
to be a useful tool for measuring the ability to service debt. For the year
ending December 31, 1995, EBITDA includes $14,662 of expenses resulting from
the Red Lion Formation and the Red Lion Refinancing. Excluding these
expenses, EBITDA would have been $96,584.
101
<PAGE> 113
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION OF RED LION
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes appearing elsewhere in this document. Red Lion believes the
comparison of actual results for the six months ended June 30, 1996 to pro forma
results for the six months ended June 30, 1995 and pro forma results for 1995 to
pro forma results for 1994 provides a more meaningful presentation than a
comparison to actual 1995 operations which represent the results of one hotel
and a relatively short time period since Red Lion's operations commenced.
Six Months Ended June 30, 1996 Compared to Pro Forma Six Months Ended June 30,
1995
Revenues. Red Lion's operating revenues for the six months ended June 30,
1996 were $258.0 million, an increase of $17.2 million or 7% from pro forma
operating revenues of $240.8 for the six months ended June 30, 1995. The change
in operating revenues is primarily a result of increased room and other
revenues.
Room revenues increased 8% to $147.4 million for the six months ended June
30, 1996 as compared to pro forma room revenues of $135.9 million for the six
months ended June 30, 1995. This increase was primarily due to a 7% rise in
average daily room rates to $79.75. Actual occupancy of 71% during the six
months ended June 30, 1996 declined 2% as compared to the pro forma occupancy
rate for the six months ended June 30, 1995. Another component of the increase
was the acquisition of two hotels since June 30, 1995 which contributed
additional room revenues of approximately $6.5 million during the six months
ended June 30, 1996.
A summary of occupancy and room rates for the six months ended June 30 is
as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Occupancy percentage............................... 71.0% 72.2%
Average room rate.................................. $79.75 $74.88
</TABLE>
Other revenues increased 21% to $29.1 million for the six months ended June
30, 1996 as compared to pro forma other revenues of $24.1 million for the six
months ended June 30, 1995 due primarily to increased telephone income, banquet
rentals, ancillary banquet services and insurance proceeds relating to two
hotels which were affected by the February 1996 flood in the Portland, Oregon
area.
Expenses. Departmental direct expenses (expenses related to a specific
function, such as rooms or food and beverage) for the six months ended June 30,
1996 increased 4% over pro forma departmental direct expenses for the six months
ended June 30, 1995. As a percentage of revenues and pro forma revenues,
departmental direct expenses and pro forma departmental direct expenses
decreased to 43% from 44% for the six months ended June 30, 1996 and 1995,
respectively, primarily due to the increase in revenues.
Property indirect expenses for the six months ended June 30, 1996 increased
7% over pro forma property indirect expenses for the six months ended June 30,
1995 and remained constant as a percentage of revenues. Indirect costs include
expenses related to a hotel's general operation, such as utilities, repairs and
maintenance, promotional expenses and administrative costs.
Gross Operating Profit. Red Lion's gross operating profit for the six
months ended June 30, 1996 was $92.1 million, an increase of $9.0 million or 11%
from pro forma gross operating profit of $83.1 million for the six months ended
June 30, 1995. The increase is primarily attributable to the higher revenues
discussed above. Gross operating profit margin for the six months ended June 30,
1996 improved to 36% from pro forma gross operating profit margin of 35% for the
six months ended June 30, 1995.
Payments Due to Owners of Managed Hotels. Revenues and expenses include
operating revenues and expenses of unconsolidated managed properties since the
operating responsibilities associated with those hotels are substantially the
same as those for owned hotels. Payments to owners of those hotels, net of Red
102
<PAGE> 114
Lion's management fees, increased approximately $2.3 million for the six months
ended June 30, 1996 as compared to the pro forma payments to owners of managed
hotels for the six months ended June 30, 1995. The increase in payments due to
owners of managed hotels is primarily attributable to improved operating
performance at the managed hotels.
Management fees in connection with the managed hotels increased to $6.1
million for the six months ended June 30, 1996 as compared to pro forma
management fees of $5.4 million for the six months ended June 30, 1995.
Operating Income. Red Lion's operating income for the six months ended
June 30, 1996 was $38.7 million, an increase of $6.3 million or 19% from pro
forma operating income of $32.4 million for the six months ended June 30, 1995.
The increase is primarily attributable to the higher revenues discussed above.
Interest Expense. Interest expense, net, decreased $2.2 million to $7.8
million for the six months ended June 30, 1996 as compared to pro forma interest
expense of $10.0 million for the six months ended June 30, 1996. The decrease is
primarily due to interest income earned during the six months ended June 30,
1996 of approximately $1.3 million and a lower average outstanding principal
balance on Red Lion's debt.
Income Tax Expense. Income tax expense increased $3.0 million to $12.6
million for the six months ended June 30, 1996 as compared to pro forma income
tax expense of $9.6 million for the six months ended June 30, 1995. Red Lion's
estimated effective tax rate is 40% for both quarters.
Net Income. Red Lion's net income increased 31% to $18.8 million ($.60 per
share) for the six months ended June 30, 1996 from pro forma net income of $14.3
million ($.46 per share) for the six months ended June 30, 1995. The increase in
net income is primarily due to increased operating income and decreased interest
expense.
Pro Forma 1995 Compared to Pro Forma 1994
Pro forma net income increased from $24.9 million, or $.80 per share, in
1994, to $32.8 million, or $1.05 per share in 1995, an increase of 31.4%. Net
income for 1995 reflected pre-tax expenses resulting from the Red Lion Formation
and Red Lion Offering totaling $14,662,000, the effects of which were
substantially offset by a deferred income tax benefit of $9,736,000. The net
negative effect of these factors on pro forma income for 1995 was $96,000, or
less than $.01 per share.
Revenues. Pro forma revenues rose from $462.9 million in 1994 to $492.4
million in 1995, an increase of $29.5 million, or 6.4%. The changes in specific
revenue categories are discussed below.
Pro forma room revenues increased 7.6% to $277.2 million in 1995, compared
to $257.7 million in 1994. The increase in pro forma room revenues was due
primarily to a 6.6% increase in average daily room rate, which rose to $75.14.
Occupancy for 1995 increased from 72.1% to 72.7.%
Pro forma food and beverage revenues for 1995 increased 3.8% from 1994. The
increase in pro forma food and beverage revenues was primarily due to an
increase in banquet revenues and the addition of an airport restaurant facility
which opened in late 1994.
Other pro forma revenues for 1995 rose 8.4% over 1994 due mainly to an
increase in meeting room rentals and telephone sales.
Expenses. Pro forma departmental direct expenses (expenses related to a
specific function such as rooms or food and beverage) increased 4.2% in 1995.
However, as a percentage of revenues, pro forma departmental direct expenses
decreased from 44.5% to 43.6% primarily due to effective control of food costs.
Pro forma property indirect expenses increased 4.4% in 1995 but decreased
modestly as a percentage of revenues. Indirect costs include expenses related to
a hotel's general operation, such as utilities, repairs and maintenance,
promotional expenses and administrative costs.
Pro forma gross operating profit (revenues less departmental direct and
property indirect expenses) rose from $157.4 million in 1994 to $173.9 million
in 1995, a 10.5% increase. Pro forma gross operating profit
103
<PAGE> 115
margins improved from 34.0% in 1994 to 35.3% in 1995, primarily due to the
decrease in departmental direct expenses as a percentage of revenues.
Pro forma other costs, which include corporate administrative and general
expenses, property taxes, insurance, leases and other miscellaneous costs,
increased 6.5% due primarily to increases in corporate administrative and
general expenses and insurance, while depreciation and amortization fell 2.5%
from 1994 to 1995.
Red Lion's revenues and expenses include operating revenues and expenses of
unconsolidated managed properties since the operating responsibilities
associated with those hotels are substantially the same as those for owned
hotels. Payments to owners of those hotels, net of Red Lion's management fees,
increased 9.5% from 1994 to 1995, primarily due to improved operating
performance of the managed properties.
Management fees in connection with the managed hotels for 1995 increased
6.7% from $10.3 million to $10.9 million. The majority of the management fees
are incentive fees related mainly to Red Lion Inns Limited Partnership (the
"MLP") (see Note 7 to the Consolidated Financial Statements of Red Lion), which
are determined, in part, on the basis of available cash flows. For 1995,
incentive management fees increased $1.0 million.
The pro forma results for 1995 include $14.7 million of nonrecurring costs
associated with the Red Lion Formation and Red Lion Offering (see Note 9 to the
Consolidated Financial Statements of Red Lion). Such costs include approximately
$13.4 million expended in conjunction with an incentive unit plan and a
supplemental income retirement agreement. As the obligations under the plan and
the agreement were contingent upon completion of Red Lion's initial public
offering, no liability or related expense had been recorded by Historical Red
Lion. In addition, Red Lion recognized $1.3 million of expense in connection
with refinancing the assumed debt and transferring Historical Red Lion's assets
to Red Lion.
Pro forma operating income decreased from $60.6 million in 1994 to $56.6
million in 1995 due primarily to the expenses resulting from the Red Lion
Formation and Red Lion Offering. Excluding those expenses, pro forma operating
income would have increased $10.7 million, or 17.7%, in 1995.
Pro forma interest expense increased from $20.8 million in 1994 to $21.8
million in 1995, an increase of 4.8%, due primarily to interest rate increases
on debt not refinanced. Interest income increased $2.3 million as a result of
interest earned on short-term investments acquired with proceeds from the
initial public offering.
Pro forma income tax expense decreased from $16.6 million in 1994 to $7.3
million in 1995, a decrease of $9.3 million. The decrease resulted largely from
$9.7 million of deferred tax benefits recognized as a result of a change in tax
status at the Red Lion Formation date as Historical Red Lion was a partnership
whose partners were responsible for its taxes. The decrease also reflects $4.9
million of tax benefits associated with the $14.7 million in expenses resulting
from the Red Lion Formation and Red Lion Offering. Excluding the tax benefits
resulting from the Red Lion Formation and Red Lion Offering and the resultant
change in tax status, the effective tax rate for 1995 would have been 40.0%, the
same effective rate as 1994.
Red Lion for the Ten Months ended December 31, 1995
The only operations of Red Lion prior to the Red Lion Formation related to
a joint venture interest in one Red Lion hotel that was contributed to Red Lion
by Historical Red Lion in March 1995. On a historical basis, which includes the
actual operations of Red Lion following the August 1, 1995 Red Lion Formation,
Red Lion had net income of $15.6 million for the ten months ended December 31,
1995. The period's net income included an income tax benefit of approximately
$9.7 million, recorded in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," and expenses, net of income
tax benefits, of approximately $9.8 million resulting from the Red Lion
Formation and Red Lion Offering.
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Historical Red Lion 1994 Compared to Historical Red Lion 1993
The comparison of operating results of Historical Red Lion for the years
ended December 31, 1994 and 1993 is based on the actual results of operations of
Historical Red Lion as reflected in its statements of income. Such results do
not include the effects of the Red Lion Formation and Red Lion Refinancing.
Income before cumulative effect of accounting change increased from $21.6
million in 1993 to $31.0 million in 1994, an increase of $9.4 million, or 43.6%
In 1993, Historical Red Lion changed its method of measuring impairment of
individual hotel properties from using undiscounted future cash flows to
discounted cash flows, resulting in a reduction of net income of $29.9 million,
which is reflected as cumulative effect of an accounting change.
Revenues. Revenues increased 5.2% from $440.0 million in 1993 to $462.9
million in 1994. Room revenues rose $15.5 million in 1994, an increase of 6.4%.
The increase in room revenues was due to improvements in occupancy and average
daily room rate at existing hotels and an increase in the number of available
room nights. Average daily room rates rose from $67.94 in 1993 to $70.52 in
1994, a 3.8% increase. Occupancy improved from 70.9% in 1993 to 72.1% in 1994,
while available room nights increased 0.8% from 5,027,000 to 5,068,000. Revenues
from group business increased $5.4 million, or 6.8%, primarily due to a 4.9%
increase in group room nights. Food and beverage revenues increased 1.9% from
$156.2 million in 1993 to $159.2 million in 1994, a year in which Historical Red
Lion completed a program to reformat its restaurants to respond to customer
preferences for more casual dining and lighter fare. Other revenues grew from
$41.6 million in 1993 to $46.0 million in 1994, an increase of 10.6%. This
increase was due primarily to higher banquet-related revenues. The results for
1994 include the first full year of operations of a managed hotel that was added
to the Red Lion system in May of 1993.
Expenses. Departmental direct expenses increased from $201.2 million in
1993 to $205.8 million in 1994, an increase of 2.3%, but decreased as a
percentage of revenues from 45.7% to 44.5%. This decrease as a percentage of
revenues was due primarily to reduced labor costs resulting from higher labor
productivity and to lower food costs resulting from more centralized purchasing.
Property indirect expenses increased 4.8% from $95.1 million in 1993 to
$99.7 million in 1994. As a percentage of revenues, property indirect expenses
remained relatively constant.
Gross operating profit rose from $143.7 million in 1993 to $157.4 million
in 1994, an increase of 9.6%. Gross operating margin improved from 32.6% in 1993
to 34.0% in 1994.
Other costs increased from $18.3 million in 1993 to $19.6 million in 1994,
but remained relatively constant as a percentage of revenues. The increase in
other costs was attributable largely to increases in property taxes, insurance
costs and administrative expenses.
Payments due to owners of managed hotels increased $1.1 million, or 2.7%,
to $42.8 million in 1994. Management fees received in connection with the
managed hotels increased from $6.1 million in 1993 to $10.3 million in 1994, an
increase of 67.8%. These increases were primarily due to an increase of $3.3
million in incentive management fees due to improved operating performance of
the managed hotels.
Operating income climbed from $52.4 million in 1993 to $63.7 million in
1994, an improvement of 21.5%, and increased as a percentage of revenues from
11.9% to 13.8%. The increase in operating income resulted primarily from the
improvement in gross operating profit, offset by increases in other costs,
depreciation and amortization, and payments due to owners of managed hotels.
Equity in earnings of unconsolidated joint ventures increased from $1.2
million in 1993 to $1.3 million in 1994.
Interest expenses, net, increased 8.9% from $30.1 million in 1993 to $32.7
million in 1994. This increase reflects higher interest rates in 1994, partially
offset by a reduction of $4.4 million in average outstanding debt balances, an
increase in average combined cash and cash equivalents balances of $22.6 million
and an increase of $9.3 million in average short-term debt securities balances.
Average combined cash and cash equivalents
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balances and short-term average debt securities balances increased as a result
of borrowings under Historical Red Lion's revolving credit line.
Losses on sale of property reflects a sale of excess land in 1993,
resulting in a $1.7 million loss.
Income attributable to joint venturers' interests increased from $0.3
million in 1993 to $1.3 million in 1994. This item reflects earnings
attributable to the joint venture partners in the five consolidated joint
venture hotels.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased to $36.5 million at June 30, 1996 from $68.4 million at
December 31, 1995 primarily as a result of an acquisition, ongoing capital
expenditures, repayment of term loan principal and seasonal working capital
fluctuations. Red Lion's principal source of cash is hotel operations. Red Lion
and Historical Red Lion historically have generated internal cash flow to meet
operating needs, make capital expenditures and reduce outstanding debt.
At June 30, 1996, commitments relating to capital improvement projects were
approximately $9.6 million. As part of its capital expenditure program, Red Lion
budgets for costs incurred in connection with environmental compliance at its
properties. These costs historically have not been material, and Red Lion does
not anticipate incurring material costs for environmental compliance in the
future.
In connection with the Red Lion Formation, Red Lion repaid the majority of
the debt contributed to Red Lion by Historical Red Lion with the proceeds of the
Red Lion Offering and a new $135.0 million seven year term loan. In addition, on
August 1, 1995, Red Lion obtained a $130.0 million credit line facility of which
$80.0 million is available for acquisitions and $50.0 million is available for
working capital requirements. The credit line facility has a term of seven
years. The term loan and credit line facility (collectively the "Red Lion Credit
Facility") carry a variable interest rate based on LIBOR plus 2% (7.5% at June
30, 1996). Quarterly mandatory prepayments which increase over the term of the
Red Lion Credit Facility are required. In addition, in March of each year a
mandatory prepayment of the Red Lion Credit Facility is required in an amount
equal to 50% of annual excess cash flow (as defined in the credit agreement) for
the prior fiscal year. At August 9, 1996, there was no outstanding balance under
the Red Lion Credit Facility except for the term loan. In connection with the
Merger, it is expected that the Red Lion Credit Facility will be repaid with a
portion of the proceeds of the Financing Plan. See "The Merger -- Financing of
the Merger."
SEASONALITY
The lodging industry is affected by normally recurring seasonal patterns.
At most Red Lion hotels, demand is higher in the summer and early fall (May
through October) than during the balance of the year. Demand also changes on
different days of the week, with Sunday generally having the lowest occupancy.
INFLATION
The effect of inflation, as measured by fluctuations in the Consumer Price
Index, has not had a material impact on Red Lion's revenue or net income during
the periods under review.
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BUSINESS OF RED LION
GENERAL
Red Lion is a leading full service hospitality company. At June 30, 1996,
Red Lion operated 55 hotels containing 14,540 rooms in the western United
States. In July 1996, Red Lion acquired a hotel in Houston, Texas containing 319
rooms. In September 1996, Red Lion purchased the Modesto, California hotel,
which it managed prior to such acquisition. A typical Red Lion property is a
full service hotel located in close proximity to a business or commercial
center, airport, major highway or tourist destination. Red Lion hotels target
the business traveler (both individual and group) and compete primarily in the
upscale segment of the lodging industry with national chains. For the six months
ended June 30, 1996, Red Lion's average room and occupancy rates were $79.75 and
71.0%, respectively.
Red Lion's operating strengths have translated into strong financial
performance. Red Lion has significantly outperformed the full service segment of
the lodging industry in periods of industry weakness as well as periods of
industry growth, as measured by gross operating margins. For the three years
ended December 31, 1995, Red Lion's gross operating margins ranged from 32.6% to
35.3%, compared to the average for the full service segment during this time
period of 27.4% to 31.8%. Management attributes these higher margins to an
operating strategy that has resulted in high labor productivity, well trained
employees and effective cost controls and to the efficiencies generated through
its centralized support services.
Red Lion has long-term operating control over each of its hotels. This
operating control allows Red Lion to implement consistent standards and programs
at the hotels. As of September 15, 1996, Red Lion owned or leased, under a
long-term lease, 41 of its 56 hotels. Red Lion's remaining 15 hotels are
operated pursuant to management contracts. Owned hotels consist of 100% owned
properties (17 hotels) and properties in which Red Lion holds at least a 50%
interest through joint venture agreements (seven hotels). In addition, Red Lion
owns a 10% interest in the joint venture which owns Red Lion Hotel, Spokane City
Center. See "-- Joint Ventures." Leased properties (17 hotels) are operated
pursuant to a lease, which has a 15 year initial term and is renewable, at the
option of Red Lion, for five additional five year periods on the same terms (the
"Partnership Lease"). See "-- The Partnership Lease." Ten of the managed hotels
are owned by the MLP, and operated by Red Lion pursuant to a management
contract, expiring in 2062, including all renewals. The general partner of the
MLP is a wholly-owned subsidiary of Red Lion. The other five management
contracts (including the contract at the Spokane joint venture) have remaining
terms ranging from one to 20 years and an average remaining term of 12 years,
including all renewals. Under each management contract, Red Lion receives a base
management fee ranging from 3 - 4% of gross revenues plus an incentive
management fee based on the operating performance of the hotels. See
"-- Management Contracts."
HOTELS
Red Lion's properties are high quality, primarily full service hotels. In
addition to restaurants, lounges, banquet and meeting space, these hotels
generally offer premium television channel and movie availability, complimentary
airport shuttle service, swimming pools, room service and valet services. Other
guest amenities may include health and fitness facilities, tennis courts, spas,
gift shops, car rental desks, free parking, hair styling salons, valet parking,
concierge services, business centers, honor bars, in-room two-line telephones
and guest memberships at health clubs, tennis courts and golf courses. Eight Red
Lion hotels containing fewer than 5% of Red Lion's total hotel rooms are limited
service hotels, reflecting the smaller communities where these hotels are
located.
Red Lion's full service hotels have in excess of 688,000 aggregate square
feet of meeting and convention space. These extensive meeting and convention
facilities attract numerous national, regional and local associations and major
corporate groups to Red Lion's hotels for business conventions, conferences,
banquets,
receptions, sales meetings, training sessions, seminars and private
celebrations. Red Lion believes that the significant size of, and amenities
provided at, its facilities attract repeat business from these associations and
groups. Fourteen of the hotels have ballrooms that can accommodate groups of
over 1,000 people.
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Red Lion's restaurants, lounges and banquet services are committed to
providing high quality food and beverage services. Food and beverage revenues
constituted 33.6%, 34.4% and 35.5% of Red Lion's revenues in 1995, 1994 and
1993, respectively. Management believes that a significant portion of its
restaurant and lounge business comes from local communities and that this
patronage increases repeat business potential in the local community. Red Lion
renovated or reformatted substantially all of its restaurants during the last
six years in response to customers' desires for a casual dining format and
lighter fare.
The following table sets forth certain information with respect to each of
the hotels currently operated by Red Lion, all of which are managed by Red Lion.
<TABLE>
<CAPTION>
OWNED (O),
MANAGED (M) OR NUMBER OF
HOTEL LOCATION STATE LEASED (L) ROOMS
- ---------------------------------------------------- ----------- -------------- ---------
<S> <C> <C> <C>
Scottsdale, LaPosada Resort......................... Arizona O (1) 262
Bakersfield......................................... California O (1) 262
Costa Mesa, Orange County Airport................... California O (1) 484
Eureka.............................................. California O (2) 178
Glendale............................................ California O (1) 348
Los Angeles, Los Angeles Airport.................... California M 371
Modesto............................................. California O (2) 258
Ontario............................................. California O (1) 339
Redding............................................. California O (2) 194
Rohnert Park, Sonoma County......................... California L (3) 245
Sacramento.......................................... California M (4) 448
Sacramento, Sacramento Inn.......................... California L (3) 376
San Diego........................................... California L (3) 300
San Jose............................................ California O (2) 505
Santa Barbara (Fess Parker's Red Lion Resort)....... California O (1) 360
Colorado Springs.................................... Colorado M (4) 299
Denver.............................................. Colorado M 573
Durango............................................. Colorado L (3) 159
Boise, Boise Downtowner............................. Idaho L (3) 182
Boise, Boise Riverside.............................. Idaho M (4) 304
Kalispell........................................... Montana O (2) 64
Missoula............................................ Montana L (3) 76
Missoula Village.................................... Montana O (1) 172
Omaha............................................... Nebraska M (4) 413
Astoria............................................. Oregon L (3) 124
Bend, Bend North.................................... Oregon L (3) 75
Bend, Bend South.................................... Oregon O (2) 75
Coos Bay............................................ Oregon L (3) 143
Eugene.............................................. Oregon L (3) 138
Springfield......................................... Oregon M (4) 234
Klamath Falls....................................... Oregon O (2) 108
Medford............................................. Oregon L (3) 186
Pendleton........................................... Oregon L (3) 168
Portland, Coliseum.................................. Oregon M 212
Portland, Columbia River............................ Oregon O (2) 351
Portland, Downtown.................................. Oregon M (4) 235
Portland, Jantzen Beach............................. Oregon O (2) 320
Portland/Lloyd Center............................... Oregon M (4) 476
</TABLE>
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<TABLE>
<CAPTION>
OWNED (O),
MANAGED (M) OR NUMBER OF
HOTEL LOCATION STATE LEASED (L) ROOMS
- ---------------------------------------------------- ----------- ------
<S> <C> <C> <C>
Austin, Austin Airport.............................. Texas M (5) 300
Houston............................................. Texas O (2) 319
San Antonio......................................... Texas O (2) 290
Salt Lake City...................................... Utah L (3) 495
Aberdeen............................................ Washington O (2) 67
Bellevue............................................ Washington O (2) 353
Bellevue, Bellevue Center........................... Washington M (4) 208
Kelso............................................... Washington L (3) 163
Pasco............................................... Washington O (2) 279
Port Angeles........................................ Washington O (2) 187
Richland, Richland/Hanford House.................... Washington O (2) 149
Seattle, Seattle Airport............................ Washington L (3) 850
Spokane Valley...................................... Washington M (4) 237
Spokane City Center................................. Washington M (6) 369
Vancouver........................................... Washington L (3) 160
Wenatchee........................................... Washington L (3) 149
Yakima.............................................. Washington O (2) 58
Yakima, Yakima Valley............................... Washington M (4) 209
------
Total..................................... 14,859
======
</TABLE>
- ---------------
(1) Owned and managed by Red Lion pursuant to a joint venture (Red Lion owns at
least a 50% interest in each joint venture).
(2) Wholly-owned (100%) and managed by Red Lion.
(3) All leased properties are also managed by Red Lion.
(4) Owned by the MLP. A wholly-owned subsidiary of Red Lion is the sole general
partner of the MLP.
(5) Owned by Red Lion subject to a non-recourse cash flow mortgage.
(6) Managed by Red Lion pursuant to a joint venture in which Red Lion owns a 10%
interest.
CUSTOMERS AND MARKETING
Customers, Marketing and Sales
Red Lion's customer mix consists of business travelers, leisure travelers,
groups and contract accounts. These customer segments accounted for an estimated
46%, 11%, 33% and 10%, respectively, of total room nights in 1995. Red Lion's
marketing and sales program consists of a centrally coordinated national
marketing team operating through sales offices in Sacramento, Los Angeles, San
Francisco, Portland, Seattle, Chicago and Washington, D.C. and over 300 trained
sales and catering managers located at individual properties. Property sales
personnel participate in local and regional trade shows, design local
promotional and advertising campaigns and use direct solicitation to increase
room and catering sales to national and local groups and associations.
The combined national and local sales force works to expand Red Lion's base
of profitable group business. As a result of its efforts, the number of room
nights attributable to groups has increased from 1.0 million in 1990 to
approximately 1.2 million in 1995 ($93.4 million in revenues in 1995), or 33.2%
of Red Lion's total room nights and 19.0% of total revenues during 1995. In
addition, catering sales personnel assisted in generating $95.6 million in
banquet-related revenues in 1995 (19.4% of total Red Lion revenues for that
period).
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Central Reservations System
In 1995, Red Lion's central reservations system accounted for approximately
32% of Red Lion's total business and leisure traveler room nights. The toll-free
reservation system is available to customers throughout the United States and
Canada. The reservation system provides Red Lion's reservation agents with
information about hotel locations, available rooms and prices in order to assist
customers in booking rooms. In 1995, Red Lion's reservation center processed
over 990,000 calls, contributing approximately 722,000 reservations to the Red
Lion system with approximately a 65% conversion ratio of calls to reservations.
In 1993, Red Lion commenced development of a new central reservations
system, known as "OSCAR," that will include, among other enhanced features, a
direct interface with airlines, increases in marketing database capabilities and
improved revenue management tools, including real time room inventory. Red Lion
anticipates that OSCAR will be operational throughout the Red Lion system in
early 1997 at a total cost of approximately $11 million.
In addition, Red Lion participates in four major airline reservation
systems, American Airlines' "SABRE," United Airlines' "APOLLO," Trans World
Airlines/Delta's "WORLDSPAN" and Continental's "AMADEUS/SYSTEM ONE." These
airline reservation systems have an aggregate of approximately 385,000 computer
terminals on line at approximately 111,000 locations, allowing other travel
agents to book Red Lion hotel reservations when guests are making other travel
arrangements. Red Lion's system includes a direct communications interface with
major airline systems that allows immediate confirmation numbers for
reservations.
HOTEL MANAGEMENT AND CENTRALIZED SUPPORT SERVICES
Hotel Management
Each Red Lion hotel is managed by a general manager and supported by a
regional and corporate management organization. The size of each management team
and its hourly staff varies by hotel, based on the size and business volume of a
particular hotel. Management carefully monitors staffing levels to ensure labor
productivity.
Red Lion's hotel general managers have an average of over 16 years of
experience in the lodging industry, and over 90% of the managers have been
promoted from an existing position with Red Lion. Red Lion's general managers
report directly to a regional vice president. A regional sales director and a
regional controller complete the regional support team. The regional management
teams provide management support and direction to the general managers and their
staff, coordinate communications between the properties and the centralized
support organization and assist in establishing and administering corporate
policies, procedures and standards.
Corporate and Centralized Support Services
Red Lion provides each Red Lion hotel with the benefits of its management
services which are delivered by a network of experienced executives, corporate
personnel and regional managers. Red Lion also provides technical assistance and
training to each hotel's employees for administrative operations, room and guest
services, reservations, maintenance and engineering, retail services, and human
resources and benefits. Other services provided by Red Lion include treasury,
internal audit, credit services, accounting, payroll, tax, legal and risk
management. Red Lion has several auxiliary divisions including: (i) a
centralized procurement division that allows Red Lion to maintain uniform
quality and control costs; (ii) a centralized systems department that supports
all property and corporate computer systems and applications, including a
standardized proprietary property management system and Red Lion's central
reservations system; and (iii) a construction and design department that
administers Red Lion's capital expenditure programs, provides design and product
expertise in selecting materials and equipment, and provides project
administration on major renovation and new construction projects.
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MANAGEMENT CONTRACTS
Red Lion operates 15 hotels pursuant to management agreements under which
it is responsible for the day-to-day operations of the hotels. Ten of the hotels
are owned by the MLP and operated by Red Lion pursuant to a management agreement
expiring in 2062, including all renewal options. A wholly owned subsidiary of
Red Lion is the general partner of the MLP. Red Lion's compensation under the
management agreement with the MLP is comprised of an annual base management fee
equal to 3% of gross revenues of the hotels and an annual incentive management
fee. The annual incentive management fee is a percentage of adjusted operating
profit, subject to increase if certain operating profits targets are met. Red
Lion has received incentive management fees in each year since 1989. Those fees
totaled $4.4 million and $5.4 million in 1994 and 1995, respectively.
The other five management contracts have remaining terms ranging from one
to 20 years, and an average remaining term of 12 years, including renewal
options. Red Lion's compensation under these agreements is comprised of a base
management fee (ranging from 3 - 4% of gross revenues) and an incentive
management fee (based on a percentage of cash flow or operating profit). The
incentive fees under these management contracts totaled $317,000 and $309,000 in
1994 and 1995, respectively.
JOINT VENTURES
Red Lion owns at least a 50% interest in seven joint ventures, each of
which owns a Red Lion hotel. In September 1996, the Partnership exercised its
right to sell to Red Lion for approximately $1.36 million certain minority
interests in these joint ventures that the Partnership had retained in
connection with the Red Lion Formation. In addition to the above, in December
1995 Red Lion acquired a 10% interest in the joint venture which owns the Red
Lion Hotel, Spokane City Center.
In addition to its ownership interest in the joint ventures, Red Lion is
responsible for the day-to-day operations of the hotels owned by the joint
ventures and receives management fees for operating the hotels. Under each joint
venture agreement or separate management agreement with respect to the joint
venture, Red Lion's compensation is comprised of either an annual base
management fee (ranging from 3 - 4% of gross revenues), an annual incentive
management fee (based on a percentage of cash flow or operating profit) or both.
Red Lion has made significant advances to certain of the joint ventures.
Repayment of these advances receives priority distribution from the cash flow of
those joint ventures.
THE PARTNERSHIP LEASE
On August 1, 1995, the Red Lion Leased Hotels were leased by the
Partnership to Red Lion pursuant to the Partnership Lease. The initial term of
the Partnership 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 Partnership Lease). In addition, Red Lion has the option to extend the
Partnership Lease on a hotel-by-hotel basis for five additional five year
periods on the same terms. The Partnership's ownership interest in the Red Lion
Leased Hotels is subject to the Partnership Lease.
Rental payments under the Partnership Lease consist of base rent (the "Base
Rent"), payable quarterly, and additional rent (the "Additional Rent"), payable
annually, based on growth in revenues at the Red Lion Leased Hotels. The Base
Rent for all of the Red Lion Leased Hotels is $15 million per year. The
Additional Rent for the Red Lion Leased Hotels will be equal to 7.5% of the
amount, if any, by which the aggregate Operating Revenues (as defined in the
Partnership Lease) for all of the Red Lion Leased Hotels under the Partnership
Lease for the given year exceeds the aggregate Operating Revenues at all such
Red Lion Leased Hotels for the twelve month period commencing October 1, 1995.
This long-term arrangement allows Red Lion to retain all of the benefit from any
increase in operating income from these properties during the term of the
Partnership Lease, subject to the payment of Additional Rent.
The Partnership has retained the right to sell one or more of the Red Lion
Leased Hotels to third parties, subject to the terms of the Partnership Lease.
Upon any sale of a Red Lion Leased Hotel by the Partnership, the Red Lion Leased
Hotel would be leased under a stand alone lease which would be modified to
provide,
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among other things, for a calculation of Additional Rent based on the Gross
Revenues (as defined in the Partnership Lease) of that Red Lion Leased Hotel
alone.
The Partnership Lease is a triple net lease which requires Red Lion to
maintain the Red Lion Leased Hotels in good condition and repair and in
conformity with all applicable legal requirements and to make or cause to be
made all items of maintenance, repair, replacement and alteration to the Red
Lion Leased Hotels as necessary for such purposes. In addition, Red Lion is
required to pay substantially all expenses associated with the operation of the
Red Lion Leased Hotels, including all ground lease expense, real estate taxes,
insurance, utilities and services. If in any year Red Lion fails to spend at
least 3% of the aggregate annual Operating Revenues from all of the Red Lion
Leased Hotels under the Partnership Lease on capital expenditures, including
without limitation renovations, at one or more of the Red Lion Leased Hotels, it
will be required to deposit any shortfall into a reserve account. Any fixtures,
furniture or equipment installed and used in the Red Lion Leased Hotels that are
replaced during the term of the Partnership Lease will become the property of
Red Lion, subject to a security interest therein granted to the Partnership. At
the end of the Partnership Lease, the Partnership will have the option to
purchase any such fixtures, furniture or equipment from Red Lion at their then
fair market value.
The Partnership Lease provides that each of the following constitutes an
Event of Default: (i) failure to pay any monetary obligation, including Base
Rent and Additional Rent, subject to certain limited cure periods, (ii) failure
by Red Lion after notice to comply with any material term, covenant or condition
of the Partnership Lease, (iii) certain events of bankruptcy or insolvency with
respect to Red Lion, (iv) the liquidation or dissolution of Red Lion or
commencement of proceedings therefor, (v) failure by Red Lion, after notice or
passage of time, to vacate or discharge any levy or attachment upon the estate
or interest of Red Lion in any Red Lion Leased Hotel, (vi) voluntary cessation
by Red Lion of operation of any Red Lion Leased Hotel for a certain period,
except as a result of damage, destruction or a partial or complete condemnation,
(vii) default by Red Lion of its obligations under the Red Lion Credit Facility
and (viii) an assignment or subletting by Red Lion without obtaining from the
Partnership any required consent. In addition, the Partnership's lenders have,
pursuant to the terms of its credit facility, certain rights to consent to any
changes to the Partnership Lease, and certain rights to consent to assignments
or sublettings by Red Lion to third parties of hotels that are subject to the
Partnership Lease.
Red Lion has indemnified 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 Red Lion Leased Hotels prior to or during
the term of the Partnership Lease, including violations of Environmental Laws,
discharges, disposals or releases of Hazardous Materials, presence of Hazardous
Materials, including any which are the result of off-site migration onto the Red
Lion Leased Hotels, and certain exposures to Hazardous Materials (as such terms
are defined in the Partnership Lease) which exist at or are released from any of
the Red Lion Leased Hotels prior to or during the term of the Partnership Lease.
Such indemnities will survive the termination of the Partnership Lease. Pursuant
to the Partnership Services Agreement, Doubletree has agreed to guaranty Red
Lion's indemnity obligations to the Partnership following the Effective Time.
See "The Merger Agreement -- Partnership Services Agreement."
While Red Lion believes the terms of the Partnership Lease are fair to both
parties, such terms were not negotiated on an arms-length basis.
COMPETITION
Red Lion competes in the upscale and mid-priced sectors of the hospitality
market, depending on the communities in which its hotels are located. In each
locality there are other limited and full service establishments that compete
with Red Lion's hotels. Red Lion's food and beverage operations also compete
with local free standing restaurants and lounges. There is no single competitor
or small number of competitors of Red Lion that is or are dominant in Red Lion's
markets. However, some of Red Lion's competitors have a larger network of
locations and greater financial resources than Red Lion. Competition in the
United States lodging industry is based generally on convenience of location,
price, range of services and guest amenities offered and quality of customer
service and overall product. Red Lion considers the location of its hotels and
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the services and guest amenities provided by it to be among the most important
factors in its business. The present sites of Red Lion's hotels were chosen for
their convenient access to airports, major traffic arteries, commercial centers
and tourist destinations.
ENVIRONMENTAL MATTERS
Most of Red Lion's properties have been subject to Phase I environmental
assessments (which generally provide a physical inspection and database search
but not soil or groundwater analyses). Most of Red Lion's properties have also
been inspected to determine the presence of asbestos. While asbestos-containing
materials are present in certain of Red Lion's properties, Red Lion believes
that these materials have been adequately contained. Red Lion has developed and
implemented an operations and maintenance program that establishes operating
procedures with respect to asbestos-containing materials at such properties.
Red Lion operates a service station located in Vancouver, Washington. In
addition, some of the Red Lion properties are on, adjacent to or near properties
that have contained in the past or currently contain underground storage tanks
and/or above-ground storage tanks used to store petroleum products or other
hazardous or toxic substances. Several of the Red Lion properties have been
contaminated with petroleum products. Monitoring wells have been installed at
some of these sites. In addition, certain of the Red Lion properties are on,
adjacent to or near properties upon which others have engaged or may in the
future engage in activities that may release petroleum products or other
hazardous or toxic substances into the soil or groundwater. One of Red Lion's
hotels is located on property that was used as a landfill. The state agency
responsible for oversight of potentially contaminated properties has determined
the leachate from the landfill has contaminated groundwater, and the state
agency has placed the landfill on the list of sites where a release of hazardous
substances has been confirmed. Although the state agency has not placed the
landfill on the list of sites requiring investigation or remediation, there can
be no assurance that Red Lion will not be required in the future to investigate
or remediate any contamination resulting from the landfill. There can be no
assurance that there are no environmental liabilities or claims of which Red
Lion is unaware or that the current condition of the Red Lion properties,
including the service station, has not been or will not be affected by the
historical or current uses of such properties or the activities in the vicinity
of the Red Lion properties.
Pursuant to the Partnership Lease, Red Lion has indemnified 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 Red
Lion Leased Hotels prior to or during the term of the Partnership 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 Red Lion Leased Hotels, and certain
exposures to Hazardous Materials (as such terms are defined in the Partnership
Lease) which exist at or are released from any of the Red Lion Leased Hotels
prior to or during the term of the Partnership Lease. Such indemnities will
survive the termination of the Partnership Lease. See "-- The Partnership
Lease." In addition, Red Lion has indemnified the Partnership and its affiliates
from and against any and all liabilities, costs, losses and damages (including
without limitation interest, penalties and costs of mitigation) incurred in
connection with any environmental laws arising out of any event or condition
relating to the assets, liabilities and businesses contributed to Red Lion.
Pursuant to the Partnership Services Agreement, Doubletree has agreed to
guaranty Red Lion's indemnity obligation to the Partnership following the
Effective Time. See "The Merger Agreement -- Partnership Services Agreement."
EMPLOYEES
As of June 30, 1996, Red Lion employed 11,600 persons, of whom
approximately 90% were nonmanagement employees. Approximately 416 of these
employees work at the corporate headquarters. Red Lion has a career development
program managed by its Human Resources division through which Red Lion's
approximately 1,225 property level management staff receive training to enhance
opportunities for promotion within the Red Lion organization.
Employees at two of Red Lion's hotels currently are represented by a labor
union. Red Lion's management believes its ongoing labor relations are good.
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TRADEMARKS AND SERVICE MARKS
Red Lion, Red Lion Inn and Red Lion Hotel are each registered trademarks of
Red Lion. Red Lion monitors use of similar names and takes appropriate action
when possible infringements occur.
In connection with the sale of Red Lion in 1985, Red Lion licensed the use
of the Red Lion trademark and central reservations system to one of the founders
of Red Lion for the operation of certain Red Lion hotels in Nevada. Under the
terms of the current license agreement, Red Lion licenses its name and central
reservation system for two hotels in Nevada and a hotel in Wyoming (which are
not included in the 56 hotels Red Lion operates) for which Red Lion receives an
annual license fee of $25,000 per hotel. The license agreement terminates with
respect to the hotel in Wyoming at such time as Red Lion opens a hotel in the
Jackson Hole area of Wyoming and otherwise expires with respect to all of these
hotels, two years after the earlier of the death of the founder or transfer of
the founder's interests in the hotels.
Red Lion knows of approximately nine lodging and food service
establishments located in the United States that use "Red Lion" in their names
(some of which may have used the name before the Red Lion chain was
established), but which have no existing or historical relationship with Red
Lion.
LEGAL PROCEEDINGS
Red Lion is involved in various lawsuits arising in the normal course of
business. Red Lion believes that the ultimate outcome of these lawsuits will not
have a material adverse effect on Red Lion.
GOVERNMENT REGULATION
The hotel industry in general, including Red Lion, is subject to numerous
federal, state and local government regulations. See "Risk Factors -- Government
Regulations."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF DOUBLETREE
The following table sets forth certain information regarding beneficial
ownership of Doubletree Common Stock at August 15, 1996 and as adjusted to
reflect the Merger and the Financing Plan by (i) each person who is known by
Doubletree to own beneficially more than five percent of Doubletree's Common
Stock, (ii) each of Doubletree's current directors and nominees, (iii) each of
Doubletree's named executive officers and (iv) all current Doubletree executive
officers and directors as a group. Except as otherwise indicated, the persons
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES OF DOUBLETREE COMMON STOCK
BENEFICIALLY OWNED(1)
-----------------------------------------------
BEFORE THE MERGER
AND THE FINANCING AFTER THE MERGER AND
PLAN THE FINANCING PLAN(2)
--------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
GE Investment Management Incorporated(3)........... 6,060,981 26.2% 6,060,981 15.5%
Trustees of General Electric Pension Trust(4)...... 137,134 * 3,289,987 8.3%
---------- ------- ---------- -------
Total GEI Entities............................... 6,198,115 26.8% 9,350,968 23.8%
3003 Summer Street
P.O. Box 7900
Stamford, Connecticut 06905
Red Lion, a California Limited Partnership(5)...... -- -- 5,011,820 12.9%
4001 Main Street
Vancouver, Washington 98663
Putnam Investments, Inc.(6)........................ 2,446,674 10.6% 2,446,674 6.3%
One Post Office Square
Boston, MA 02109
Ridge Partners, L.P.(7)............................ 1,532,432 6.6% 1,532,432 3.9%
1436 Ridge Road
Northbrook, Illinois 60062
RCM Capital Management(8).......................... 1,315,500 5.7% 1,315,500 3.4%
Four Embarcadero Center
San Francisco, CA 94111
Richard J. Ferris(7)(10)(11)....................... 1,537,432 6.7% 1,537,432 3.9%
Peter V. Ueberroth(9)(10)(11)...................... 1,085,432 4.7% 1,085,432 2.8%
William R. Fatt(10)(11)............................ 5,000 * 5,000 *
Dale F. Frey(10)(12)............................... -- -- -- --
Ronald K. Gamey(10)(11)............................ 5,000 * 5,000 *
Norman B. Leventhal(10)(11)(13).................... 15,000 * 15,000 *
John H. Myers(10)(12).............................. -- -- -- --
Richard M. Kelleher(10)(11)........................ 106,347 * 106,347 *
William L. Perocchi(10)(14)........................ 60,674 * 60,674 *
James P. Evans(10)................................. -- -- -- --
Stephen D. Pletcher(10)(14)........................ 12,500 * 12,500 *
Margaret Ann Rhoades(10)(14)....................... 13,500 * 13,500 *
David L. Stivers(10)(14)........................... 12,500 * 12,500 *
Thomas W. Storey(10)(14)........................... 45,000 * 45,000 *
Raymond Terry(10).................................. 19,748 * 19,748 *
Edward A. Gilhuly.................................. -- -- -- --
Michael W. Michelson(5)............................ -- -- -- --
All current directors and executive officers as a
group (17 persons)(15)........................... 2,918,133 12.5% 2,918,133 7.4%
</TABLE>
- ---------------
* Less than 1%.
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(1) Beneficial ownership as of August 15, 1996 includes shares subject to
options which are exercisable within 60 days after such date. All
expressions of percent of class held assume that the options of the
particular person or group in question, and no others, have been exercised.
(2) The number of shares of Doubletree Common Stock and percentages reflected
in this column are based on the assumptions that (i) the Financing Plan is
effectuated, (ii) the purchase price per share of Doubletree Common Stock
in connection with the GEPT Equity Investment is $36.72 and (iii) no
adjustments to the Exchange Ratio are made.
(3) Based on Schedule 13G filed jointly by GEHOP, GEIM, General Electric
Company ("GE") and GEPT. Shares indicated as beneficially owned by GEIM
include 6,049,226 shares owned of record by GEHOP and 1,755 shares owned of
record by GEIM. GEIM is a wholly-owned subsidiary of GE, and thus GE may be
deemed to be the beneficial owner of such 1,755 shares owned by GEIM.
Shares indicated as beneficially owned by GEIM exclude 137,134 shares owned
beneficially and of record by GEPT and, giving effect to the Merger and the
Financing Plan (assuming the exercise of the Warrants), 3,152,853 shares to
be owned of record and beneficially by GEPT. GEHOP, GEIM and GEPT each
disclaim beneficial ownership of the shares owned by the others, and GE
disclaims beneficial ownership of the shares owned by GEHOP and GEPT. Also
includes 10,000 shares reserved for issuance upon exercise of the vested
portion of an outstanding option to purchase 20,000 shares granted to
GEHOP, which is exercisable within 60 days after August 15, 1996. Each of
Messrs. Frey and Myers disclaim beneficial ownership of such shares.
(4) Based on shares to be beneficially owned by GEPT, after giving effect to
the Merger and the Financing Plan and assuming the exercise of the
Warrants. Each of Messrs. Frey and Myers disclaim beneficial ownership of
all such shares. GEPT disclaims beneficial ownership of all shares owned by
GE, GEIM and GEHOP.
(5) RLA will have sole voting and investment power with respect to the shares
of Doubletree Common Stock to be owned of record by the Partnership. RLA
has a 1% general partnership interest in the Partnership. George Roberts is
the President and a director of RLA. The stockholders of RLA are general
and limited partners of KKR Associates (Delaware). KKR Associates
(Delaware) is a limited partner of the Partnership. Mr. Michelson, who will
be appointed to the Board of Directors of Doubletree following the Merger,
and Mr. Roberts are general partners of KKR Associates (Delaware). Mr.
Michelson and Mr. Roberts will disclaim beneficial ownership of any shares
of Doubletree Common Stock held by the Partnership.
(6) Based on Schedule 13G filed jointly by Putnam Investments, Inc. ("Putnam"),
Marsh & McClennan Companies, Inc. ("MMC"), Putnam Investment Management,
Inc. ("PIM") and The Putnam Advisory Company, Inc. ("TPAC"). Shares
indicated as beneficially owned by Putnam include 1,190,516 and 165,900
shares owned of record by PIM and TPAC, respectively, both wholly-owned
subsidiaries of Putnam. Putnam is a wholly-owned subsidiary of MMC, and MMC
may be deemed to beneficially own such shares. Putnam and MMC disclaim
beneficial ownership of such shares. Putnam, PIM and TPAC have shared
dispositive power with respect to the shares, and Putnam and TPAC have
shared voting power with respect to 105,400 shares owned of record by TPAC.
Neither Putnam, PIM nor TPAC have any voting power with respect to the
remainder of the shares.
(7) Based on Schedule 13D filed by Ridge Partners, L.P. ("Ridge"), Kelrick,
Inc. ("Kelrick") and Richard J. Ferris. Ridge is a limited partnership
whose sole general partner is Kelrick. Ridge is the record owner of the
shares. Kelrick has sole voting and dispositive power with respect to such
shares. Mr. Ferris is the President and holder of 51% of the shares of
Doubletree Common Stock of Kelrick and may be deemed to have the right to
receive or the power to direct the receipt of dividends from, or the
proceeds from the sale of, the shares of Doubletree Common Stock owned by
Ridge. Mr. Ferris disclaims beneficial ownership of the shares owned by
Ridge, except to the extent of his ownership of Kelrick.
(8) Based on Schedule 13G filed jointly by RCM Capital Management ("RCM
Capital"), RCM Limited L.P. ("RCM Limited") and RCM General Corporation
("RCM General"). RCM Capital is the beneficial owner of these shares. RCM
Limited is the general partner of RCM Capital and has
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beneficial ownership of these shares only to the extent that RCM Limited
may be deemed to have beneficial ownership of securities managed by RCM
Capital. RCM General is the general partner of RCM Limited and has
beneficial ownership of these shares only to the extent that RCM General
may be deemed to have beneficial ownership of securities managed by RCM
Capital.
(9) Based on Schedule 13D filed by Peter V. and Virginia M. Ueberroth, as
cotrustees of The Ueberroth Family Trust (the "1986 Trust"), Alice J.
Saviez, as trustee of the Ueberroth Investment Trust (the "1994 Trust") and
Peter V. Ueberroth (collectively, the 1986 Trust and the 1994 Trust may be
referred to herein as the "Ueberroth Trusts"). Includes 919,459 shares of
Doubletree Common Stock beneficially owned by Peter V. and Virginia M.
Ueberroth as co-trustees of the 1986 Trust, who have shared voting and
shares dispositive power with respect to such shares. Also includes 160,973
shares of Doubletree Common Stock beneficially owned by Alice J. Saviez as
trustee of the 1994 Trust (who has sole voting and dispositive power with
respect to such shares). Mr. Ueberroth may be deemed to have an interest in
the 1,080,432 shares of Doubletree Common Stock as a trustee and
beneficiary of the 1986 Trust and as a family member of the beneficiaries
of the 1994 Trust. Mr. Ueberroth disclaims beneficial ownership of such
shares.
(10) The address of Messrs. Ferris, Ueberroth, Fatt, Frey, Gamey, Leventhal,
Myers, Kelleher, Evans, Perocchi, Pletcher, Stivers, Storey, Terry and Ms.
Rhoades is c/o Doubletree Corporation, 410 North 44th Street, Suite 700,
Phoenix, Arizona 85008.
(11) Includes 5,000 shares reserved for issuance upon exercise of outstanding
options owned by Messrs. Ferris, Ueberroth, Fatt, Gamey and Leventhal and
75,000 shares reserved for issuance upon exercise of outstanding options
owned by Mr. Kelleher.
(12) Excludes 6,049,226 shares owned of record by GEHOP, 1,755 shares owned of
record by GEIM, which is GEHOP's sole general partner and a direct
wholly-owned subsidiary of GE, and 137,134 shares owned of record by GEPT.
Each of Messrs. Frey and Myers are executive officers and directors of GEIM
and Trustees of GEPT, and Mr. Frey is an executive officer of GE. Messrs.
Frey and Myers have voting and investment power with respect to such shares
and, therefore, may be deemed to be beneficial owners of such shares. Also
excludes 10,000 shares reserved for issuance upon exercise of the vested
portion of an outstanding option to purchase 20,000 shares granted to
GEHOP, which is exercisable within 60 days of August 15, 1996. Also
excludes 3,152,853 shares to be owned of record and beneficially by GEPT
after giving effect to the Merger and the Financing Plan (assuming the
exercise of the Warrants). Each of Messrs. Frey and Myers disclaim
beneficial ownership of all such shares.
(13) Includes 10,000 shares beneficially owned by Muriel Leventhal, Mr.
Leventhal's wife. Mr. Leventhal disclaims beneficial ownership of such
shares.
(14) Messrs. Evans, Perocchi, Pletcher, Stivers, Storey, Terry and Ms. Rhoades
are executive officers of Doubletree but are not directors. Includes
45,000, 12,500, 12,500, 45,000 and 12,500 shares reserved for issuance upon
the exercise of outstanding options held by Messrs. Perocchi, Pletcher,
Stivers, Storey and Ms. Rhoades, respectively, exercisable within 60 days
of August 15, 1996.
(15) Includes shares of Doubletree Common Stock held by Ridge, Peter V. and
Virginia M. Ueberroth, as co-trustees of the 1986 Trust, and Alice J.
Saviez, as trustee of the 1994 Trust (see footnotes 7 and 9 above).
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DESCRIPTION OF CAPITAL STOCK OF DOUBLETREE
The following description of Doubletree's capital stock does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of Doubletree's Certificate of Incorporation (the "Doubletree
Certificate") and the bylaws of Doubletree (the "Doubletree Bylaws"), copies of
which have been incorporated by reference as exhibits to the Registration
Statement of which this Proxy Statement/ Prospectus is a part.
The authorized capital stock of Doubletree consists of 100,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred
Stock, par value $.01 per share (the "Doubletree Preferred Stock"). After giving
effect to the consummation of the Merger and the Financing Plan, 38,960,540
shares of Doubletree Common Stock are expected to be issued and outstanding, and
no shares of Doubletree Preferred Stock will be issued or outstanding.
COMMON STOCK
Holders of the Doubletree Common Stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. Holders of Doubletree
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of the Doubletree Common Stock are entitled to receive such
dividends as may be declared from time to time by the Doubletree Board of
Directors out of funds legally available therefor, subject to the terms of
Doubletree's credit agreements restricting payment of dividends. Doubletree does
not anticipate paying cash dividends in the foreseeable future. See
"Summary -- Dividends." In the event of the liquidation, dissolution or winding
up of Doubletree, the holders of Doubletree Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities.
Holders of Doubletree Common Stock have no preemptive, conversion or
redemption rights and are not subject to further calls or assessments by
Doubletree. All of the outstanding shares of Doubletree Common Stock are, and
the shares to be issued by Doubletree in connection with the Merger will be,
validly issued, fully paid and nonassessable.
The Transfer Agent and Registrar for the Doubletree Common Stock is Harris
Trust Company of California.
PREFERRED STOCK
Doubletree's Board of Directors is authorized to issue from time to time,
without shareholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of Doubletree Preferred Stock with such
dividend, redemption, conversion and exchange provisions as may be provided in
the particular series. Any series of Doubletree Preferred Stock may possess
voting, dividend, liquidation and redemption rights superior to those of the
Doubletree Common Stock. The rights of the holders of Doubletree Common Stock
will be subject to and may be adversely affected by the rights of the holders of
any Doubletree Preferred Stock that may be issued in the future. Issuance of a
new series of Doubletree Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of entrenching Doubletree's Board of Directors and making it
more difficult for a third party to acquire, or discourage a third party from
acquiring, a majority of the outstanding voting stock of Doubletree. Doubletree
has no present plans to issue any series of Doubletree Preferred Stock.
REGISTRATION RIGHTS
In connection with the Doubletree Combination Transaction, certain of
Doubletree's original stockholders entered into a registration rights agreement,
as amended (the "1993 Registration Rights Agreement"), which gives each of such
stockholders certain "piggyback" registration rights with respect to the
registration under the Securities Act of the shares of Doubletree Common Stock
issued to them in the Doubletree Reorganization, including rights to include
such shares in any registration under the Securities Act effected for
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the benefit of Doubletree or at the request of another holder of Doubletree
Common Stock. In addition, GEHOP and Metropolitan (two of such original
stockholders) have demand registration rights pursuant to which they may require
Doubletree to register under the Securities Act the shares of Doubletree Common
Stock issued to them in the Doubletree Reorganization. According to the terms of
the 1993 Registration Rights Agreement, Doubletree is required to effect two
such demand registrations for GEHOP and one such demand registration for
Metropolitan. Upon the exercise of a demand registration right by Metropolitan,
Doubletree may, at its option and in lieu of effecting such registration,
purchase from Metropolitan the shares required to be registered as a result of
such exercise. The 1994 Trust sold 240,000 shares of Doubletree Common Stock
pursuant to the exercise of its "piggyback" registration rights in Doubletree's
public offering completed in June 1995 and 212,000 shares of Doubletree Common
Stock pursuant to its "piggyback" registration rights in Doubletree's public
offering completed in May 1996.
In connection with the RFS Acquisition, pursuant to an amendment to the
1993 Registration Rights Agreement, the RFS Stockholders were granted demand
registration rights pursuant to which, on two occasions, they may require
Doubletree to register the RFS Acquisition Shares under the Securities Act. The
RFS Stockholders sold 1,508,422 shares of Doubletree Common Stock pursuant to
the exercise of one of their demand registration rights in connection with
Doubletree's public offering completed in May 1996. The second registration
demand can occur no earlier than February 27, 1997 and may include the balance
of the RFS Acquisition Shares.
The RFS Stockholders also have "piggyback" registration rights with respect
to any registration under the Securities Act effected for the benefit of
Doubletree or at the request of another holder of Doubletree Common Stock, and
in certain limited circumstances, the right to require Doubletree to file and
maintain a shelf registration statement. For a further description of the RFS
Acquisition, see "Business of Doubletree -- The RFS Acquisition."
Pursuant to the Merger Agreement, at the Effective Time, the 1993
Registration Rights Agreement will be amended to grant to the Partnership four
demand and unlimited "piggyback" registration rights with respect to the shares
of Doubletree Common Stock to be issued to the Partnership pursuant to the
Merger. In addition, the amendment will provide that the shares of Doubletree
Common Stock to be issued to GEPT or an affiliate thereof as part of the
Financing Plan, including any shares that are issued upon the exercise of the
Warrants, will be covered by GEHOP's demand and "piggyback" registration rights.
Doubletree is not required to file a registration statement upon exercise
of any of the above-described demand registration rights within 90 days
following any underwritten public offering of Doubletree Common Stock. All
expenses of any such registration relating to the subject shares are to be borne
by Doubletree.
CERTAIN PROVISIONS OF DELAWARE LAW
Doubletree is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" (as defined) with a Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by certain
employee stock ownership plans); or (iii) following the transaction in which
such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder.
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LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Doubletree Certificate provides that to the fullest extent permitted by
the DGCL, a director of Doubletree shall not be liable to Doubletree or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Under the DGCL, liability of a director may not be limited (i) for any breach of
the director's duty of loyalty to Doubletree or its stockholders, (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases and (iv) for any transaction from which the
director derives an improper personal benefit. The effect of such provision in
the Doubletree Certificate is to eliminate the rights of Doubletree and its
stockholders (through stockholders' derivative suits on behalf of Doubletree) to
recover monetary damages against a director for breach of the fiduciary duty of
care as a director (including breaches resulting from negligent or grossly
negligent behavior), except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of Doubletree
or any stockholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. In addition,
the Doubletree Certificate provides that Doubletree shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.
Doubletree has entered into agreements (the "Indemnification Agreements")
with each of the directors and officers of Doubletree pursuant to which
Doubletree has agreed to indemnify such director or officer from claims,
liabilities, damages, expenses, losses, costs, penalties or amounts paid in
settlement incurred by such director or officer in or arising out of his or her
capacity as a director, officer, employee and/or agent of Doubletree or any
other corporation of which he or she is a director or officer at the request of
Doubletree to the maximum extent provided by applicable law. In addition, such
director or officer is entitled to an advance of expenses to the maximum extent
authorized or permitted by law.
To the extent that the Board of Directors or the stockholders of Doubletree
may in the future wish to limit or repeal the ability of Doubletree to provide
indemnification as set forth in the Doubletree Certificate, such repeal or
limitation may not be effective as to directors and officers who are currently
parties to the Indemnification Agreements, because their rights to full
protection would be contractually assured by the Indemnification Agreements. It
is anticipated that similar contracts may be entered into, from time to time,
with future directors of Doubletree.
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COMPARATIVE RIGHTS OF STOCKHOLDERS
GENERAL
As a result of the Merger, holders of Red Lion Common Stock will become
stockholders of Doubletree and the rights of all such former Red Lion
stockholders will thereafter be governed by the Doubletree Certificate, the
Doubletree Bylaws and the DGCL. The rights of the holders of Red Lion Common
Stock are presently governed by the certificate of incorporation of Red Lion
(the "Red Lion Certificate"), the bylaws of Red Lion (the "Red Lion Bylaws") and
the DGCL. The following summary, which does not purport to be a complete
statement of the general differences between the rights of the stockholders of
Doubletree and Red Lion, sets forth certain differences between the Doubletree
Certificate and the Red Lion Certificate and between the Doubletree Bylaws and
the Red Lion Bylaws. This summary is qualified in its entirety by reference to
the full text of each of such documents and the DGCL. For information as to how
such documents may be obtained, see "Available Information."
AUTHORIZED CAPITAL
The total number of authorized shares of capital stock of Doubletree is
105,000,000, consisting of 100,000,000 shares of Doubletree Common Stock, and
5,000,000 shares of Doubletree Preferred Stock.
The total number of authorized shares of capital stock of Red Lion is
110,000,000, consisting of 100,000,000 shares of Red Lion Common Stock and
10,000,000 shares of preferred stock, par value $.01 per share (the "Red Lion
Preferred Stock").
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Doubletree Certificate provides that the number of directors of the
corporation shall be fixed in the manner provided in the Doubletree Bylaws. The
Doubletree Bylaws provide that the Doubletree Board shall fix the number of
directors that shall constitute the entire board, but that in the absence of any
such designation, the number of directors shall be eight. If the office of any
director becomes vacant, a majority (whether or not a quorum) of the directors
may elect a successor to serve for the unexpired term created by such vacancy.
Additionally, the Doubletree Bylaws provide that all current and future
directors of the corporation (other than Mr. Norman B. Leventhal) shall be
required to retire from the Doubletree Board of Directors immediately prior to
the annual meeting of the stockholders in the year that such director reaches 70
years of age.
The Red Lion Certificate provides that the number of directors will be
fixed from time to time by a bylaw or amendment thereof duly adopted by the
Board of Directors or by an affirmative vote of not less than a majority of the
entire capital stock of Red Lion issued and outstanding and entitled to vote.
The Red Lion Bylaws provide that the Board of Directors shall be composed of not
less than five directors nor more than nine directors, the exact number to be
determined from time to time by resolution adopted by the Board of Directors.
The Red Lion Bylaws further provide that any vacancies (including newly
created directorships) will be filled by the affirmative vote of a majority of
the remaining directors, although less than a quorum, or by a sole remaining
director. Directors appointed to fill vacancies will serve the remainder of the
term of the resigning or terminated director. Additionally, the Red Lion Bylaws
provide that if, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Red Lion Board of Directors (as constituted immediately prior to
any such increase), the Delaware Court of Chancery may, upon the application of
any stockholder or stockholders holding at least ten percent (10%) of the total
number of shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in office.
Under Section 141(k)(1) of the DGCL, unless otherwise provided in the
corporation's certificate of incorporation, directors serving on a classified
board may only be removed by the stockholders for cause. The
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Red Lion Certificate provides that any or all of the directors of Red Lion may
be removed from office at any time, either with or without cause, by affirmative
vote of stockholders owning a majority in amount of the entire capital stock of
the corporation issued and outstanding, and entitled to vote. In addition, the
Red Lion Bylaws provide that unless otherwise restricted by the Red Lion
Certificate or by law, any director or the entire Board of Directors may be
removed, either with or without cause by a vote of a majority of the stock
represented at any meeting of the stockholders. Neither the Doubletree
Certificate nor the Doubletree Bylaws contains a similar provision.
CLASSIFIED BOARD OF DIRECTORS
The DGCL provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. Pursuant to the Red Lion
Certificate, the Red Lion Board of Directors is divided into three classes of
directors, as nearly equal in number as is possible by dividing the number of
total directors by three. One class of directors is elected each year for a
three-year term.
Classification of directors has the effect of making it more difficult for
stockholders to change the composition of the Red Lion Board of Directors. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in the majority of the Red Lion Board of Directors.
Such a delay may help ensure that Red Lion's directors, if confronted by a
holder attempting to force a proxy contest, a tender or exchange offer or other
extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interests of the stockholders.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of Red Lion, even though such a transaction could
be beneficial to Red Lion and its stockholders. The classification of the Red
Lion Board of Directors might also increase the likelihood that incumbent
directors will retain their positions.
The Doubletree Certificate does not contain a provision which classifies
the Doubletree Board of Directors into separate classes.
SPECIAL MEETINGS OF STOCKHOLDERS
The Doubletree Certificate and the Doubletree Bylaws provide that special
meetings of stockholders, for any purpose or purposes prescribed in the notice
of the meeting, may only be called by the Board of Directors (or any two
Directors), the Chairman or any Co-Chairman of the Board of Directors or by the
President of the corporation.
The Red Lion Certificate provides that special meetings of the stockholders
for any purpose or purposes may be called at any time by (i) the Board of
Directors, (ii) the Chairman of the Board of Directors, (iii) the President, or
(iv) the stockholders owning a majority in amount of the entire capital stock of
the corporation issued and outstanding, and entitled to vote.
STOCKHOLDER ACTION BY WRITTEN CONSENT
The Doubletree Certificate provides that any action required to be taken,
or which may be taken, at any annual or special meeting of the stockholders by
any class of stockholders, may be taken without a meeting, without prior notice
and without a vote if consent in writing, setting forth the action so taken, is
signed by all the holders of such outstanding class of stock.
Pursuant to the Red Lion Bylaws, unless otherwise provided in the Red Lion
Certificate (which it does not), any action required or permitted to be taken at
any Annual or Special Meeting of Stockholders of the corporation may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, are signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
122
<PAGE> 134
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS, INCLUDING NOMINATION OF
DIRECTORS
Under the Red Lion Bylaws, the bringing of business before the annual
meeting of stockholders, including nominations of persons for election to the
Red Lion Board of Directors, may be made by or at the direction of the Red Lion
Board of Directors, any committee of persons appointed by the Red Lion Board of
Directors (to the extent provided in a resolution by the Red Lion Board of
Directors), or by any Red Lion stockholder entitled to vote for the election of
directors who complies with certain advance notice procedures. The Red Lion
Bylaws provide that business may only be brought before the annual meeting by a
Red Lion stockholder, including nomination of directors, if such stockholder has
given timely written notice to the Secretary of Red Lion of such stockholder's
intention to bring such business before the meeting. To be timely, such notice
must be delivered to or mailed and received at the principal executive offices
of Red Lion no less than 50 days nor more than 75 days prior to the scheduled
date of the meeting (or, if less than 65 days' notice or prior public disclosure
of the date of the meeting is given, the 15th day following the earlier of (i)
the date such notice was mailed or (ii) the date such public disclosure was
made).
In addition to the timely notice requirements set forth in the immediately
preceding paragraph, a Red Lion stockholder's notice of the nomination of a
person to serve as director of Red Lion must also set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director, (a) the name, age, business address and residence address of the
person, (b) the principal occupation or employment of the person, (c) the class
and number of shares of capital stock of the corporation which are beneficially
owned by the person, and (d) any other information relating to the proposed
nominee that would be required to be included in a proxy statement soliciting
proxies for the proposed nominee; and (ii) as to the stockholder giving the
notice (a) the name and record address of the stockholder and (b) the class and
number of shares of capital stock of Red Lion which are beneficially owned by
the stockholder. Red Lion may require any proposed nominee to furnish such other
information as may reasonably be required by Red Lion to determine the
eligibility of such proposed nominee to serve as a director of the corporation.
A Red Lion stockholder's notice relating to business other than the
nomination of directors must contain certain information about such business and
about the proposing stockholder, including, without limitation, (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the stockholder proposing such business, (iii) the class,
series and number of shares of stock of Red Lion which are beneficially owned by
such stockholder, and (iv) any material interest of the stockholder in such
business.
With respect to all business brought before the annual meeting of Red Lion
stockholders, including the nomination of directors, the Red Lion officer
presiding at the annual meeting may, if the facts warrant, determine and declare
to the annual meeting that business was not brought before the annual meeting in
accordance with the proper procedures as set forth in the Red Lion Certificate
and the Red Lion Bylaws, and if he/she so determines, he/she may so declare to
the annual meeting and any such business not properly brought before the meeting
shall not be transacted.
Although neither the Red Lion Certificate nor the Red Lion Bylaws
authorizes the Red Lion Board of Directors to approve or disapprove stockholder
nominations for the election of directors or proposals for action, the foregoing
provisions may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to Red Lion and its stockholders.
The Doubletree Certificate and the Doubletree Bylaws do not contain
provisions requiring advance notice of business to be brought before a
stockholders' meeting by a stockholder. Pursuant to the Doubletree Bylaws, the
chairman of any meeting of the stockholders determines the order of business and
the procedure established for the meeting.
123
<PAGE> 135
CUMULATIVE VOTING
The Red Lion Bylaws provide that at any stockholders' meeting involving the
election of directors, no stockholder shall be entitled to cumulate votes (i.e.,
cast for any candidate a number of votes greater than the number of the
stockholders' shares entitled to vote on the election of directors).
The Doubletree Certificate does not provide for cumulative voting by
stockholders involving the election of directors.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
Under the DGCL, the affirmative vote of a majority of the outstanding
shares entitled to vote is required to amend the certificate of incorporation of
Doubletree or Red Lion, except in the case of Doubletree as described in the
next paragraph.
Pursuant to the Doubletree Certificate, the corporation reserves the right
to amend, alter, change or repeal any provision in the Doubletree Certificate.
All rights and powers conferred by the Doubletree Certificate on stockholders,
directors and officers are subject to this reserved power. In addition, pursuant
to the Doubletree Certificate, any amendment to the provisions of the Doubletree
Certificate which provides for (i) stockholder action by written consent, (ii)
the calling of special meetings of the stockholders, and (iii) the reserved
power of the corporation to amend, alter, change or repeal any provision in the
Doubletree Certificate requires, in addition to the approval required by
applicable law, the affirmative vote of the holders of at least eighty percent
(80%) of the then outstanding shares of Doubletree Common Stock.
The Doubletree Certificate authorizes the Doubletree Board of Directors to
adopt, amend or repeal the Doubletree Bylaws, subject to the right of the
stockholders to alter, amend and repeal the Bylaws adopted by the Doubletree
Board of Directors. The Doubletree Bylaws may be altered, amended or repealed,
and new bylaws not inconsistent with any provision of the Doubletree Certificate
or of applicable law, may be made, either by action of the Doubletree
stockholders at any annual or special meeting of the Doubletree stockholders, or
by action of the Doubletree Board of Directors.
The Red Lion Certificate provides that the Board of Directors and the
stockholders of Red Lion, by the affirmative vote of a majority of the
outstanding shares entitled to vote, are each expressly authorized to adopt,
repeal, alter, amend or rescind the Red Lion Bylaws, unless the Red Lion Bylaws
otherwise provide, which they do not.
BUSINESS COMBINATIONS
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested stockholder" for a three-year period following the date
that such stockholder becomes an interested stockholder unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding shares held by
directors who are also officers and employee stock purchase plans in which
employee participants do not have the right to determine confidentially whether
plan shares will be tendered in a tender or exchange offer) or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors of the corporation and by the affirmative vote at an annual or special
meeting, and not by written consent, of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder. Except as
specified in Section 203 of the DGCL, an interested stockholder is defined to
include (a) any person that is the owner of 15% or more of the outstanding
voting stock of the corporation or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation, at any time within three years immediately prior to the
relevant date and (b) the affiliates and associates of any such person.
124
<PAGE> 136
Under certain circumstances, Section 203 of the DGCL may make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the corporation's certificate of incorporation or stockholders may
elect to exclude a corporation from the restrictions imposed thereunder.
The Doubletree Certificate does not exclude Doubletree from the
restrictions imposed under Section 203 of the DGCL. Similarly, the Red Lion
Certificate does not exclude Red Lion from the restrictions imposed under
Section 203. It is anticipated that the provisions of Section 203 of the DGCL
may encourage companies interested in acquiring Doubletree to negotiate in
advance with the Doubletree Board, since the stockholder approval requirement
would be avoided if a majority of the directors then in office approve either
the business combination or the transaction which results in the stockholder
becoming an interested stockholder.
LIMITATION OF LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for damages for a breach of the
director's fiduciary duty, subject to certain limitations. Each of the
Doubletree Certificate and the Red Lion Certificate includes such a provision,
as set forth below, to the maximum extent required by law.
Each of the Doubletree Certificate and the Red Lion Certificate provides
that a director will not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty by such director
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions or (iv) for any transaction from which
the director derived an improper personal benefit.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of the corporation only if he or she is a director of the corporation
and is acting in his or her capacity as director, and do not apply to officers
of the corporation who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. The DGCL provides that no indemnification may be made
for any claim, issue or matter as to which a person has been adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable to the corporation, unless and only to the extent a court determines that
the person is entitled to indemnity for such expenses as the court deems proper.
The Doubletree Certificate provides that each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative or otherwise, by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation, or by reason of the
fact that such director or officer, at the request of the corporation, is or was
serving any other corporation, partnership, joint venture, employee benefit plan
or other enterprise, in any capacity, will be indemnified by the corporation to
the full extent authorized or permitted by law. The indemnification rights
conferred by the Doubletree Certificate are not exclusive of any other right to
which persons seeking indemnification may be entitled under any law, bylaw,
agreement, vote of stockholders or
125
<PAGE> 137
disinterested directors or otherwise. Doubletree is authorized to purchase and
maintain (and Doubletree maintains) insurance on behalf of its directors,
officers, employees and agents. In addition, the Merger Agreement requires
Doubletree to maintain directors and officers insurance for Red Lion's former
directors and officers for a period of six years. See "The Merger
Agreement -- Certain Covenants -- Indemnification and Insurance."
The Red Lion Certificate and the Red Lion Bylaws contain substantially
similar provisions relating to indemnification and insurance.
LEGAL MATTERS
The validity of the issuance of the shares of Doubletree Common Stock being
offered hereby will be passed upon for Doubletree by Dewey Ballantine, New York,
New York.
EXPERTS
The consolidated financial statements and schedule of Doubletree and its
subsidiaries as of December 31, 1994 and 1995, and for each of the years in the
three-year period ended December 31, 1995, included herein and elsewhere in the
Registration Statement have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Red Lion Hotels, Inc. as of December 31, 1995
and for the ten month period then ended and the consolidated statements of
operations, partners' equity, and cash flows of Historical Red Lion for the
seven month period ended July 31, 1995 included or incorporated by reference in
this Proxy Statement/Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, appearing herein, and have been
so included or incorporated by reference in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements included or incorporated by reference in this
Proxy Statement/Prospectus relating to Historical Red Lion and its subsidiaries,
to the extent and for the periods indicated in their reports, have been audited
by Arthur Andersen LLP, independent public accountants, and are included or
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports. Reference is made to the report on the Financial
Statements of Historical Red Lion, which includes an explanatory paragraph with
respect to changes in accounting for joint ventures and the accounting method
for measuring impairment of hotel properties, effective January 1, 1993, as
discussed in Note 1 of those Financial Statements.
126
<PAGE> 138
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DOUBLETREE CORPORATION
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheet at December 31, 1994, December 31, 1995 and June 30, 1996
(unaudited)...................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993,
December 31, 1994, December 31, 1995, Six Months Ended June 30, 1995 (unaudited)
and Six Months Ended June 30, 1996 (unaudited)................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993,
December 31, 1994, December 31, 1995, Six Months Ended June 30, 1995 (unaudited)
and Six Months Ended June 30, 1996 (unaudited)................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1993, December 31, 1994, and December 31, 1995 and Six Months Ended June 30, 1996
(unaudited)...................................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
RED LION HOTELS, INC.
Independent Auditors' Report........................................................ F-24
Consolidated Balance Sheets at December 31, 1995 and June 30, 1996 (unaudited)...... F-25
Consolidated Statements of Income for the Ten Months Ended December 31, 1995,
Four Months Ended June 30, 1995 (unaudited) and Six Months Ended June 30, 1996
(unaudited)...................................................................... F-26
Consolidated Statements of Stockholders' Equity for the Ten Months Ended
December 31, 1995 and Six Months Ended June 30, 1996 (unaudited)................. F-27
Consolidated Statements of Cash Flows for the Ten Months Ended December 31, 1995,
Four Months Ended June 30, 1995 (unaudited) and Six Months Ended June 30, 1996
(unaudited)...................................................................... F-28
Notes to Consolidated Financial Statements.......................................... F-29
HISTORICAL RED LION
Independent Auditors' Reports....................................................... F-43
Consolidated Balance Sheet at December 31, 1994..................................... F-45
Consolidated Statements of Operations for the Years Ended December 31, 1994
and 1993 and the Seven Months Ended July 31, 1995................................ F-46
Consolidated Statements of Partners' Equity for the Years Ended December 31, 1994
and
1993 and the Seven Months Ended July 31, 1995.................................... F-47
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994 and
1993 and the Seven Months Ended July 31, 1995.................................... F-48
Notes to Consolidated Financial Statements.......................................... F-50
</TABLE>
F-1
<PAGE> 139
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Doubletree Corporation
We have audited the consolidated financial statements of Doubletree
Corporation and subsidiaries (Company) and of Samantha Hotel Corporation and
subsidiaries (Predecessor) as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Company consolidated and financial
statements present fairly, in all material respects, the financial position of
Doubletree Corporation and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for the Company period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the aforementioned Predecessor consolidated financial statements
present fairly, in all material respects, the results of their operations and
their cash flows for the Predecessor period, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Orange County, California
February 27, 1996
F-2
<PAGE> 140
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER DECEMBER 1996
31, 31, -----------
1994 1995
----------- ----------- (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 23,169 $ 32,652 $ 46,566
Restricted cash............................................ 535 -- --
Accounts receivable, net of allowance for doubtful accounts
of $393, $295 and $316, respectively..................... 11,887 17,907 20,596
Current portion of notes and other receivables, including
amounts due from affiliates of $16 in 1994............... 16 390 477
Other...................................................... 1,831 2,694 2,944
-------- -------- --------
Total current assets.................................. 37,438 53,643 70,583
-------- -------- --------
Notes and other receivables, including amounts due from
affiliates of $10,674, $10,755 and $15,342,
respectively............................................. 17,312 24,185 30,949
Investments................................................ 2,606 5,070 29,892
Hotel properties, net...................................... 11,143 10,572 10,289
Leasehold improvements and office equipment, net........... 2,253 3,968 3,526
Management contracts, net.................................. 45,372 49,634 48,275
Goodwill, net.............................................. 17,407 15,431 15,228
Deferred costs and other assets............................ 1,170 604 3,231
-------- -------- --------
$ 134,701 $ 163,107 $ 211,973
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses...................... $ 22,505 $ 25,072 $ 25,347
Leases payable............................................. 4,283 6,744 10,122
Accrued interest payable................................... 11 23 15
Current portion of notes payable........................... 65 672 --
Income taxes payable....................................... 124 585 3,774
-------- -------- --------
Total current liabilities............................. 26,988 33,096 39,258
-------- -------- --------
Deferred income taxes...................................... 14,680 15,625 18,254
Notes payable.............................................. 1,446 -- --
-------- -------- --------
43,114 48,721 57,512
-------- -------- --------
Commitments and contingencies (Notes 4, 7, 8 and 16)
Stockholders' equity:
Common stock, $.01 par value.
Authorized 100,000,000 shares: issued and
outstanding 21,677,811, 22,099,186 and 23,070,961
shares at December 31, 1994 and 1995 and June 30,
1996, respectively.................................... 216 221 231
Additional paid-in capital............................... 93,215 100,462 128,061
Unrealized gain on marketable equity securities.......... -- 22 26
Unearned employee compensation........................... -- (211) (176)
Retained earnings (accumulated deficit).................. (1,844) 13,892 26,319
-------- -------- --------
91,587 114,386 154,461
-------- -------- --------
$ 134,701 $ 163,107 $ 211,973
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 141
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- ------------------
PREDECESSOR COMPANY COMPANY COMPANY COMPANY
1993 1994 1995 1995 1996
----------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Management and franchise fees.............. $10,612 $ 26,330 $ 30,082 $14,536 $ 18,519
Owned hotel revenues....................... 9,943 92 7,081 3,308 3,979
Leased hotel revenues...................... 14,923 73,769 141,942 65,534 86,321
Purchasing and service fees................ 329 10,746 16,487 7,478 7,585
Other fees and income...................... 2,547 1,545 994 493 972
------- -------- -------- ------- --------
Total revenues.......................... 38,354 112,482 196,586 91,349 117,376
------- -------- -------- ------- --------
Operating costs and expenses:
Corporate general and administrative
expenses................................ 7,485 11,879 14,413 7,106 8,641
Owned hotel expenses....................... 6,400 101 6,049 2,936 3,217
Leased hotel expenses...................... 14,266 68,981 132,644 61,008 79,735
Purchasing and service expenses............ 620 9,807 13,925 6,346 5,648
Depreciation and amortization.............. 1,572 2,943 4,686 2,056 2,940
Business combination expenses (Note 2)..... 1,865 -- 2,565 -- --
------- -------- -------- ------- --------
Total expenses.......................... 32,208 93,711 174,282 79,452 100,181
------- -------- -------- ------- --------
Operating income............................. 6,146 18,771 22,304 11,897 17,195
Interest expense........................... (1,228) (831) (227) (132) (143)
Interest income............................ 254 1,630 4,147 1,858 2,090
------- -------- -------- ------- --------
Income before income taxes and minority
interest................................... 5,172 19,570 26,224 13,623 19,142
Minority interest share of net (income)
loss.................................... 175 -- 35 (7) (22)
------- -------- -------- ------- --------
Income before taxes.......................... 5,347 19,570 26,259 13,616 19,120
Income tax expense......................... (414) (6,335) (8,468) (4,229) (6,693)
------- -------- -------- ------- --------
Net income................................... $ 4,933 $ 13,235 $ 17,791 $ 9,387 $ 12,427
======= ======== ======== ======= ========
Earnings per share (Note 12)................. $ 0.66 $ 0.80 $ 0.43 $ 0.54
======== ======== ======= ========
Weighted average common and common equivalent
shares outstanding......................... 20,071 22,219 21,984 22,849
======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 142
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -------------------
PREDECESSOR COMPANY COMPANY COMPANY COMPANY
1993 1994 1995 1995 1996
----------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income............................................................ $ 4,933 $ 13,235 $ 17,791 $ 9,387 $ 12,427
Adjustments to reconcile net income to net cash provided by
operations:
Provision for bad debts............................................. 56 189 211 69 202
Depreciation and amortization....................................... 1,601 3,013 4,686 2,056 2,940
Equity in (earnings) loss of partnerships........................... (992) (373) 91 (231) 37
Gain on termination of management contracts......................... -- (500) -- -- --
Minority interest share of net income............................... (175) -- (35) 7 22
Asset write-offs and other non-cash expenses........................ 615 -- 70 70 35
Deferred income taxes............................................... 42 3,394 3,375 2,118 2,629
Net (deposits to) withdrawals from restricted cash.................. (1,091) 1,179 535 535 --
Increase in accounts receivable..................................... (873) (3,407) (6,187) (5,209) (2,687)
(Increase) decrease in other assets................................. 25 (648) (1,234) (702) (113)
Increase in accounts payable and accrued expenses................... 3,085 6,680 5,225 3,242 7,063
Other, net.......................................................... (313) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by operations................................ 6,913 22,762 24,528 11,342 22,555
-------- -------- -------- -------- --------
Cash flow from investing activities:
Cash acquired at purchase of Doubletree Hotels Corporation............ 22,819 -- -- -- --
Purchase of Doubletree Hotels Corporation............................. (45,000) -- -- -- --
Purchases of furniture and equipment.................................. (66) (1,877) (2,708) (948) (656)
Investments in partnerships and ventures.............................. (255) (1,021) (2,531) (692) (25,146)
Distributions from partnerships and ventures.......................... 149 603 514 153 292
Investments in management contracts................................... -- (6,607) (7,181) (4,671) (811)
Proceeds from terminations of management contracts.................... -- 2,188 562 408 --
Acquisition of investment property.................................... (12,504) (11,129) -- -- --
Loans to owners of managed hotels..................................... (7,309) (4,935) (7,367) (7,800) (6,381)
Deposits in hotels to obtain management contracts..................... -- (280) 250 250 (250)
Purchase of marketable securities..................................... -- -- (516) (369) --
Increase in deferred costs............................................ -- -- -- -- (2,626)
Other................................................................. 1,255 76 (43) -- --
-------- -------- -------- -------- --------
Net cash used in investing activities.......................... (40,911) (22,982) (19,020) (13,669) (35,578)
-------- -------- -------- -------- --------
Cash flow from financing activities:
Proceeds from issuance of common stock, net of offering costs......... -- 40,261 6,620 6,620 27,372
Proceeds from exercise of common stock options........................ -- -- 249 -- 237
Capital contributions................................................. 135 -- -- -- --
Cash distributions to stockholders.................................... (943) (34) (2,055) (6) --
Minority interest share of Doubletree Partners distributions.......... (80) -- -- -- --
GQEL redemption, purchase of common and preferred stock............... (261) -- -- -- --
Proceeds from borrowings.............................................. 39,640 -- -- -- 5,000
Issuance of redeemable preferred stock................................ 540 -- -- -- --
Purchase of common and redeemable preferred stock..................... (231) (182) -- -- --
Principal payments on notes payable................................... (3,358) (25,414) (839) (807) (5,672)
-------- -------- -------- -------- --------
Net cash provided by financing activities...................... 35,442 14,631 3,975 5,807 26,937
-------- -------- -------- -------- --------
Net increase in cash end cash equivalents............................... 1,444 14,411 9,483 3,480 13,914
Cash and cash equivalents at beginning of year.......................... 7,314 8,758 23,169 23,169 32,652
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period.............................. $ 8,758 $ 23,169 $ 32,652 $ 26,649 $ 46,566
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 143
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL UNEARNED EARNINGS
COMMON PAID-IN ESOP TREASURY EMPLOYEE UNREALIZED (ACCUMULATED
STOCK CAPITAL OBLIGATION STOCK COMPENSATION GAIN DEFICIT) TOTAL
------ ---------- ---------- -------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor:
Balances at December 31,
1992........................ $ -- $ 28,459 $ -- $ -- $ -- $ -- $(18,686) $ 9,773
Issuance of 2,727,811 shares
of common stock to acquire
RFS, Inc., accounted for
as a pooling of
interests................. 27 (25) (592) -- -- -- (811) (1,401)
Distributions to
stockholders.............. -- (926) -- -- -- -- -- (926)
Capital contribution........ -- 1,282 -- -- -- -- -- 1,282
Preferred stock dividends... -- -- -- -- -- -- (17) (17)
Termination of ESOP......... -- -- 592 (452) -- -- (371) (231)
Redemption of GQEL minority
interest.................. -- (852) -- -- -- -- -- (852)
Net income.................. -- -- -- -- -- -- 4,933 4,933
---- -------- ----- ----- ----- --- -------- --------
Company:
Balances at December 31,
1993........................ 27 27,938 -- (452) -- -- (14,952) 12,561
Issuance of 15,500,000
shares of common stock to
the partners of Doubletree
Partners in exchange for
their interests in
Doubletree Partners and
Samantha.................. 155 25,051 -- -- -- -- -- 25,206
Proceeds from sale of
3,450,000 shares of common
stock to the public, net
of offering costs of
$4,589.................... 35 40,226 -- -- -- -- -- 40,261
Preferred stock dividends... -- -- -- -- -- -- (34) (34)
Preferred stock
conversion................ -- 440 -- -- -- -- -- 440
Purchase of allocated ESOP
shares.................... -- -- -- (82) -- -- -- (82)
Retirement of treasury
shares.................... (1) (440) -- 534 -- -- (93) --
Net income.................. -- -- -- -- -- -- 13,235 13,235
---- -------- ----- ----- ----- --- -------- --------
Balances at December 31,
1994........................ 216 93,215 -- -- -- -- (1,844) 91,587
Proceeds from sale of
400,000 shares of common
stock to the public, net
of offering costs of
$980...................... 4 6,616 -- -- -- -- -- 6,620
Exercise of common stock
options and other
grants.................... -- 289 -- -- -- -- -- 289
Tax benefits attributable to
common stock options
exercised................. -- 62 -- -- -- -- -- 62
Common stock issued to
employees................. 1 280 -- -- (281) -- -- --
Amortization of unearned
employee compensation..... -- -- -- -- 70 -- -- 70
Marketable equity securities
unrealized gain........... -- -- -- -- -- 22 -- 22
Distributions to
stockholders.............. -- -- -- -- -- -- (2,055) (2,055)
Net income -- -- -- -- -- -- 17,791 17,791
---- -------- ----- ----- ----- --- -------- --------
Balances at December 31,
1995........................ 221 100,462 -- -- (211) 22 13,892 114,386
Proceeds from the sale of
952,300 shares of common
stock to the public, net
of offering costs of
$1,045 (unaudited)........ 10 27,362 -- -- -- -- -- 27,372
Exercise of common stock
options (unaudited)....... -- 237 -- -- -- -- -- 237
Amortization of unearned
employee compensation
(unaudited)............... -- -- -- -- 35 -- -- 35
Marketable equity securities
unrealized gain
(unaudited)............... -- -- -- -- -- 4 -- 4
Net income (unaudited)...... -- -- -- -- -- -- 12,427 12,427
---- -------- ----- ----- ----- --- -------- --------
Balances at June 30, 1996
(unaudited)................. $231 $128,061 $ -- $ -- $ (176) $ 26 $ 26,319 $154,461
==== ======== ===== ===== ===== === ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 144
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE SIX MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(1) SUMMARY OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Doubletree Corporation was incorporated on May 19, 1994 as a Delaware
corporation to succeed to all the assets, liabilities and business operations of
Doubletree Partners, formerly Guest Quarters Hotel Partnership ("GQHP").
Doubletree Corporation and its majority-owned subsidiaries are collectively
referred to as the "Company." At June 30, 1996, the Company managed 86 hotels,
leased 55 hotels, owned one hotel and had franchise agreements with 37 hotels.
On December 16, 1993, Doubletree Partners and Doubletree Hotels Corporation
("DHC") were combined through the transfer of the ownership interests of DHC to
Doubletree Partners in exchange for cash and partnership interests in Doubletree
Partners. On June 30, 1994 (immediately prior to the Company's initial public
offering), the owners of Doubletree Partners (Samantha Hotel Corporation
("Samantha"), Canadian Pacific Hotels (U.S.) Inc. ("CPHUS") and MetPark Funding,
Inc. ("MET")) contributed their ownership interests to the Company and the
Samantha owners contributed Samantha to the Company. In consideration for such
transfer, each of the owners was issued shares of common stock (15,500,000
shares in the aggregate) of the Company in proportion to their direct or
indirect ownership interests in Doubletree Partners prior to such transfer. The
June 1994 transaction has been accounted for as if it were a pooling of
interests. Accordingly, the 1994 consolidated financial statements combine the
previously separate minority interests of CPHUS and MET with the financial
statements of Samantha as if the transaction occurred at the beginning of 1994.
The operating results and cash flows for the periods prior to December 16, 1993
are those of Samantha, the then 92% owner of Doubletree Partners.
On February 27, 1996, Doubletree Corporation acquired a 100% interest in
RFS, Inc. ("RFS Management") in a transaction accounted for as a pooling of
interests. Accordingly, the consolidated financial statements have been restated
to include RFS Management as if it had been acquired at the beginning of the
earliest period presented.
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Certain financial statement
items from prior years have been reclassified to be consistent with the current
year financial statement presentation. The accounts of DHC and its subsidiaries
are included from the date of acquisition, December 16, 1993. All significant
inter-entity accounts and transactions have been eliminated.
(a) Revenue Recognition
Management fees, franchise fees, purchasing and service fees, and hotel
revenues are recognized when earned.
(b) Hotel Properties
Buildings are carried at cost and depreciated over 30 - 40 years using the
straight-line method. Furniture, fixtures and equipment are depreciated using
the straight-line method over 7 years. Leasehold improvements are amortized over
the shorter of the lives of the assets or the terms of the related leases.
Accumulated depreciation at December 31, 1994 and 1995 and June 30, 1996 was
$182,000, $601,000 and $904,000, respectively.
(c) Investments
Investments in partnerships and ventures are accounted for using the equity
method of accounting when the Company has a general partnership interest or its
limited partnership interest exceeds 5%. All other
F-7
<PAGE> 145
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investments are accounted for using the cost method with the exception of
marketable equity securities which are recorded at market.
(d) Leasehold Improvements and Office Equipment
Improvements to office leaseholds are amortized over the shorter of the
lives of the assets or the terms of the related leases. Office furniture and
equipment is depreciated using the straight-line method over 3 to 10 years.
Accumulated depreciation at December 31, 1994 and 1995 and June 30, 1996 was
$2,767,000, $2,730,000 and $2,945,000, respectively.
Repairs and maintenance are charged to operations as incurred; major
renewals and improvements at the leased hotels are the responsibility of the
owner.
(e) Management Contracts and Goodwill
Management contracts acquired in the acquisition of DHC represent the
estimated present value of net cash flows expected to be received over the
estimated lives of the contracts and is being amortized using the straight-line
method over the estimated weighted average contract life (25 years) from
December 16, 1993. Management contracts acquired subsequent to the acquisition
represent the cash paid to acquire the contract and are being amortized using
the straight-line method over the life of the respective contract. Management
contracts are carried net of accumulated amortization of $2,199,000, $4,554,000
and $6,224,000 at December 31, 1994 and 1995 and June 30, 1996, respectively.
Goodwill arose in connection with the acquisition of DHC by Doubletree
Partners in December 1993 and is amortized using the straight-line method over
40 years. Goodwill is carried net of accumulated amortization of $389,000,
$835,000 and $1,038,000 at December 31, 1994 and 1995 and June 30, 1996,
respectively.
(f) Deferred Costs and Other Assets
At June 30, 1996 deferred costs and other assets primarily consist of
franchise application fees paid in connection with the acquisition of RFS
Management which are amortized over the lives of the franchise agreements. The
initial cost of obtaining franchise licenses for hotels leased by RFS Management
are paid by the owner. Accumulated amortization at June 30, 1996 is $60,000.
(g) Statements of Cash Flows
All short-term, highly liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents for
purposes of the statement of cash flows.
Cash paid for interest amounted to $1,188,000, $892,000 and $215,000 for
the years ended December 31, 1993, 1994, and 1995, respectively, and $121,000
and $151,000 for the six months ended June 30, 1995 and 1996, respectively. Cash
paid for income taxes amounted to $456,000, $3,020,000 and $4,631,000 for the
years ended December 31, 1993, 1994 and 1995, respectively, and $768,000 and
$875,000 for the six months ended June 30, 1995 and 1996, respectively.
(h) Income Taxes
Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets, including net operating loss carryforwards,
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect
on deferred
F-8
<PAGE> 146
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(i) Earnings Per Share
Earnings per share is determined by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
year. Common equivalent shares include employee stock options which have been
deemed exercised for the purpose of computing earnings per share. The Company
has no other potentially dilutive securities.
(j) Notes Receivable
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosure, on January 1, 1995. There was no
financial statement impact as a result of such adoption. Management considers a
note to be impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the note. When a
loan is considered to be impaired, the amount of the impairment is measured
based on the present value of expected future cash flows discounted at the
note's effective interest rate. Impairment losses are charged to expense.
Generally, cash receipts will first be applied to reduce accrued interest and
then to reduce principal.
(k) Long-Lived Assets
The recoverability of management contract costs, goodwill, hotel
investments and franchise application fees are periodically evaluated to
determine whether such costs will be recovered from future operations.
Evaluations of goodwill are based on projected earnings, exclusive of goodwill
amortization, on an undiscounted basis. Management contracts are individually
evaluated based on the projected management fee stream on an undiscounted basis.
If the undiscounted earnings or fee streams are insufficient to recover the
recorded assets, then the projected earnings or fee stream is discounted to
determine the revised carrying value and a write-down for the difference is
recorded.
(2) ACQUISITIONS
Acquisition of RFS, Inc.
On February 27, 1996, the Company issued 2,727,811 shares of its common
stock in exchange for all of the outstanding stock of RFS Management (a
privately held hotel operator) in a transaction accounted for as a pooling of
interests. At June 30, 1996, RFS Management operates 56 hotels (44 hotels are
leased and managed, 4 are leased only and 6 are managed).
Effective January 1, 1995, RFS Management was a Subchapter S Corporation
for income tax purposes and, therefore, was not generally liable for income
taxes for the year ending December 31, 1995.
F-9
<PAGE> 147
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents total revenues and net income of the merged
companies. Additionally, the table includes unaudited 1995 pro forma net income
and earnings per share. The 1995 pro forma adjustments exclude business
combination expenses, provide for additional tax expense due to the exclusion of
the business combination expenses and increase the provision for taxes for RFS
Management to a 35% rate which is the Company's 1995 effective tax rate.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
--------------------------------- ENDED
1993 1994 1995 JUNE 30, 1995
------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenues
Doubletree........................... $26,229 $ 49,908 $ 74,066 $33,726
RFS Management....................... 12,125 62,574 122,520 57,623
------- -------- -------- -------
Total revenues, as reported............ $38,354 $112,482 $196,586 $91,349
======= ======== ======== =======
Net income
Doubletree........................... $ 4,368 $ 12,578 $ 15,662 $ 7,666
RFS Management....................... 565 657 2,129 1,721
------- -------- -------- -------
Net income, as reported................ $ 4,933 $ 13,235 17,791 9,387
======= ========
Business combination expenses.......... 2,565 --
Pro forma additional income tax
expense.............................. (1,620) (536)
-------- -------
Pro forma net income................... $ 18,736 $ 8,851
======== =======
Pro forma earnings per share........... $ 0.84 $ 0.40
======== =======
Weighted average shares outstanding.... 22,219 21,984
======== =======
</TABLE>
The Company incurred pre-tax expenses in the fourth quarter of 1995 related
to the business combination of approximately $2,565,000. The costs incurred
include legal, professional and accounting fees, due diligence and certain other
costs necessary to complete the transaction.
Certain of the franchisors required the payment of an application fee, as a
result of the merger, of $2,626,000 which is being amortized over the terms of
the respective franchise agreements.
Acquisition of Doubletree Hotels Corporation
On December 16, 1993 Doubletree Partners purchased all of the outstanding
stock of DHC from CPHUS and MET for $72,000,000, including acquisition costs.
The purchase price was established by an assessment of the net assets acquired
and was paid by issuing partnership interests in the amount of $25,852,000
representing a 40% interest in Doubletree Partners and $45,000,000 in cash. The
cash portion of the purchase price was paid by causing DHC to borrow $25,000,000
and using $20,000,000 of DHC's cash. The purchase price of $72,000,000 is
comprised of the $45,000,000 of cash paid and the $27,000,000 of net assets
acquired. The transaction has been accounted for as a purchase. The purchase
price was allocated to the net assets acquired, including management contracts,
based upon their estimated fair market values. The excess of the purchase price
over the estimated fair value of the net assets acquired of $14,936,000 was
recorded as goodwill. During 1994, the Company concluded negotiations and
reached agreements with several key executives of DHC regarding severance and
related benefits. Primarily, as a result, goodwill and liabilities increased by
$2,857,000. The consolidated statement of operations for 1993 includes the
results of operations of DHC from December 16, 1993.
F-10
<PAGE> 148
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma summary presents the consolidated results
of operations of Samantha as if DHC had been acquired at the beginning of 1993.
The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations that would actually
have resulted had the combination been in effect on the date indicated (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1993
-----------------
(UNAUDITED)
<S> <C>
Total revenues............................................... $56,796
=======
Net income................................................... $ 8,615
=======
</TABLE>
In 1993, business combination expenses represented the estimated costs to
close duplicate facilities, relocate certain equipment, make severance payments
to terminated employees and relocate certain other employees of GQHP as a result
of the acquisition of DHC. They also include the write-off of all costs related
to the Guest Quarters name as management determined that all Doubletree and
Guest Quarters hotels would be marketed under the Doubletree brand.
(3) REDEMPTION OF GQEL MINORITY INTEREST
Effective December 16, 1993 Doubletree Partners distributed its ownership
interest in two hotels, its leasehold interest in another hotel and certain
liabilities to its partner, GQ Equities Limited ("GQEL"), in complete redemption
of GQEL's interest in Doubletree Partners. The owners of GQEL were also the
owners of Samantha. On December 16, 1993 the carrying amount of the distributed
assets and the carrying amount of the liabilities, having an aggregate net book
value of $3,056,000, including cash of $261,000, approximated their fair market
value. Pursuant to the redemption agreement, Doubletree Partners and GQEL have
entered into management agreements for each of the hotels, which provide that
Doubletree Partners shall continue to receive base management fees at the
existing rate and an incentive fee, which, if earned, will not be less than 68%
of the hotels' net cash flow (as defined therein). The agreement will terminate
upon the sale of the hotels or the leasehold interests but, in any event, no
earlier than December 16, 1998.
(4) HOTEL PROPERTIES
Owned hotel revenues and expenses represent the operating results of hotels
owned by the Company. The Company currently owns a 239-room hotel in Southfield,
Michigan which was acquired (from a subsidiary of General Electric Capital
Corporation) on December 22, 1994 for approximately $11,129,000 in cash, of
which $556,000 was allocated to land. In December 1992 and July 1993, Doubletree
Partners acquired hotels in Cincinnati and Atlanta, respectively. The purchase
price of the Cincinnati property was $7,950,000 of which $5,168,000 was financed
in the form of a nonrecourse purchase money mortgage note and the balance was
paid in cash. The purchase price of the Atlanta property was $12,000,000, of
which $9,000,000 was financed in the form of a non-recourse mortgage, $2,000,000
was borrowed from an affiliate and the balance was paid in cash. Those hotels
and the Company's leasehold interest in another hotel were distributed to GQEL
on December 16, 1993 at which time GQEL assumed the related financing.
As of December 31, 1993, 1994 and 1995 and June 30, 1996 the Company leased
12, 44 and 52 and 55 hotels, respectively. The Company leased 50 of these hotels
from the REIT at June 30, 1996. All of the Company's leases require the payment
of rent equal to the greater of fixed base rent or percentage rent based on a
percentage of gross room revenue, beverage revenue and food revenue (if the
hotel offers food and beverage service). Substantially all of the hotels leased
from the REIT are cross defaulted with one another. All hotel leases are
operating leases. Percentage rents, included in total lease expense, were
$748,000, $10,961,000 and $25,254,000 for the years ended December 31, 1993,
1994 and 1995, respectively and
F-11
<PAGE> 149
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$12,091,000 and $17,978,000 for the six months ended June 30, 1995 and 1996,
respectively. The Company leases two hotels from affiliates of the General
Electric Pension Trust.
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable hotel operating leases (in thousands) as of
December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
------------
<S> <C> <C>
1996............................................................. $ 29,651
1997............................................................. 30,429
1998............................................................. 28,468
1999............................................................. 27,496
2000............................................................. 24,403
Thereafter....................................................... 209,676
--------
Total future minimum lease payments......................... $ 350,123
========
</TABLE>
The Company leased another hotel, which lease commenced in July 1991 and
required Doubletree Partners to pay all normal, recurring expenses of the hotel
including real estate taxes and interest in lieu of rent. All of these amounts
are included in leased hotel expenses. The lease term expired on December 31,
1994.
(5) RESTRICTED CASH
Restricted cash consisted of amounts in escrow for fixed asset replacement
at hotels under management.
F-12
<PAGE> 150
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) NOTES AND OTHER RECEIVABLES
Notes and other receivables, consisting primarily of loans to owners of
managed hotels, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
REPAYMENT TERMS ----------------- JUNE 30,
INTEREST RATE INTEREST/PRINCIPAL MATURITY 1994 1995 1996
- ------------- ------------------------------------------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
SECURED:
Monthly/monthly to the extent of cash
12.0% flow....................................... 2006 $ 4,000 $ 4,000 $ 4,500
Monthly/monthly to the extent of cash
10.0% flow....................................... 2005 -- 2,850 2,850
8.0-10.0% Monthly/at maturity........................ 2001 2,250 2,800 2,800
Quarterly/quarterly to the extent of cash
10.0% flow....................................... 2003 -- 2,600 2,575
9.0% Monthly/at maturity........................ 2015 -- 1,625 3,193
Prime-1.5% Monthly/at maturity........................ 2010 -- 1,300 1,300
6.5-9.0% Monthly/at maturity........................ 2000 1,250 1,250 1,250
Monthly/monthly to the extent of cash
8.0% flow....................................... 2014 1,000 1,000 1,000
8.0-10% Various.................................... Upon sale 1,273 1,153 1,313
Notes repaid in full....................... 3,040 1,000 --
------- ------- -------
12,813 19,578 20,781
------- ------- -------
UNSECURED:
7.5% Monthly/at maturity........................ 2000 3,000 3,500 4,000
10.0% Monthly/annually........................... 2000 -- -- 3,000
8.0% Monthly/at maturity........................ 2001 -- -- 1,000
10.0% Quarterly/quarterly........................ 2002 720 720 665
8.50% At maturity/at maturity.................... 2005 -- -- 459
5.75%-10.0% Various.................................... Upon sale 795 777 1,521
------- ------- -------
4,515 4,997 10,645
------- ------- -------
Total notes and other receivables.......... 17,328 24,575 31,426
Less: current portion...................... 16 390 477
------- ------- -------
Non-current portion........................ $17,312 $24,185 $ 30,949
======= ======= =======
</TABLE>
Repayment of notes receivable are generally due upon the earlier of
termination of the management contract or sale of the hotel. At December 31,
1995 and June 30, 1996, the Company does not consider any of its notes
receivable to be impaired.
(7) INVESTMENTS
As of June 30, 1996 the Company and its subsidiaries have general and/or
limited partnership interests in 17 partnerships. Eleven of the partnerships own
hotels while the others own retail or industrial properties. Six of the
partnership interests were acquired in the acquisition of DHC and six were
acquired in the acquisition of RFS Management. The Company's percentage of
ownership in such partnerships at June 30, 1996 ranges from less than 1% to
49.9%. The partnership investments include an investment in a partnership that
is a majority owned subsidiary of the REIT. These partnership interests are
convertible into common stock of the REIT.
F-13
<PAGE> 151
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, unrecorded losses of approximately $381,000, related
to certain limited partnership investments have not been recorded because the
book value of these investments has been reduced to zero. The Company has no
obligation to further fund these investments.
The aggregate carrying value of the partnership interests is less than the
proportionate share of aggregate net assets of such partnerships by
approximately $1,685,000 at December 31, 1995. This difference is principally
the result of previous write-offs of the Company's investment, in excess of that
recorded by certain of the partnerships, offset by losses in excess of amounts
invested which are not reflected in the accompanying financial statements
because the Company has no obligation to further fund the investments.
In October 1995, the Company acquired a 50% interest in Candlewood Hotel
Company, L.L.C. ("Candlewood"). Candlewood will compete in the extended stay
market of the lodging industry and will design, develop and manage and/or
franchise hotels under the Candlewood brand. The Company committed to provide
$15,000,000 of capital to the venture, of which, $7,400,000 has been funded at
June 30, 1996 ($1,200,000 at December 31, 1995).
The Company, through RFS Management, purchased 973,684 shares of the REIT's
convertible preferred stock for $19 per share or approximately $18,500,000. This
investment is recorded at cost as there is no ready market for these securities.
The convertible preferred stock will pay a fixed annual dividend of $1.45 per
share and is convertible on a one-for-one share basis at the end of seven years.
Separately, the REIT granted the Company a 10-year right of first refusal to
manage and lease future hotels acquired or developed by the REIT. The Company
has committed to the REIT to maintain $15,000,000 of net worth in RFS
Management.
Investments also include 35,000 shares of REIT common stock recorded at
market value. The unrealized gain is reflected in stockholders' equity as these
securities are classified as available-for-sale.
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
REIT convertible preferred stock........................ $ -- $ -- $ 18,500
REIT common shares...................................... -- 538 542
Hotel partnerships...................................... 2,989 3,746 4,171
Candlewood.............................................. -- 1,098 6,991
Other................................................... (383) (312) (312)
------ ------ -------
$2,606 $5,070 $ 29,892
====== ====== =======
</TABLE>
(8) OPERATING LEASES
The Company occupies administrative offices under operating leases which
provide for minimum annual rental charges plus a share of maintenance expenses
and real estate taxes.
Total rent expense for operating leases of office space for the years ended
December 31, 1993, 1994 and 1995 amounted to approximately $816,000, $1,402,000
and $1,597,000, respectively, and $688,000 and $689,000 for the six months ended
June 30, 1995 and 1996, respectively.
F-14
<PAGE> 152
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule, by year, of future minimum rental payments
required under non-cancelable operating leases for administrative office space
(in thousands) as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1996................................................................. $1,392
1997................................................................. 1,447
1998................................................................. 874
1999................................................................. 591
2000................................................................. 596
Thereafter........................................................... 1,856
------
Total future minimum lease payments................................ $6,756
======
</TABLE>
(9) NOTES PAYABLE
Note payable due December 16, 1999 with interest payable monthly at LIBOR
plus a variable rate (between 0.675% and 1.50%) related to debt-to-equity and
interest coverage ratios. The note payable is a credit facility which allows
borrowings up to $30,000,000, all of which was available for borrowing at
December 31, 1995. Subsequent to December 31, 1995 the Company borrowed
$5,000,000 under this facility and repaid the entire amount prior to June 30,
1996. Interest related to this borrowing amounted to $105,000. The facility
requires the payment of a quarterly commitment fee that ranges from 0.20% to
0.375% of the unused balance. The loan has various covenants which prohibit the
payment of distributions (including dividends) from DHC and Doubletree Partners
(which owns substantially all of the assets) to their stockholders and partners,
respectively, and restricts the payment of certain expenditures based on the
financial condition of the Company. Various notes receivable and stock of
certain significant subsidiaries have been pledged as collateral. The loan is
guaranteed by the Company, Samantha and Doubletree Partners.
The maximum borrowing which may be outstanding under the facility declines
one year prior to the maturity date to $12,500,000 and is due in full one year
later. The facility provides that, at the election of the Company and approval
by the Lender, the maturity dates can both be extended by one year.
Other notes payable outstanding at December 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
------ ----
<S> <C> <C>
8% note payable shareholder, repaid March 1996...................... $ 902 $672
10% note payable shareholders, repaid June 1995..................... 609 --
------ ----
$1,511 $672
====== ====
</TABLE>
(10) STOCKHOLDERS' EQUITY
On July 8, 1994, the Company completed its initial public offering of
3,450,000 shares of its common stock at a price to the public of $13 per share.
The net proceeds to the Company, after expenses of the offering and giving
effect to the underwriter's discount, were $40,261,000. The proceeds of the
offering were primarily used for the repayment of debt outstanding under the
credit facility and for general corporate purposes.
In March 1995, the Company issued 2,000 shares of common stock with a fair
value at the date of issuance of $40,000 to certain non-executive employees.
In June 1995, the Company completed an offering of 4,600,000 shares of its
common stock (of which 400,000 shares were newly issued shares of the Company)
at a price to the public of $19 per share. The net
F-15
<PAGE> 153
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proceeds to the Company, after expenses of the offering and giving effect to the
underwriter's discount, were $6,620,000.
In January 1995, RFS Management issued 12 restricted shares of RFS
Management common stock to certain of its employees. These shares vest ratably
over a four year period from the date of issuance. The estimated fair market
value of these shares at issuance was $281,000. The shares were exchanged for
approximately 36,500 Company common shares, subject to the same restrictions, in
connection with the acquisition of RFS Management.
In February 1996 the Company issued 2,727,811 shares (including the 36,500
restricted shares) of its common stock to acquire all of the outstanding common
stock of RFS Management.
In May 1996, the Company completed an offering of 4,234,300 shares of its
common stock (of which 952,300 shares were newly issued shares of the Company)
at a price to the public of $31.25 per share. The net proceeds to the Company,
after expenses of the offering and giving effect to the underwriter's discount,
were $27,372,000.
(11) STOCK OPTIONS
The Company has one stock option plan, the 1994 Equity Participation Plan
(the "Plan"), in which options may be granted to key personnel to purchase
shares of the Company's common stock at a price not less than the current market
price at the date of the grant. The options vest annually and ratably over the
four-year period from the date of grant and expire ten years after the grant
date. An aggregate of 3,300,000 shares have been authorized for issuance. The
Plan also provides for the issuance of stock appreciation rights, restrictive
stock or other awards, none of which have been granted. Activity in the stock
option plan is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
------------------------ ENDED
PRICE RANGE 1994 1995 JUNE 30, 1996
---------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
year................................ $13.00 - $23.50 -- 967,500 1,103,500
Granted............................... $13.00 - $28.88 1,099,500 193,000 710,270
Exercised............................. $13.00 -- (19,375) (19,745)
Canceled.............................. $13.00 - $17.78 (132,000) (37,625) (27,250)
--------- --------- ---------
Options outstanding, end of period.... $13.00 - $28.88 967,500 1,103,500 1,766,775
--------- --------- ---------
Number of options exercisable......... $13.00 - $20.38 -- 243,750 443,275
Number of shares available for future
issuance............................ 1,032,500 877,125 1,494,105
</TABLE>
(12) EARNINGS PER SHARE
For the year ended December 31, 1994, earnings per share has been
calculated assuming the 15,500,000 shares issued immediately prior to the
initial public offering were outstanding since January 1, 1994. Additionally,
the 2,727,811 shares issued to acquire RFS Management are assumed to be
outstanding for the entire years of 1994 and 1995. Per share data for 1993 has
not been provided as the information is not comparable. The common equivalent
shares include employee stock options which have been deemed exercised using the
treasury stock method for the purpose of computing earnings per share. The
Company has no outstanding securities or agreements which would result in the
issuance of common shares other than common stock equivalents.
F-16
<PAGE> 154
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) TRANSACTIONS WITH RELATED PARTIES
Revenues include amounts derived from entities in which affiliates of the
Company own interests and, in general, exercise operational control. Revenues
derived from these entities were as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES
Management fees and franchise fees........ $ 5,513 $ 15,051 $ 15,241 $ 7,225 $ 9,417
Leased hotel revenues..................... -- -- 11,327 4,236 8,581
Share of partnership income............... -- 243 388 424 12
Interest income........................... 30 847 1,674 706 878
Purchasing and service fees............... 96 4,436 6,288 2,745 1,389
EXPENSES
Hotel expenses............................ -- -- 10,721 3,975 7,823
Administrative office rent................ 334 312 73 35 35
</TABLE>
Additionally, the Company was reimbursed for expenses incurred in providing
centralized services to its managed and/or franchised hotels related to
marketing, central reservations, accounting, data processing, internal audit and
training as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Marketing and central
reservations...................... $ 2,587 $ 11,129 $ 11,020 $ 4,465 $ 5,171
Accounting, data processing,
internal audit and training....... 1,151 2,084 1,781 835 989
------- -------- -------- ------- -------
$ 3,738 $ 13,213 $ 12,801 $ 5,300 $ 6,160
====== ======= ======= ====== ======
</TABLE>
Amounts due from affiliates included in accounts receivable at December 31,
1994 and 1995 and June 30, 1996 are $3,877,000, $4,318,000 and $7,102,000,
respectively. Non-current amounts due from affiliates included in other assets
at December 31, 1994 and 1995 and June 30, 1996 are $114,000, $147,000 and
$321,000, respectively.
Amounts due to affiliates included in accounts payable at December 31, 1994
and 1995 and June 30, 1996 amounted to $123,000, $105,000 and $246,000,
respectively.
During 1995 RFS Management, under terms of a consulting agreement, made
payments of $780,000 to Hospitality Advisory Services, Inc. ("HAS"). The
consulting agreement terminated on February 27, 1996 and $75,000 was paid prior
to termination. Subsequently, two of the former HAS shareholders entered into
new consulting agreements, that terminate February 27, 1997, with RFS Management
and were paid $70,000 in total through June 30, 1996.
(14) EMPLOYEE BENEFIT PLANS
The Company participates in 401(k) retirement savings plans. Generally,
employees who are over 21 years of age and have completed one year of service
are eligible to participate in the plans. The Company, except for RFS
Management, matches employee contributions up to 3% of an employee's salary. RFS
Management matches employee contributions up to 2% of an employee's salary. The
aggregate expense under all plans amounted to $135,000, $218,000 and $563,000
for the years ended December 31, 1993, 1994 and 1995, respectively.
F-17
<PAGE> 155
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company, except for RFS Management, maintains a self-insured group
health plan through a Voluntary Employee Benefit Association. This plan is
funded to the limits provided in the Internal Revenue Code. RFS Management
maintains a self-insured group health plan. Liabilities are recorded for
estimated incurred but unreported claims. Aggregate and stop loss insurance
exists at amounts which limit the exposure to the Company, including RFS
Management.
(15) INCOME TAXES
The components of income tax expense consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
---- ------ ------
<S> <C> <C> <C>
Federal:
Current.................................................. $257 $1,559 $3,561
Deferred................................................. 42 3,476 2,832
---- ------ ------
299 5,035 6,393
---- ------ ------
State:
Current.................................................. 115 1,382 1,532
Deferred................................................. -- (82) 543
---- ------ ------
115 1,300 2,075
---- ------ ------
$414 $6,335 $8,468
==== ====== ======
</TABLE>
The actual income tax expense differs from the expected tax expense
computed by applying the Federal statutory income tax rate as a result of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ----- -----
<S> <C> <C> <C>
Income tax expense at Federal statutory rate............... 34.0% 34.0% 34.0%
Goodwill and other permanent differences................... 0.2 1.1 0.7
State income taxes......................................... 0.8 4.3 5.5
RFS, Inc. S Corp. earnings not taxed....................... -- -- (2.8)
Effect of net operating loss and other carryforwards....... (29.2) -- --
Decrease in valuation allowance............................ -- (8.3) (5.2)
Other...................................................... 2.2 1.3 --
------ ----- -----
8.0% 32.4% 32.2%
====== ===== =====
</TABLE>
The income tax benefit attributable to the use of net operating loss
carryforwards ("NOLs") in the year ended 1993 was $2,129,000 and $47,000 in
1994.
Deferred income taxes result principally from amortization of management
contracts, investments in partnerships and the utilization of NOLs and passive
activity loss carryforwards.
F-18
<PAGE> 156
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................. $ 17,596 $ 15,288
Passive activity loss carryforwards.......................... 2,206 834
Reserves..................................................... 3,540 3,335
Other........................................................ 2,867 3,979
Valuation allowance.......................................... (25,522) (22,605)
-------- --------
Total deferred tax assets................................. 687 831
-------- --------
Deferred tax liabilities:
Management contracts......................................... (13,457) (13,982)
Investments in partnerships.................................. (1,910) (2,474)
-------- --------
Total deferred tax liabilities............................ (15,367) (16,456)
-------- --------
Net deferred tax liability................................... $(14,680) $(15,625)
======== ========
</TABLE>
The Company estimates that, more likely than not, it will not realize a
substantial portion of the benefits of its deferred tax assets. Accordingly, it
has established a valuation allowance to reflect this uncertainty. A portion of
the valuation allowance was established upon the combination of Doubletree
Partners and DHC. In accordance with purchase accounting methodology, to the
extent the tax benefits to which this allowance relates are recognized, the
reduction in the valuation allowance will be applied to reduce goodwill. As of
December 31, 1995, the amount of the valuation allowance subject to this
treatment is approximately $6,500,000. During 1995, $1,530,000 was used and
credited to goodwill. None of this NOL was recognized in 1994.
The Company's federal NOLs of $40,979,000 expire as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT OF
YEAR OF EXPIRATION FEDERAL NOLS
- ------------------ ------------
<S> <C> <C>
2004............................................................. $ 4,320
2005............................................................. 9,860
2006............................................................. 1,230
2007............................................................. --
2008............................................................. 13,086
2009............................................................. 12,483
-------
40,979
Passive loss carryforwards -- no stated expiration............... 2,166
-------
$ 43,145
=======
</TABLE>
Total NOLs for state purposes are less than the amounts stated above due
primarily to shorter carryforward periods.
The Company also has passive loss carryforwards that do not have a stated
expiration term. The tax benefit attributable to these federal and state NOLs
and passive loss carryforwards has been calculated considering the reduced
amount available for state purposes.
F-19
<PAGE> 157
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) COMMITMENTS AND CONTINGENCIES
Certain hotel management contracts provide that if a hotel does not achieve
agreed-upon performance levels, the Company may elect or may be required to fund
any performance shortfalls for a specified period of time. In general, if the
Company elects not to fund the shortfall, the hotel owner may elect to terminate
the management contract. If the Company elects to fund the shortfall, but
performance standards are not achieved at the expiration of the funding period,
the owner may elect to terminate the management contract at that time. The
Company funded one shortfall in the amount of $487,000 in June 1996. The Company
has not funded any other shortfalls during the three year and six month period
ended June 30, 1996.
The Company has guaranteed certain mortgages, leases and construction bonds
up to $6,460,000 ($2,860,000 of which are collateralized by letters of credit).
The Company has also committed to lend up to $8,907,000, $7,007,000 to the owner
of the Somerset hotel, of which $707,000 is for renovations and $6,300,000 is to
provide bridge financing, if needed. The remaining loan commitments are to two
other hotels primarily for renovations.
In October 1995, the Company acquired a 50% interest in Candlewood Hotel
Company, L.L.C. ("Candlewood"). Candlewood will compete in the extended stay
market of the lodging industry and will design, develop and manage and/or
franchise hotels under the Candlewood brand. The Company committed to provide
$15,000,000 of capital to the venture, of which, $7,400,000 has been funded at
June 30, 1996 ($1,200,000 at December 31, 1995). The Company expects to fund the
remainder of its commitment by December 31, 1996.
In addition, in August 1996 Doubletree committed to provide a credit
support for a loan facility that will be utilized by Candlewood to arrange
construction and permanent financing for Candlewood franchisees on terms that,
in most cases, are much more attractive than that which the franchisees could
obtain on their own. The source of the loan facility will be General Motors
Acceptance Corporation Mortgage Group. In providing such credit support,
Doubletree's maximum exposure on any one Candlewood franchise will be
approximately $1 million, with the aggregate amount of exposure for all such
credit support capped at between $20 to $30 million.
In August 1996, Doubletree and Patriot American Hospitality, Inc. formed a
joint venture wherein Doubletree will invest up to $20.0 million of capital to
be combined with up to $200.0 million of capital from Patriot to be used for the
acquisition of hotels. Doubletree will have a 10% interest in the Venture.
The Company has a commitment to contribute an additional $3,127,000 to an
investment partnership formed for the purpose of acquiring hotel properties. The
Company has a 4.35% limited partnership interest and it is anticipated that at
least 50% of the properties acquired will be either managed and/or franchised by
the Company.
The Company is a defendant in various litigation matters arising from the
normal course of its operations. While it is not feasible to predict or
determine the ultimate outcome of these matters, it is the opinion of management
that their ultimate outcome is not likely to have a material adverse effect on
the results of operations and the financial position of the Company.
Metropolitan Life has indemnified the Company against any litigation
matters which occurred prior to the date of acquisition of MetHotels by DHC
(December 6, 1990), and certain indemnification by Canadian Pacific exists for
events which transpired from December 6, 1990 to December 16, 1993.
Four of the hotels leased by the Company are managed by others under
agreements with terms of ten to twenty years. Management fees are based on a
percentage of each hotel's revenues.
F-20
<PAGE> 158
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
------------------- 30,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Accounts payable...................................... $ 6,342 $ 5,592 $ 5,290
Payroll and related costs............................. 3,395 4,805 4,518
Leased and owned hotel expenses....................... 1,609 3,290 4,586
Deferred compensation................................. 2,702 2,106 2,005
Marketing costs....................................... 2,449 2,038 2,168
Business combination expenses......................... 1,013 2,555 1,077
Insurance expense..................................... 1,237 1,055 1,980
Professional fees..................................... 1,209 679 739
Sales tax............................................. 760 1,102 1,427
Other................................................. 1,789 1,850 1,557
------- ------- -------
$22,505 $25,072 $25,347
======= ======= =======
</TABLE>
(18) REIMBURSABLE COSTS
The Company is reimbursed for costs associated with providing central
reservations, sales and marketing, accounting, data processing, internal audit
and employee training services to managed hotels. The Company is also reimbursed
for central reservations and marketing services provided to franchised hotels.
Such costs primarily consist of personnel and related fringe benefits,
advertising, promotional fees and reservation service costs.
(19) MANAGEMENT CONTRACTS
An analysis of management contract activity follows (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1992............................................... $ 423
Contracts acquired at acquisition of DHC................................... 42,000
Amortization............................................................... (135)
-------
Balance at December 31, 1993............................................... 42,288
Contracts acquired......................................................... 6,607
Contract conversions and terminations...................................... (1,718)
Amortization............................................................... (1,805)
-------
Balance at December 31, 1994............................................... 45,372
Contracts acquired......................................................... 7,181
Contract conversions and terminations...................................... (562)
Amortization............................................................... (2,357)
-------
Balance at December 31, 1995............................................... 49,634
Contracts acquired (unaudited)............................................. 811
Contract conversions and terminations (unaudited).......................... (500)
Amortization (unaudited)................................................... (1,670)
-------
Balance at June 30, 1996 (unaudited)....................................... $48,275
=======
</TABLE>
F-21
<PAGE> 159
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, notes and other receivables, accounts payable
and accrued expenses, accrued interest payable and income taxes payable, each as
included in the consolidated balance sheets under such captions. With the
exception of notes and other receivables and the investment in RFS Partnership
L.P. units, the carrying amounts of all other classes of financial instruments
approximate fair value due to the short maturity of those instruments or, in the
case of marketable equity securities they are carried at their estimated fair
value. The Company has determined that the fair value of its notes receivable is
not significantly different from their carrying value based on interest rate and
payment terms the Company would currently offer on notes with similar security
to borrowers of similar creditworthiness. RFS Partnership L.P. units, which are
convertible into REIT common shares, have a carrying value of $841,000 and an
estimated fair value of $1,197,000 at December 31, 1995.
(21) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 1994 and
1995, restated to reflect the acquisition of RFS Management, is presented below
(in thousands except per share data). The sum of the individual quarterly data
may not equal the annual data due to rounding.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1994
Total revenues....................... $17,186 $ 23,913 $33,272 $ 38,111
Net income........................... 1,884(a) 3,821(a) 4,180 3,350
Earnings per share................... $ 0.10(a) $ 0.21(a) $ 0.19 $ 0.15
Weighted average common and common
equivalent shares outstanding...... 18,228 18,228 21,900 21,938
</TABLE>
- ---------------
(a) The Company's effective tax rate for the quarters ended March 31 and June 30
was 29% and 25%, respectively, due to the organizational structure of the
Company prior to its initial public offering. Had a 35% rate been incurred,
net income and earnings per share would have been $1,648 and $0.09 per share
and $3,073 and $0.17 per share, respectively.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1995
Total revenues....................... $40,580 $ 50,771 $52,891 $ 52,344
Net income........................... 3,645 5,742 5,606 2,798(b)
Earnings per share................... $ 0.17 $ 0.26 $ 0.25 $ 0.12
Net income -- pro forma(c)........... $ 3,490 $ 5,360 $ 5,311 $ 4,575(d)
Earnings per share -- pro forma(c)... $ 0.16 $ 0.24 $ 0.24 $ 0.20(d)
Weighted average common and common
equivalent shares outstanding...... 21,910 22,057 22,443 22,472
</TABLE>
- ---------------
(b) Includes $2,565,000 of business combination expenses.
F-22
<PAGE> 160
DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY)
SAMANTHA HOTEL CORPORATION (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Effective January 1, 1995 RFS Management elected to be taxed as a Subchapter
S Corporation for federal income tax purposes. As a result, it was generally
not liable for income taxes and its financial statements for the year ended
December 31, 1995 did not include a provision for federal income taxes. A
pro forma adjustment to each quarter increasing the provision for income
taxes by approximately $0.8 million in the aggregate has been reflected in
the 1995 pro forma results.
(d) Excludes $2,565,000 of business combination expenses and provides for a
related increase in income tax expense.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------
MARCH 31, JUNE 30,
--------- --------
<S> <C> <C>
1996
Total Revenues.................................................. $53,829 $ 63,547
Net income...................................................... 4,878 7,549
Earnings per share.............................................. $ 0.22 $ 0.33
Weighted average common and common equivalent shares
outstanding................................................... 22,584 23,173
</TABLE>
(22) SUBSEQUENT EVENT (UNAUDITED)
On September 12, 1996, Doubletree, through a subsidiary, entered into an
Agreement and Plan of Merger with Red Lion Hotels, Inc. ("Red Lion"), whereby
Doubletree would acquire all of the outstanding common stock of Red Lion. Red
Lion is a full service hospitality company that owns, leases and/or manages 55
hotels as of June 30, 1996 principally in the western United States. The
purchase price, which is subject to adjustment, and includes the assumption of
approximately $213.3 million of indebtedness, is approximately $1.2 billion and
is anticipated to be funded with a combination of newly-issued shares of
Doubletree Common Stock, $600.0 million in institutional debt, and existing
cash. Consummation of the transaction is subject to certain conditions and is
expected to be completed prior to December 31, 1996.
F-23
<PAGE> 161
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Red Lion Hotels, Inc.:
We have audited the accompanying consolidated balance sheet of Red Lion
Hotels, Inc. and subsidiaries (the "Company") as of December 31, 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the ten month period ended December 31, 1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Red Lion Hotels, Inc. and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the ten month period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Portland, Oregon
February 24, 1996
F-24
<PAGE> 162
RED LION HOTELS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1996
1995 (UNAUDITED)
------------ --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 68,355 $ 36,509
Accounts receivable, net........................................... 19,709 21,761
Accounts receivable -- affiliates.................................. 12,096 4,572
Inventories........................................................ 6,339 6,286
Prepaid expenses and other current assets.......................... 5,461 4,596
Deferred income taxes.............................................. 2,306 2,796
-------- --------
Total current assets....................................... 114,266 76,520
Property and Equipment, net.......................................... 336,269 375,567
Investment in and Advances to Unconsolidated Joint Ventures.......... 16,429 16,274
Goodwill, net........................................................ 21,508 21,147
Deferred Income Taxes................................................ 6,571 4,773
Due from Affiliate................................................... 20,828 25,758
Other Assets, net.................................................... 11,049 11,844
-------- --------
$526,920 $531,883
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 23,618 $ 18,086
Accrued expenses................................................... 37,197 38,288
Current portion of long-term debt.................................. 7,759 9,219
-------- --------
Total current liabilities.................................. 68,574 65,593
Long-Term Debt, net of current portion............................... 215,608 204,109
Other Long-Term Obligations.......................................... 11,169 11,776
Joint Venturers' Interest............................................ 1,290 1,290
-------- --------
Total liabilities.......................................... 296,641 282,768
-------- --------
Commitments and Contingencies (Notes 5 and 11)
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
0 shares issued and outstanding................................. -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
31,312,500 shares issued and outstanding........................ 313 313
Additional paid-in capital and net assets contributed.............. 214,361 214,361
Retained earnings.................................................. 15,605 34,441
-------- --------
Total stockholders' equity................................. 230,279 249,115
-------- --------
$526,920 $531,883
======== ========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 163
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOUR SIX
MONTHS ENDED MONTHS ENDED
TEN JUNE 30, JUNE 30,
MONTHS ENDED 1995 1996
DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED)
----------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Rooms......................................... $ 115,370 $ -- $ 147,445
Food and beverage............................. 72,711 -- 81,389
Other......................................... 26,688 3,421 29,133
----------- ----------- -------
Total revenues........................ 214,769 3,421 257,967
Operating Costs and Expenses:
Departmental direct expenses:
Rooms...................................... 28,723 -- 36,991
Food and beverage.......................... 54,181 -- 63,634
Other...................................... 7,996 -- 10,079
Property indirect expenses.................... 43,668 -- 55,163
Other costs................................... 17,111 189 18,028
Depreciation and amortization................. 8,715 721 9,167
Payments due to owners of managed hotels...... 19,428 295 26,178
Expenses resulting from the Formation and
Offering................................... 14,662 -- --
----------- ----------- -------
Operating Income.............................. 20,285 2,216 38,727
Equity in Earnings of Unconsolidated Joint
Ventures...................................... 685 -- 1,423
Other Income (Expense):
Interest income............................... 1,600 -- 1,275
Interest expense.............................. (9,707) (1,256) (9,054 )
----------- ----------- -------
Total other expense................... (8,107) (1,256) (7,779 )
----------- ----------- -------
Income Before Joint Venturers' Interests...... 12,863 960 32,371
Joint Venturers' Interests...................... (1,365) (570) (978 )
----------- ----------- -------
Income Before Income Taxes.................... 11,498 390 31,393
Income Tax Benefit (Expense).................... 4,107 1,044 (12,557 )
----------- ----------- -------
Net Income...................................... $ 15,605 $ 1,434 $ 18,836
=========== =========== =======
Earnings Per Common Share....................... $ 1.00 $ 14,340 $ 0.60
=========== =========== =======
Weighted Average Common Shares Outstanding...... 15,656,300 100 31,312,500
=========== =========== =======
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 164
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
COMMON STOCK CAPITAL AND
----------------- NET ASSETS RETAINED
SHARES AMOUNT CONTRIBUTED EARNINGS TOTAL
------ ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1995............. -- $ -- $ -- $ -- $ --
Net assets contributed................... 20,900 209 34,427 -- 34,636
Net proceeds from initial public
offering............................... 10,063 101 173,287 -- 173,388
Issuance of shares in conjunction with
termination of an incentive unit
plan................................... 350 3 6,647 -- 6,650
Net income............................... -- -- 15,605 15,605
------ ---- -------- ------- --------
Balance at December 31, 1995............. 31,313 313 214,361 15,605 230,279
Net income (unaudited)................... -- -- -- 18,836 18,836
------ ---- -------- ------- --------
Balance at June 30, 1996 (unaudited)..... 31,313 $313 $ 214,361 $ 34,441 $249,115
====== ==== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 165
RED LION HOTELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
TEN MONTHS ENDED 1995 1996
DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED)
----------------- ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income......................................................... $ 15,605 $ 1,434 $ 18,836
Adjustments to reconcile net income to cash provided by operating
activities:
Income attributable to joint venturers' interest................. 1,365 570 978
Distributions to joint venturers................................. (1,702) -- (557)
Equity in earnings of unconsolidated joint ventures.............. (685) -- (1,423)
Depreciation and amortization.................................... 8,715 721 9,167
Amortization of other assets..................................... 1,092 83 656
Deferred income taxes............................................ (8,877) (1,200) 1,308
Issuance of common stock in connection with termination of the
incentive unit plan............................................ 6,650 -- --
Changes in assets and liabilities:
Accounts receivable............................................ (1,097) (1,278) (2,052)
Accounts receivable -- affiliates.............................. (2,015) -- 7,524
Inventories.................................................... (413) -- 53
Prepaid expenses and other current assets...................... (427) -- 865
Accounts payable, accrued expenses and other long-term
obligations................................................. 17,683 -- (4,255)
-------- ------- --------
Net cash provided by operating activities................... 35,894 330 31,100
-------- ------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment, net............................ (16,499) (330) (48,735)
Net increase in due from affiliates................................ (8,017) -- (4,930)
Net increase in other assets....................................... -- (820)
Net (increase) decrease in advances to and investments in
unconsolidated joint ventures.................................... (3,509) -- 1,451
Distributions from unconsolidated joint ventures................... 160 -- 127
Other investing activities......................................... 501 -- --
-------- ------- --------
Net cash used in investing activities....................... (27,364) (330) (52,907)
-------- ------- --------
Cash Flows from Financing Activities:
Cash received from contribution of assets.......................... 10,480 -- --
Net proceeds from common stock issued in the Offering.............. 173,388 -- --
Proceeds from long-term borrowings................................. 135,000 -- 9,000
Repayment of long-term borrowings.................................. (256,467) -- (19,237)
Increase in note payable........................................... 165 -- 198
Other financing activities......................................... (2,741) -- --
-------- ------- --------
Net cash provided by (used in) financing activities......... 59,825 -- (10,039)
-------- ------- --------
Net Increase (Decrease) in Cash and Cash Equivalents................. 68,355 -- (31,846)
Cash and Cash Equivalents at Beginning of Period..................... -- -- 68,355
-------- ------- --------
Cash and Cash Equivalents at End of Period........................... $ 68,355 $ -- $ 36,509
======== ======= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest......................................................... $ 8,133 $ 1,252 $ 9,211
Income taxes..................................................... 2,945 -- 7,945
Noncash Investing and Financing Activities:
Net assets (other than cash) contributed by Historical Red Lion
(Note 1), including property and equipment of $327,928,
long-term debt of $344,500, investments in and advances to
unconsolidated joint ventures of $12,790, other assets and
amounts receivable from affiliates of $54,644, other long-term
obligations of $7,396, joint venturers' interests of $1,742,
and current assets and current liabilities of $29,572 and
$47,140, respectively.......................................... $ 24,156 $ 93 $ --
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE> 166
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Red Lion Hotels, Inc. together with its subsidiaries ("Red Lion" or the
"Company") is a full service hospitality company operating 55 hotels in 10
western states. A typical Red Lion property is a full service hotel located in
close proximity to a business or commercial center, airport, major highway or
tourist destination. Red Lion hotels target the business traveler (both
individual and group) and compete primarily in the upscale segment of the
lodging industry.
The Company was incorporated in Delaware in March 1994 as a wholly owned
subsidiary of Red Lion, a California Limited Partnership ("Historical Red
Lion"). The Company's operations commenced in March 1995 when Historical Red
Lion contributed to the Company a 49.4% interest in a joint venture (the "Santa
Barbara Joint Venture") which owns Fess Parker's Red Lion Resort (the "Santa
Barbara Hotel") located in Santa Barbara, California.
The Company initiated an initial public offering of a portion of its common
stock on July 26, 1995 (the "Offering"), which closed August 1, 1995, raising
net proceeds of approximately $173 million. After giving effect to the Offering,
Historical Red Lion owns approximately 67% of the Company.
On August 1, 1995, prior to the closing of the Offering, Historical Red
Lion repaid certain of its outstanding indebtedness with existing cash balances
and contributed substantially all of its assets (excluding 17 hotels and certain
related obligations (the "Leased Hotels"), certain minority joint venture
interests and certain current assets) and certain liabilities to the Company
(the "Formation"). Historical Red Lion subsequent to the Formation and
refinancing of the Company (the "Partnership") retained the Leased Hotels and
the related goodwill, deferred loan costs and mortgage debt, certain minority
joint venture interests and certain current assets.
On August 1, 1995, the Company refinanced or repaid substantially all of
the debt contributed pursuant to the Formation with the net proceeds of the
Offering, borrowings under a new term loan and existing cash (the
"Refinancing"). The Company also entered into a long-term master lease with the
Partnership for the Leased Hotels.
Basis of Presentation
The accompanying financial statements reflect the contribution, at
Historical Red Lion's net book value, of the interest in the Santa Barbara Joint
Venture. Accordingly, the Santa Barbara Joint Venture has been consolidated with
the Company in the accompanying financial statements prior to the Formation. In
connection with the Formation, the other assets and liabilities contributed by
Historical Red Lion have been recorded in the accompanying consolidated
financial statements at Historical Red Lion's net book value at August 1, 1995.
There were no operations of the Company prior to the contribution of the Santa
Barbara Joint Venture. Therefore, the accompanying consolidated financial
statements reflect ten months rather than twelve months of 1995 operations,
consisting of the results of the Santa Barbara Joint Venture for ten months and
the results of the other hotels and operations contributed pursuant to the
Formation for five months.
The Santa Barbara Joint Venture contribution did not transfer the right to
manage the operations of the Santa Barbara Hotel to the Company. Therefore, the
financial statements of the Company prior to the Formation do not include the
operating revenues and expenses of the Santa Barbara Hotel or that hotel's
current assets and current liabilities. These amounts were included in the
financial statements of Historical Red Lion, which continued to manage the Santa
Barbara Hotel. The right to manage the operations of the Santa Barbara Hotel was
transferred to the Company at Formation, and that hotel's operating revenues,
expenses and current assets and current liabilities are reflected in the
consolidated financial statements of the Company beginning August 1, 1995.
F-29
<PAGE> 167
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements include seven joint ventures in which
the Company holds a 49.9% interest. When combined with the interests retained by
the Partnership, the Company and the Partnership own at least 50% of these joint
ventures. Pursuant to an agreement between the Company and the Partnership, the
Company has the power, in its sole discretion, to prescribe the Partnership's
conduct with respect to the joint venture interests held by the Partnership.
Accordingly, the Company consolidates the four joint ventures in which the
combined interests of the Partnership and the Company exceed 50%. The Company
consolidates one of its 50% owned joint ventures because the Company controls
the joint venture through contractual arrangements, has the majority of capital
at risk through its significant ownership percentage and has guaranteed 100% of
the joint venture's third party debt. The unconsolidated joint ventures,
including one other 10% owned joint venture, are accounted for on the equity
method of accounting.
In 1987, Historical Red Lion sold its interest in 10 hotels to Red Lion
Inns Limited Partnership, a publicly traded limited partnership (the "MLP"). Red
Lion Properties, Inc., the general partner of the MLP, was contributed to the
Company in connection with the Formation and is a wholly owned subsidiary of the
Company. The MLP's public limited partners have an effective 98.01% ownership
interest in the MLP's hotels with the general partner retaining the remaining
1.99 % ownership interest. The Company operates the MLP's hotels under a
management agreement.
Operating revenues, expenses and current assets and current liabilities of
the MLP and other management contract hotels (including the three unconsolidated
joint ventures which are also managed by the Company) are included in the
accompanying consolidated financial statements because the operating
responsibilities associated with these hotels are substantially the same as
those for owned hotels. The operating profit, net of management fee income
earned by the Company for managed hotels, is recorded as an expense in the
accompanying consolidated statements of income. The consolidated financial
statements include current assets and current liabilities of $9,933,000 and
$8,843,000 (unaudited) at December 31, 1995 and June 30, 1996, respectively, and
operating revenues of $73,685,000 and $95,128,000 (unaudited) and operating
expenses of $49,263,000 and $62,811,000 (unaudited) for the ten months ended
December 31, 1995 and six months ended June 30, 1996, respectively, related to
the operation of the MLP and other management contract hotels.
One wholly owned hotel was acquired by Historical Red Lion in 1989 subject
to a nonrecourse cash flow mortgage which requires interest payments contingent
on achieving certain levels of performance. Because of the nonrecourse and cash
flow nature of the loan, the mortgage has not been recorded as an obligation and
the property and equipment of the hotel are excluded from the consolidated
financial statements. The mortgage is in substance a management contract with a
purchase option. Accordingly, the hotel is treated as a management contract in
the accompanying consolidated financial statements.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. While
management endeavors to make accurate estimates, actual results could differ
from estimates.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
The unaudited consolidated financial statements reflect, in the opinion of
the management, all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of the Company at June 30,
1996 and the results of operations and cash flows for the six month period ended
June 30, 1996 and for the four month period ended June 30, 1995. Interim results
are not necessarily indicative of results to be expected for a full fiscal year.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-30
<PAGE> 168
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks, time
deposits, commercial paper and U.S. government and other short-term securities
with maturities of three months or less when purchased. The carrying amount
approximates fair value because of the short-term maturity of these instruments.
The balance at December 31, 1995 and June 30, 1996 includes commercial paper of
$6,991,000 and $0 (unaudited) and government obligations of $58,443,000 and
$32,463,000 (unaudited), respectively.
Accounts Receivable
Accounts receivable are shown net of allowances for doubtful accounts of
$361,000 and $221,000 (unaudited) at December 31, 1995 and June 30, 1996,
respectively.
Inventories
Inventories consist primarily of consumable supplies as well as food and
beverage products held for sale. Inventories are valued at the lower of cost,
determined on a first-in, first-out basis, or market.
Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
Land........................................... $ 48,126 $ 53,195
Buildings and improvements..................... 321,940 345,580
Furnishings and equipment...................... 122,351 131,166
Construction in progress....................... 14,834 19,803
---------
507,251 549,744
Accumulated depreciation....................... (170,982) (174,177)
---------
$ 336,269 $ 375,567
=========
</TABLE>
Property and equipment are stated at Historical Red Lion's carrying value
at the date of contribution, plus additions, at cost, made subsequent to the
contribution. Additions and improvements are capitalized at cost, including
interest costs incurred during construction. Normal repairs and maintenance are
charged to expense as incurred. Upon the sale or retirement of property and
equipment, the cost and related accumulated depreciation and amortization are
removed from the respective accounts and the resulting gain or loss, if any, is
included in income.
Base stock (linens, china, silverware and glassware) is depreciated to 50%
of its initial cost on a straight-line basis over three years. Subsequent
replacements are expensed when placed in service. The carrying value of base
stock is included in furnishings and equipment.
Depreciation is computed on a straight-line basis using the following
estimated useful lives:
<TABLE>
<S> <C>
Building and improvements..................................... 10 to 40 years
Furnishings and equipment..................................... 5 to 15 years
</TABLE>
F-31
<PAGE> 169
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment in and Advances to Unconsolidated Joint Ventures
The Company is a partner in three joint ventures which are accounted for on
the equity method of accounting. The Company's equity in and advances to these
joint ventures are shown under the caption "Investment in and Advances to
Unconsolidated Joint Ventures" in the consolidated balance sheets. Because the
Company manages these joint ventures, they are accounted for as managed hotels,
and therefore, the operating revenues, expenses and current assets and current
liabilities of the hotels are included in the consolidated financial statements.
Profits and losses of these joint ventures are allocated in accordance with
the joint venture agreements. The Company's share of the income or losses of the
joint ventures (after management fee income) is recorded under the caption
"Equity in Earnings of Unconsolidated Joint Ventures" in the consolidated
statements of income. If a joint venture experiences operating losses which
reduce the other joint venture partner's equity to a zero balance, the loss
which would otherwise be attributable to the other joint venturer is absorbed
within the Company's consolidated operating results.
Summarized financial information for the unconsolidated joint ventures,
excluding the current assets and current liabilities and operating revenues and
expenses included in the Company's consolidated financial statements, is as
follows (in thousands and unaudited):
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Property and equipment, net....................... $ 35,263 $ 34,486
Goodwill, net..................................... 678 667
Deferred loan costs............................... 541 498
-------- ---------
$ 36,482 $ 35,651
======== =========
LIABILITIES AND PARTNERS' DEFICIT
Net working capital............................... $ 1,741 $ 842
Long-term debt, excluding current portion......... 21,841 21,364
Company advances.................................. 27,384 27,606
Partners' deficit................................. (14,484) (14,161)
-------- ---------
$ 36,482 $ 35,651
======== =========
</TABLE>
<TABLE>
<CAPTION>
TEN MONTHS
ENDED SIX MONTHS
DECEMBER ENDED
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Revenues (payments from the Company representing
gross operating profit, net of management
fees)........................................... $ 2,729 $ 4,996
Expenses (principally depreciation and interest on
outside debt and Company advances).............. 3,276 5,215
----------- -----------
Net............................................... $ (547) $ (219)
============ ===========
</TABLE>
Goodwill
Historical Red Lion acquired interests in certain hotels, motor inns and
supporting auxiliary enterprises in 1985. Goodwill resulted from the acquisition
and represents the excess of purchase price over the fair value of net assets
acquired. Goodwill relates primarily to the hotels contributed to the Company by
Historical Red Lion and is being amortized on a straight-line basis over its
estimated useful life of approximately 40 years. Amortization expense was
$301,000 and $361,000 (unaudited) for the ten months ended December 31, 1995
F-32
<PAGE> 170
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and six months ended June 30, 1996, respectively. Accumulated amortization
aggregated $7,219,000 and $7,580,000(unaudited) at December 31, 1995 and June
30, 1996, respectively.
Deferred Loan Costs
Deferred loan costs incurred in connection with the Company's indebtedness
are included in other assets, net, and are amortized over the life of the
associated debt.
Accrued Expenses
Accrued expenses include the following items (in thousands):
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
Accrued payroll and related costs................. $22,253 $20,085
Accrued interest.................................. 2,311 2,153
Other............................................. 12,633 16,050
------- -------
$37,197 $38,288
======= =======
</TABLE>
Other Long-Term Obligations
The Company provides for the uninsured portions of medical, property,
liability and workers compensation claims. Such costs are estimated each year
based on historical claims data relating to operations. While actual results may
vary from estimates, the Company maintains stop-loss insurance to minimize the
effect of large claims on financial results. The long-term portion of accrued
claims costs relates primarily to general liability and workers compensation
claims which are not expected to be paid within one year and is reflected in
other long-term obligations.
The Company's retirement savings plan includes a non-qualified Supplemental
Employee Retirement Plan ("SERP") designed to supplement key employees whose
benefits would otherwise be reduced due to certain statutory limits of a 401(k)
plan. In addition, the Chief Executive Officer of the Company has entered into a
separate supplemental income retirement agreement with the Company. Both of
these obligations are reflected in long-term obligations.
Income Taxes
The Company utilizes the liability method to account for income taxes.
Under the liability method, deferred taxes are provided for the effects of
temporary differences between the financial statement and tax bases of assets
and liabilities.
Property Indirect Expenses
Property indirect expenses include undistributed property expenses for
selling, general and administrative, utilities, repairs and maintenance and an
allocation of certain corporate services (such as marketing, legal, tax and
accounting services) related to the operation of the properties.
Other Costs
Other costs include corporate administrative and general expenses, property
taxes, insurance, leases and other miscellaneous costs.
F-33
<PAGE> 171
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Payments Due to Owners of Managed Hotels
Payments due to owners of managed hotels is analogous to rent owed to
outside owners due to the nature of the management contracts and the control the
Company has over operations. The amounts shown in the consolidated statement of
income are net of management fee income of $4,994,000 and $6,138,000 (unaudited)
earned by the Company for the ten months ended December 31, 1995 and six months
ended June 30, 1996, respectively.
Joint Venturers' Interests
The Company is a partner in eight joint ventures, each of which owns a
separate hotel. The assets and liabilities of five of the eight joint ventures
are fully consolidated due to the Company's control of the ventures. The other
joint ventures are accounted for on the equity method of accounting (see
"Investment in Unconsolidated Joint Ventures"). The caption "joint venturers'
interests" represents the net equity attributable to the joint venturers'
interests, including their share of income, losses, distributions and
contributions.
Profits and losses of each joint venture are allocated in accordance with
the joint venture agreement. If a joint venture experiences operating losses
which reduce the other joint venture partner's equity to a zero balance, the
loss which would otherwise be attributable to the other joint venturer is
absorbed within the Company's consolidated operating results.
Earnings per Share and Stock Options
Earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Common stock equivalents have not
been included in the earnings per share calculation since their effect is
immaterial.
Impairment of Long-Lived Assets
In March 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Management evaluates its ability
to recover the recorded value of long-lived assets such as property and
equipment, goodwill, investments in and advances to unconsolidated joint
ventures and deferred loan costs at least annually, unless events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If the sum of projected undiscounted future cash flows is less than
the carrying amount of the asset, an impairment loss would be recognized to the
extent that the carrying amount of the asset differs from its fair value
measured on a discounted cash flow basis. No impairment losses were recorded for
the ten months ended December 31, 1995 or six months June 30, 1996.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," effective January 1, 1996. SFAS No. 123 defines a fair value
based method of accounting for employee stock options or similar instruments and
permits companies to adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows a company to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by APB Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees." The Company has elected to continue to measure
compensation cost in conformity with APB No. 25 and to make pro forma
disclosures of net income and earnings per share in its annual report on Form
10-K for the year ended December 31, 1996, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied.
F-34
<PAGE> 172
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
Term loan, LIBOR plus 2% (8.0% at December 31,
1995 and 7.5% at June 30, 1996) payable
through 2002................................. $ 133,750 $ 123,869
Mortgages, variable rates (7.0% - 8.3% at
December 31, 1995 and 6.6% - 7.0% at June 30,
1996) payable through 1998................... 84,900 84,545
Note payable, 8.69, payable through 2022....... 4,717 4,914
-------- ---------
223,367 213,328
Current portion of long-term debt.............. (7,759) (9,219)
-------- ---------
Long-term debt, net of current portion......... $ 215,608 $ 204,109
======== =========
</TABLE>
The annual principal requirements for the five years subsequent to June 30,
1996 are as follows (in thousands and unaudited):
<TABLE>
<S> <C>
1997...................................................... $ 9,219
1998...................................................... 101,045
1999...................................................... 19,375
2000...................................................... 20,000
2001...................................................... 27,125
Thereafter................................................ 36,564
--------
$213,328
========
</TABLE>
The Company has available a $130 million credit line facility of which $80
million is available for acquisitions and $50 million is available for working
capital requirements. The credit line facility has a term of seven years. The
term loan and credit line facility (collectively the "Credit Facility") carry a
variable interest rate based on LIBOR plus 2% (8.0% at December 31, 1995 and
7.5% at June 30, 1996). Quarterly mandatory prepayments which increase over the
term of the Credit Facility are required. In addition, in March of each year a
mandatory prepayment of the Credit Facility is required in an amount equal to
50% of annual excess cash flow (as defined in the credit agreement) for the
prior fiscal year. The $80.0 million available for acquisitions is anticipated
to be utilized by the Company to finance the addition of hotels to the Red Lion
chain through acquisitions, management contracts, joint ventures or leases. At
June 30, 1996, there was no outstanding balance on the credit line facility. All
debt and credit facilities are secured by the hotels owned by the Company or by
its joint venture interests.
The Company's credit facilities contain covenants which, among other
things, prohibit the payment of cash dividends, require certain levels of
tangible net worth and require the maintenance of debt coverage, interest
coverage, leverage and debt-to-equity ratios. As of December 31, 1995, the
Company was in compliance with these covenants.
The Company had outstanding letters of credit totaling $5,604,000
(unaudited) at June 30, 1996. These letters of credit expire at various dates
ranging from July to October, 1996.
F-35
<PAGE> 173
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements in order to reduce
its exposure to interest rate fluctuations. The agreements have effectively
converted floating rate debt, which is tied to LIBOR, to fixed rates.
Accordingly, the net interest received or paid on the interest rate swap is
recorded as an adjustment to interest expense.
At December 31, 1995 and June 30, 1996, the Company had three interest rate
swap agreements outstanding which have substantially converted $75 million of
debt from floating LIBOR based rates to fixed rates ranging from 5.19% to 5.57%.
The agreements expire from September 1997 to March 1998. Interest income earned
by the Company relating to interest rate swap agreements for the ten months
ended December 31, 1995 and six months ended June 30, 1996, was $215,000 and
$74,000 (unaudited), respectively, and is included as an adjustment to interest
expense.
These agreements are with major commercial banks and management does not
anticipate a credit loss due to nonperformance.
5. LEASES
Certain hotels are located on leased land. Certain leases contain rental
provisions and renewal options which are based on a percentage of revenues,
changes in the Consumer Price Index or changes in property values. All land
leases extend over the remaining estimated useful lives of the buildings
situated thereon. The Company also leases certain office space and equipment
under operating leases. The Company leases 17 hotels (Leased Hotels) from the
Partnership. The Leased Hotels are leased for an initial term of 15 years. The
Company may extend the lease on a hotel-by-hotel basis for five additional
five-year periods at comparable terms. Total land, office and equipment and
Leased Hotels rent expense was $6,676,000 and $8,342,000 (unaudited) for the ten
months ended December 31, 1995 and six months ended June 30, 1996, respectively.
Future minimum rental payments required under land, office and equipment leases
and Leased Hotels for the five years subsequent to June 30, 1996 are as follows
(in thousands and unaudited):
<TABLE>
<S> <C>
1997...................................................... $ 16,403
1998...................................................... 16,367
1999...................................................... 16,050
2000...................................................... 16,029
2001...................................................... 16,004
Thereafter................................................ 155,490
--------
$236,343
========
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) retirement plan for all full
time, non-union employees who have completed one year of service and who have
attained the age of 21 years. Under the 401(k) plan, the Company contributes
amounts equal to each participant's elected contributions up to 6% of eligible
compensation. Pension expense under this plan was $723,000 and $1,385,000
(unaudited) for the ten months ended December 31, 1995 and six months ended June
30, 1996, respectively.
The Company also has a non-qualified supplemental employee retirement plan.
The SERP was designed to complement the 401(k) plan by restoring benefits
otherwise lost by certain employees due to the statutory limits in the 401(k)
plan. The pension expense under the SERP was $80,000 and $128,000 (unaudited)
for the ten months ended December 31, 1995 and six months ended June 30, 1996,
respectively.
F-36
<PAGE> 174
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1995, the Company adopted the 1995 Equity Participation Plan (the
"Incentive Plan") which provides for the issuance of incentive or nonqualified
stock options, stock appreciation rights and other awards to key employees,
officers, consultants and non-employee directors at the discretion of the
Compensation Committee. The vesting period is determined at the date of grant
and generally ranges from zero to five years beginning on the date of grant. The
following table summarizes stock option transactions:
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE
OPTION PER SHARE
------------ ------------------
<S> <C> <C>
Options outstanding at February 28, 1995............. -- --
Options granted, at fair market value on date of
grant.............................................. 2,250,833 $19.00 to $21.50
Options forfeited.................................... (15,000) $19.00
---------
Options outstanding at December 31, 1995............. 2,235,833 $19.00 to $21.50
Options granted, at fair market value on date of
grant (unaudited).................................. 142,500 $18.25 to $20.875
Options forfeited.................................... (161,000) $19.00
---------
Options outstanding at June 30, 1996 (unaudited)..... 2,217,333 $18.25 to $21.50
=========
</TABLE>
At December 31, 1995 and June 30, 1996, there were 696,667 options
exercisable and 1,064,157 and 1,082,667 (unaudited) shares available for grant
under the Incentive Plan, respectively.
7. RELATED PARTY TRANSACTIONS
Prior to the Formation the Santa Barbara Hotel was operated and managed by
Historical Red Lion. Management fees paid to Historical Red Lion were $385,000
for the five months ended July 31, 1995 and are included in other costs.
Investments in and advances to unconsolidated joint ventures includes two
notes receivable from one joint venture in the amounts of $1,500,000 and
$2,009,000 at December 31, 1995 and $1,387,000 and $2,009,000 (unaudited) at
June 30, 1996. The notes bear interest at a fixed rate of 10.0% and prime plus
1.0% (9.5% at December 31, 1995 and 9.25% at June 30, 1996), respectively. The
$1,387,000 note matures on November 21, 2003. The $2,009,000 note has an
unspecified term and is to be repaid based on cash flow available for
distribution, as defined. In addition, other assets, net, includes a note
receivable from a joint venture partner in the amount of $1,628,000 and
$1,714,000 (unaudited) at December 31, 1995 and June 30, 1996, respectively,
which bears interest at a rate based on prime (10.5% at December 31, 1995 and
10.2% at June 30, 1996) and has an unspecified term with repayment amounts based
on cash flow available for distribution, as defined. In addition, accounts
receivable-affiliates includes $4,120,000 and $3,448,000 (unaudited) at December
31, 1995 and June 30, 1996, respectively, receivable from the management
contract hotels and other related parties other than Red Lion Inns Limited
Partnership.
The Company leases the Leased Hotels from the Partnership. Annual lease
payments aggregate $15,000,000. Lease expense for the period from the Formation
through December 31, 1995 and for the six months ended June 30, 1996 totaled
$6,250,000 and $7,500,000 (unaudited), respectively.
Transactions with Red Lion Inns Limited Partnership
A wholly owned subsidiary of the Company serves as general partner and owns
1.99 percent of the MLP. The general partner is responsible for management and
administration of the MLP. In accordance with the partnership agreement, the MLP
reimburses the Company for related administrative costs.
Under a management agreement, the MLP pays base and incentive management
fees to the Company. Base management fees payable to the Company are equal to 3%
of the annual gross revenues of the MLP hotels. Incentive management fees
payable to the Company are equal to the sum of 15% of adjusted gross
F-37
<PAGE> 175
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating profit up to $36 million (operating profit target) and 25% of adjusted
gross operating profit in excess of the operating profit target. Adjusted gross
operating profit is gross operating profit less base management fees.
Incentive management fees are only payable to the extent that cash flow
available for distributions and incentive management fees exceeds the amount
required to pay the annual priority distribution to the MLP's limited partners.
Cash flow is defined as pre-tax income (or loss) before noncash charges
(primarily depreciation and amortization) and incentive management fees, but
after the reserve for capital improvements and principal payments on certain
debt.
The Company also charges the MLP hotels for their pro rata share of support
services such as computer, advertising, public relations, promotional and sales
and central reservation services.
All MLP personnel are employees of the Company. All costs for services of
such employees are reimbursed to the Company by the MLP. These costs include
salaries, wages, payroll taxes and other employee benefits. Additionally,
auxiliary enterprises owned by the Company sell operating supplies, furnishings
and equipment to the MLP.
The aggregate amounts, excluding personnel related expenses, charged by the
Company to the MLP under the arrangements described above are as follows (in
thousands):
<TABLE>
<CAPTION>
TEN MONTHS SIX MONTHS
ENDED ENDED
DECEMBER JUNE 30,
31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
Management fees................................... $ 3,614 $ 4,336
Support services.................................. 1,732 3,430
Purchases from auxiliary enterprises.............. 6,064 7,195
General Partner administrative expenses........... 197 283
</TABLE>
Included in accounts receivable-affiliates and due from affiliate is
$19,078,000 and $22,455,000 (unaudited) at December 31, 1995 and June 30, 1996,
respectively, representing amounts receivable from the MLP primarily for
advances made by the Company and Historical Red Lion for capital improvements
which exceeded the 3% reserve established in accordance with the provisions of
the management agreement. Such amounts are presented net of current assets and
current liabilities related to the managed MLP hotels of $2,194,000 and
$3,231,000 (unaudited) at December 31, 1995 and June 30, 1996, respectively. The
current balance of $2,823,000 and $1,064,000 (unaudited) at December 31, 1995
and June 30, 1996, respectively, is included in accounts receivable-affiliates.
The remaining balance of $16,255,000 and $21,391,000 (unaudited) at December 31,
1995 and June 30, 1996, respectively, is classified as due from affiliate.
Amounts receivable from the MLP earn interest at the rate of prime plus 0.5%
(9.0% at December 31, 1995 and 8.75% at June 30, 1996).
Accounts receivable-affiliates and due from affiliate also include certain
other advances to and deferred incentive management fees receivable from the
MLP. A total of $3,726,000 was advanced to the MLP to fund distributions during
the first 36 months of the MLP's operations. The advance is non-interest
bearing, has an unspecified term and is to be repaid out of available cash flow
or refinancing proceeds. Additionally, non-interest bearing deferred incentive
management fees receivable of $6,000,000 were contributed to the Company in the
Formation. At December 31, 1995, $5,153,000 and $847,000 are classified as
accounts-receivable-affiliates and due from affiliate, respectively. The Company
received $5,299,000 (unaudited) of such fees during the six months ended June
30, 1996. Of the total remaining balance of $701,000 (unaudited), $641,000
(unaudited) is classified as due from affiliate and $60,000 (unaudited) as
accounts receivable-affiliates at June 30, 1996.
F-38
<PAGE> 176
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized income statement information for the MLP is as follows (in
thousands and unaudited):
<TABLE>
<CAPTION>
AUGUST 1
THROUGH SIX MONTHS
DECEMBER ENDED
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Revenues.......................................... $16,884 $19,677
Net income........................................ 2,364 1,722
</TABLE>
Revenues of the MLP represent the gross operating profit (operating
revenues less operating expenses) of the MLP hotels as this amount is similar to
gross rent received from the Company to manage the hotels. As discussed in Note
1, the operating revenues and expenses of the MLP hotels are consolidated.
Consolidation of the operating revenues and expenses of the MLP does not affect
the Company's cash flow or net income except to the extent that management fees
were earned.
Summarized balance sheet information for the MLP, not included in the
accompanying consolidated balance sheets (including amounts due to the Company)
is as follows (in thousands and unaudited):
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
Cash............................................... $ 229 $ 448
Noncurrent assets, primarily property and
equipment........................................ 166,038 169,112
Current liabilities................................ 29,094 28,164
Long-term obligations, net of current portion...... 117,266 124,178
Deferred income taxes.............................. 1,673 1,919
Partners' equity................................... 18,234 15,299
</TABLE>
8. INCOME TAXES
Income tax benefit (expense) consists of the following (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS SIX MONTHS
ENDED ENDED
DECEMBER JUNE 30,
31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
Current
Federal......................................... $(3,928) $ (9,814)
State........................................... (842) (1,435)
Deferred
Federal......................................... 7,767 (1,144)
State........................................... 1,110 (164)
------- ---------
Total tax benefit (expense)..................... $ 4,107 $ (12,557)
======= =========
</TABLE>
F-39
<PAGE> 177
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective tax rate varies from the statutory rate due to the following
(in thousands):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED SIX MONTHS
DECEMBER JUNE 30,
31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
Expected tax expense at federal statutory rates... $(4,007) $ (10,988)
Deferred income tax benefit due to the difference
between the book and tax bases of net assets
contributed..................................... 9,736 --
Nondeductible Formation and Offering Costs........ (879) --
State income taxes................................ (586) (1,570)
Other............................................. (157) 1
-------- ---------
Total tax benefit (expense)............. $ 4,107 $ (12,557)
======== =========
</TABLE>
Since Historical Red Lion was a partnership, no deferred tax benefits had
been provided on the net assets contributed to the Company. In accordance with
SFAS No. 109, "Accounting for Income Taxes," the Company recorded net deferred
tax assets of $1.2 million and $8.5 million related to the contribution of the
Santa Barbara Joint Venture and the Formation, respectively.
The components of the net deferred income tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Basis difference in joint ventures.............. $ 9,720 $ 9,960
Accrued expenses................................ 5,851 5,852
Payroll related costs and other................. 1,734 1,687
------- ---------
Total deferred tax assets............... 17,305 17,499
DEFERRED TAX LIABILITIES:
Basis difference in property and equipment...... (8,428) (9,930)
------- ---------
Net deferred tax asset.......................... $ 8,877 $ 7,569
======= =========
Net deferred tax assets are presented as follows
(in thousands):
Current deferred tax asset........................ $ 2,306 $ 2,796
Noncurrent deferred tax asset..................... 6,571 4,773
------- ---------
Net deferred tax asset.................. $ 8,877 $ 7,569
======= =========
</TABLE>
9. EXPENSES RESULTING FROM THE FORMATION AND OFFERING
Expenses resulting from the Formation and Offering include certain
Formation costs of $1,314,000 and expenses resulting from the Offering of
$11,348,000 and $2,000,000 related to the termination of an incentive unit plan
and assumption of the obligation of a supplemental income retirement agreement,
respectively.
10. INSURANCE PROCEEDS (UNAUDITED)
On February 8, 1996, three of the Company's hotels were evacuated due to
flooding in northwestern Oregon and southwestern Washington. Two of the hotels
were damaged by flood waters, have reopened and have been repaired. The third
hotel was undamaged and reopened quickly. As the Company maintains flood and
business interruption insurance, management does not believe that the ultimate
outcome will have a
F-40
<PAGE> 178
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
material adverse effect on the results of operations or financial position of
the Company. Moreover, as the Company's flood insurance policy covers the
replacement cost of the damaged property, insurance proceeds will likely exceed
the net book value of the underlying property, resulting in the recognition of
gains when such proceeds are received.
11. COMMITMENTS AND CONTINGENCIES
At June 30, 1996, the Company had commitments relating to capital
improvement projects aggregating approximately $9,619,000 (unaudited).
In connection with the Formation, the Company agreed to indemnify the
Partnership with respect to any potential obligations arising out of the
transfer to the Company of certain assets and the assumption of certain
liabilities. Management is not aware of any such obligations.
Beginning August 2, 1996, for a period of 60 days, the Partnership has the
option to require the Company to purchase its retained joint venture interests
for $1,290,000.
The Company is party to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a material
adverse effect, if any, on the Company's financial position, results of
operations or liquidity.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments and the
methods and assumptions used to estimate such fair values at December 31, 1995,
are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
--------- ----------
<S> <C> <C>
Accounts receivable-affiliates (Note 7).............. $ 12,096 $ 11,990
Due from affiliate (Note 7).......................... 20,828 20,080
Long-term debt....................................... (223,367) (223,367)
Interest rate swaps.................................. -- 24
</TABLE>
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and other long-term obligations is a
reasonable approximation of their fair value.
The carrying value of accounts receivable-affiliates approximates fair
value due to the short-term nature of the receivable. The carrying value of due
from affiliate includes non-interest bearing receivables at December 31, 1995
aggregating $4,573,000, as discussed in Note 7. The fair value of due from
affiliate is determined using estimated rates for similar notes, based on
anticipated repayment dates. Based on borrowing rates currently quoted by
financial institutions for debt with similar terms and remaining maturities, the
carrying value of long-term debt approximates fair value.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly results of the Company are not comparable since the quarter
ended June 30, 1995 only includes the operations of one joint venture
contributed by Historical Red Lion in March 1995. The quarter ended September
30, 1995 includes the operations of that joint venture for the quarter as well
as the results of the Company subsequent to the Formation. The quarter ended
December 31, 1995 was the first full quarter of
F-41
<PAGE> 179
RED LION HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations subsequent to the Formation. Summarized quarterly financial data are
as follows (in thousands, except share and per share amounts, room and occupancy
statistics):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
JUNE DECEMBER
30, SEPTEMBER 30, 31, JUNE 30,
1995 1995 1995 1996
------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $ 2,764 $ 89,274 $ 122,074 $ 137,317
Operating income................................. $ 1,800 $ 4,290 $ 13,779 $ 24,343
Net income....................................... $ 220 $ 7,902 $ 6,269 $ 12,388
Earnings per share............................... $ 2,200 $ 0.38 $ 0.20 $ 0.40
Weighted average common shares outstanding....... 100 20,875,033 31,312,500 31,312,500
Occupancy percentage............................. -- 80.7% 65.5% 75.3%
Average room rate................................ $ -- $ 76.93 $ 73.51 $ 81.12
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED)
On August 7, 1996, the Company acquired a 319 room hotel in Houston, Texas
for $21.75 million. Additionally, on September 6, 1996, the 258 room hotel in
Modesto, California which was previously managed by Red Lion was purchased by
the Company for $15.6 million.
F-42
<PAGE> 180
INDEPENDENT AUDITORS' REPORT
To the Partners of Red Lion, a California Limited Partnership:
We have audited the accompanying consolidated statements of operations,
partners' equity and cash flows of Red Lion, a California Limited Partnership
("Historical Red Lion"), and subsidiaries for the seven month period ended July
31, 1995. These financial statements are the responsibility of Historical Red
Lion's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Historical Red Lion and subsidiaries for the seven month period ended
July 31, 1995, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 24, 1996
F-43
<PAGE> 181
INDEPENDENT AUDITORS' REPORT
To the Partners of Red Lion, a California Limited Partnership:
We have audited the accompanying consolidated balance sheet of Red Lion, a
California Limited Partnership ("Historical Red Lion"), and subsidiaries as of
December 31, 1994, and the related consolidated statements of operations,
partners' equity and cash flows for each of the two years in the period ended
December 31, 1994. These financial statements are the responsibility of
Historical Red Lion'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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Historical
Red Lion and subsidiaries as of December 31, 1994, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, Historical
Red Lion has given retroactive effect to the changes in accounting for their
investment in two joint ventures and its accounting for joint venturers'
interests. Also, as discussed in Note 1 to the consolidated financial
statements, effective January 1, 1993, Historical Red Lion changed their
accounting method for measuring impairment of hotel properties.
ARTHUR ANDERSEN LLP
Portland, Oregon
February 7, 1995
F-44
<PAGE> 182
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 27,804
Short-term debt securities.................................................... 40,891
Accounts receivable, net...................................................... 17,486
Accounts receivable, affiliates............................................... 13,138
Inventories................................................................... 6,361
Prepaid expenses and other current assets..................................... 3,729
--------
Total current assets.................................................. 109,409
--------
PROPERTY AND EQUIPMENT, NET..................................................... 514,807
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES..................................... 14,281
OTHER ASSETS:
Goodwill, net................................................................. 36,453
Other, net.................................................................... 18,394
--------
Total assets.......................................................... $693,344
========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 19,290
Accrued expenses.............................................................. 33,007
Current portion of long-term debt............................................. 108,358
--------
Total current liabilities............................................. 160,655
--------
LONG-TERM DEBT, EXCLUDING CURRENT PORTION..................................... 388,944
OTHER LONG-TERM OBLIGATIONS................................................... 7,682
JOINT VENTURERS' INTEREST..................................................... 905
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4 & 5)
PARTNERS' EQUITY.............................................................. 135,158
--------
Total liabilities and partners' equity................................ $693,344
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE> 183
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
SEVEN MONTHS 31,
ENDED JULY 31, ---------------------
1995 1994 1993
-------------- -------- --------
<S> <C> <C> <C>
REVENUES:
Rooms................................................. $161,834 $257,699 $242,193
Food and beverage..................................... 92,570 159,154 156,242
Other................................................. 27,802 46,035 41,582
-------- -------- --------
Total revenues................................ 282,206 462,888 440,017
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Departmental direct expenses:
Rooms.............................................. 39,670 64,121 60,785
Food and beverage.................................. 73,269 124,070 123,518
Other.............................................. 10,592 17,586 16,935
Property indirect expenses............................ 60,342 99,673 95,118
Other costs........................................... 10,787 19,570 18,346
Depreciation and amortization......................... 17,053 31,313 31,144
Payments due to owners of managed hotels.............. 32,073 42,841 41,722
-------- -------- --------
OPERATING INCOME........................................ 38,420 63,714 52,449
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT VENTURES..... 1,614 1,327 1,213
OTHER EXPENSE:
Interest expense, net................................. (20,316) (32,737) (30,065)
Loss on sale of property.............................. -- -- (1,701)
-------- -------- --------
Total other expense........................... (20,316) (32,737) (31,766)
-------- -------- --------
INCOME BEFORE JOINT VENTURERS' INTERESTS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE........................... 19,718 32,304 21,896
JOINT VENTURERS' INTERESTS.............................. 411 (1,321) (323)
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE.... 20,129 30,983 21,573
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NOTE 1).............................................. -- -- (29,878)
-------- -------- --------
NET INCOME (LOSS)....................................... $ 20,129 $ 30,983 $ (8,305)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE> 184
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
AND SEVEN MONTHS ENDED JULY 31, 1995
(In thousands)
<TABLE>
<CAPTION>
PARTNERS' ACCUMULATED
CAPITAL DEFICIT TOTAL
--------- ----------- --------
<S> <C> <C> <C>
BALANCE, December 31, 1992................................ $ 180,000 $ (67,520) $112,480
Net loss.................................................. -- (8,305) (8,305)
-------- -------- --------
BALANCE, December 31, 1993................................ 180,000 (75,825) 104,175
Net income................................................ -- 30,983 30,983
-------- -------- --------
BALANCE, December 31, 1994................................ 180,000 (44,842) 135,158
Net income................................................ -- 20,129 20,129
-------- -------- --------
BALANCE, July 31, 1995.................................... $ 180,000 $ (24,713) $155,287
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE> 185
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SEVEN MONTHS YEARS ENDED
ENDED DECEMBER 31,
JULY 31, --------------------
1995 1994 1993
------------ -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 20,129 $ 30,983 $ (8,305)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change................ -- -- 29,878
Loss on sale of property.............................. -- -- 1,701
Income attributable to joint venturers' interests..... (411) 1,321 323
Equity in earnings of unconsolidated joint ventures... (1,614) (1,327) (1,213)
Depreciation and amortization......................... 16,316 31,313 31,144
Amortization of other assets (principally deferred
loan costs)......................................... 737 1,927 1,612
Decrease (increase) in accounts receivable, net....... (1,185) (2,217) 72
Increase in accounts receivable, affiliates........... (1,441) (1,545) (6,253)
Decrease (increase) in inventories.................... 435 (520) 714
Decrease (increase) in prepaid expenses and other
current assets...................................... (1,305) 89 (249)
Increase (decrease) in accounts payable, accrued
expenses and other long-term obligations............ (4,548) 4,920 5,139
-------- -------- --------
Total adjustments........................................ 6,984 33,961 62,868
-------- -------- --------
Net cash provided by operating activities........ 27,113 64,944 54,563
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (15,858) (23,959) (20,002)
Proceeds from sale of property and equipment............. -- -- 1,190
Distributions to joint venturers......................... (252) (1,241) (467)
Purchase of short-term debt securities................... (19,694) (44,307) --
Proceeds from sales of short-term debt securities........ 60,585 3,416 --
Other investing activities, net.......................... 1,751 72 1,911
-------- -------- --------
Net cash (used in) provided by investing
activities..................................... 26,532 (66,019) (17,368)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings....................... $ 1,223 $ 1,892 $ 50,430
Net increase (decrease) in revolving lines of credit..... -- 72,000 (14,148)
Repayment of long-term debt.............................. (13,839) (45,523) (71,550)
Other financing activities............................... -- (768) (2,053)
-------- -------- --------
Net cash (used in) provided by financing
activities..................................... (12,616) 27,601 (37,321)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 41,029 26,526 (126)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 27,804 1,278 1,404
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 68,833 $ 27,804 $ 1,278
======== ======== ========
</TABLE>
F-48
<PAGE> 186
HISTORICAL RED LION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED YEARS ENDED
JULY 31, DECEMBER 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest,
net of capitalized portion............................ $ 23,633 $ 28,368 $ 26,738
NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property for noncash consideration........... $ -- $ -- $ 1,500
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE> 187
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Red Lion, a California Limited Partnership ("Historical Red Lion"),
acquired interests in certain hotels, motor inns and supporting auxiliary
enterprises on April 10, 1985, which were previously operating as Red Lion Inns
and Thunderbird Motor Inns. One of the previous principal owners contributed his
ownership interests in exchange for a limited partnership interest in Historical
Red Lion.
On April 14, 1987, Historical Red Lion sold its interest in 10 hotels to
Red Lion Inns Limited Partnership, a publicly traded limited partnership (the
"MLP"). Red Lion Properties, Inc., a wholly-owned subsidiary of Historical Red
Lion, is the general partner of the MLP. Since completion of this sale, the
MLP's limited partners have had an effective 98.01% ownership interest in the
hotels with the general partner retaining the remaining 1.99% ownership
interest. Historical Red Lion operates the MLP's hotels under a management
agreement.
Basis of Presentation
The accompanying consolidated financial statements include Historical Red
Lion, its wholly-owned subsidiaries and five of its seven partially owned joint
ventures. Historical Red Lion consolidates those entities which it controls.
Historical Red Lion is the managing general partner, controls and owns 75
percent, 66.67 percent, 66.67 percent, 51 percent and 50 percent of the joint
venture interests of the five consolidated joint ventures. Historical Red Lion
consolidates one of its 50 percent owned joint ventures because Historical Red
Lion controls the joint venture through contractual arrangements, has the
majority of capital at risk through its significant ownership percentage and has
guaranteed 100 percent of the joint venture's third party debt. The remaining
two joint ventures are accounted for using the equity method of accounting. Each
of the seven joint ventures is a single purpose venture whose only business is
the operation of one Red Lion hotel.
Operating revenues and expenses and current assets and current liabilities
of the MLP and other management contract hotels (including the two
unconsolidated joint ventures which are also managed by Historical Red Lion) are
included in the accompanying consolidated financial statements because the
operating responsibilities associated with these hotels are substantially the
same as those for owned hotels. The operating profit net of management fee
income for managed hotels is recorded as an expense in the accompanying
consolidated statements of operations. The consolidated financial statements
also include the following amounts related to managed hotels (including the two
unconsolidated joint ventures which are also managed by Historical Red Lion):
current assets and current liabilities of $8,121,000 at December 31, 1994;
operating revenues of $155,668,000, $166,283,000 and $110,684,000 for the years
ended December 31, 1993 and 1994 and for the seven month period ended July 31,
1995, respectively; and operating expenses of $107,801,000, $113,131,000 and
$72,216,000 for the years ended December 31, 1993 and 1994 and for the seven
month period ended July 31, 1995, respectively.
One wholly-owned hotel was acquired in 1989 subject to a non-recourse
cash-flow mortgage which requires interest payments contingent on achieving
certain levels of performance. Because of the non-recourse and cash flow nature
of the loan, the mortgage has not been recorded as an obligation, and the
property and equipment of the hotel are excluded from the accompanying
consolidated financial statements. The mortgage is in substance a management
contract with a purchase option. Accordingly, the hotel is treated as a
management contract in the accompanying consolidated financial statements.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
F-50
<PAGE> 188
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks, certificates
of deposit, time deposits and U.S. government and other short-term securities
with maturities of three months or less when purchased. The carrying amount
approximates fair value because of the short term maturity of these instruments.
Short-Term Debt Securities
Short-term debt securities include treasury bills, commercial paper and
other short-term debt securities with maturities greater than three months when
purchased. All of these securities mature within ten months from December 31,
1994. As the securities are actively traded, Historical Red Lion has classified
these investments as trading securities and these securities are recorded at
market which approximated cost at December 31, 1994.
Accounts Receivable
Accounts receivable are shown net of allowances for doubtful accounts of
$357,000 at December 31, 1994 and approximate fair value.
Inventories
Inventories consist primarily of consumable supplies as well as food and
beverage products held for sale. Inventories are valued at the lower of cost,
determined on a first-in, first-out basis, or market.
Property and Equipment
Property and equipment consist of the following at December 31, 1994 (in
thousands):
<TABLE>
<S> <C>
Land............................................................. $ 70,579
Buildings and improvements....................................... 500,922
Furnishings and equipment........................................ 183,506
Construction in progress......................................... 7,878
--------
762,885
Less allowance for depreciation and amortization................. (248,078)
--------
$ 514,807
========
</TABLE>
Additions and improvements are capitalized at cost, including interest
costs incurred during construction. There was no capitalized interest during the
seven month period ended July 31, 1995, or during each of the two years ended
December 31, 1994. Normal repairs and maintenance are charged to expense as
incurred. Upon the sale or retirement of property and equipment, the cost and
related accumulated depreciation and amortization are removed from the
respective accounts and the resulting gain or loss, if any, is included in
income.
Base stock (linens, china, silverware and glassware) is depreciated to 50%
of its initial cost on a straightline basis over three years. Subsequent
replacements are expensed when placed in service. The carrying value of base
stock is included in furnishings and equipment as noted above.
Depreciation and amortization of property and equipment were computed on a
straight-line basis using the following estimated useful lives:
<TABLE>
<S> <C>
Buildings....................................................... 40 years
Improvements.................................................... 10-15 years
Furnishings and equipment....................................... 3-15 years
</TABLE>
F-51
<PAGE> 189
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1993, Historical Red Lion prospectively changed the
estimated useful lives of its buildings to 40 years from lives averaging 32
years. The change was made to align building lives with actual experience and
common industry practice. The effect of the change was to decrease depreciation
expense for 1993 by approximately $2,600,000.
Effective January 1, 1993, Historical Red Lion changed its accounting
method for measuring impairment of hotel properties from using undiscounted
future cash flows to discounted future cash flows. Historical Red Lion made this
change because it believes this is a preferable method of measuring impairment
of hotel properties. As a result of this change, the 1993 consolidated financial
statements include a reduction in the carrying value of one hotel of $29,878,000
reflected as a cumulative effect of accounting change in the accompanying
consolidated statements of operations for the year ended December 31, 1993. The
reduction in depreciation expense as a result of this change was $994,000 in
1993.
Investment in Unconsolidated Joint Ventures
Historical Red Lion is a partner in two joint ventures that are accounted
for on the equity method of accounting. Historical Red Lion's equity in and
advances to these joint ventures are shown under the caption "Investment in
Unconsolidated Joint Ventures" in the accompanying consolidated balance sheets.
Because Historical Red Lion manages these joint ventures, they are accounted for
as managed hotels, and therefore, the operating working capital of the hotels
are consolidated in the accompanying consolidated balance sheets.
Profits and losses of these joint ventures are allocated in accordance with
the joint venture agreements. Because the hotels are accounted for as managed
hotels, the operating revenues and expenses are consolidated in the accompanying
statements of operations with Historical Red Lion's share of the income or
losses of the joint ventures (after management fee income) recorded under the
caption "Equity in Earnings of Unconsolidated Joint Ventures." If a joint
venture experiences operating losses which reduce the other joint venture
partner's equity to a zero balance, the loss which would otherwise be
attributable to the other joint venturer is absorbed within Historical Red
Lion's consolidated operating results.
Summarized financial information for the unconsolidated joint ventures,
excluding the working capital and operating revenues and expenses which are
consolidated in Historical Red Lion's consolidated financial statements, is as
follows (in thousands and unaudited):
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
ASSETS
Total current assets............................................ $ 470
Property and equipment, net..................................... 24,161
Goodwill, net................................................... 701
Other assets.................................................... 68
--------
$ 25,400
========
LIABILITIES AND PARTNERS' DEFICIT
Total current liabilities....................................... $ 1,076
Long-term debt, excluding current portion....................... 8,913
Historical Red Lion advances.................................... 26,973
Partners' deficit............................................... (11,562)
--------
$ 25,400
========
</TABLE>
F-52
<PAGE> 190
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEVEN MONTHS YEARS ENDED
ENDED DECEMBER 31,
JULY 31, -----------------
1995 1994 1993
------------ ------ ------
<S> <C> <C> <C>
Revenues (payments from Historical Red Lion
representing gross operating profit)....... $4,533 $6,642 $5,831
Expenses (principally depreciation and
interest on
outside debt and Historical Red Lion
advances).................................. 4,484 6,850 5,817
------ ------ ------
Net income (loss)............................ $ 49 $ (208) $ 14
====== ====== ======
</TABLE>
Goodwill
Goodwill resulted from the April 10, 1985 acquisition and represents the
excess of purchase price over the net fair value of assets acquired and is being
amortized on a straight-line basis over 40 years. Accumulated amortization was
$11,177,000 at December 31, 1994. Management evaluates its accounting for
goodwill impairment, considering such factors as historical and future
profitability, annually, or more frequently when events or changes in
circumstances indicate that the carrying amount of goodwill may not be
recoverable. To perform that review, the Company estimates the sum of expected
future discounted cash flows from operating activities. If the estimated net
cash flows are less than the carrying amount of goodwill, the Company will
recognize an impairment loss in an amount necessary to write down goodwill to a
fair value as determined from expected future discounted cash flows. Management
believes that the goodwill at December 31, 1994 is realizable and the
amortization period is appropriate.
Deferred Loan Costs
Deferred loan costs are included in other assets, net and represent prepaid
mortgage financing fees which are amortized over the life of the associated
mortgages.
Other Assets
Other assets include approximately $2.7 million of costs incurred through
December 31, 1994 related to the initial public offering. This amount was
contributed to Red Lion Hotels, Inc. and netted against the proceeds of such
initial public offering.
Accrued Expenses
Accrued expenses include the following items at December 31, 1994 (in
thousands):
<TABLE>
<S> <C>
Accrued payroll and related costs.................................. $20,682
Accrued interest................................................... 2,676
Other.............................................................. 9,649
-------
$33,007
=======
</TABLE>
Insurance Reserves
Historical Red Lion provides for the uninsured costs of medical, property,
liability and workers compensation claims. Such costs are estimated each year
based on historical claim data relating to operations conducted through December
31, 1994. The long-term portion of accrued claims costs relate primarily to
general liability and workers compensation claims and are reflected in other
long-term obligations in the accompanying consolidated balance sheets.
F-53
<PAGE> 191
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Historical Red Lion is a limited partnership. Accordingly, no provision is
made for income taxes as taxes on income are the responsibility of the partners.
The allocation of taxable income or loss and depreciation expense to each
partner is based on the terms of the partnership agreement.
Property Indirect Expenses
Property indirect expenses include undistributed property expenses for
selling, general and administrative, utilities, repairs and maintenance, and an
allocation of certain corporate services (such as marketing, legal, tax and
accounting services) related to the operation of the properties.
Other Costs
Other costs include corporate administrative and general expenses, property
taxes, insurance, leases and other miscellaneous costs.
Payments Due to Owners of Managed Hotels
"Payments due to owners of managed hotels" is analogous to rent owed to
outside owners due to the nature of the management contracts and the control
Historical Red Lion has over operations. The amounts shown on the statements of
operations are net of management fee income of $6,145,000 and $10,311,000 for
1993 and 1994, respectively, and $6,395,000 for the seven month period ended
July 31, 1995.
Joint Venturers' Interests
Historical Red Lion is a partner in seven joint ventures, each of which
owns a separate hotel. The assets and liabilities of five of the seven joint
ventures are fully consolidated in the accompanying financial statements. The
other joint ventures are accounted for on the equity method of accounting (see
Investment in Unconsolidated Joint Ventures above). The assets and liabilities
attributable to joint venturers' interests existing at the date of the April 10,
1985 acquisition were valued at historical amounts and were not revalued to
reflect appraised values at that date. The caption "joint venturers' interests"
represents the net equity attributable to the joint venturers' interests,
including their share of income, losses, distributions and contributions.
Profits and losses of each joint venture are allocated in accordance with a
joint venture agreement. If a joint venture experiences operating losses which
reduce the other joint venture partner's equity to a zero balance, the loss
which would otherwise be attributable to the other joint venturer is absorbed
within Historical Red Lion's consolidated operating results.
Prior Year Restatements
In 1994, Historical Red Lion retroactively changed two of its accounting
principles for all years presented in the accompanying consolidated financial
statements as follows:
- In prior years, Historical Red Lion generally absorbed losses
attributable to other joint venturers' interests once the equity of
the other joint venturer was reduced to zero. However, certain
distributions and losses attributable to other joint venturers'
interests were not absorbed by Historical Red Lion if such amounts
were deemed recoverable from the fair value of the joint ventures'
assets. Accordingly, these distributions and losses were reflected
as joint ventures' interests in the consolidated balance sheets. In
1994, Historical Red Lion changed its accounting policy to absorb
all losses and distributions to outside joint venturers once a
partner's equity has been reduced to zero. Historical Red Lion
changed its accounting policy for joint ventures'
F-54
<PAGE> 192
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest to more closely align with the accounting treatment discussed
in Emerging Issues Task Force No. 94-2 issued in 1994. This change
decreased income before cumulative effect of accounting change by
$515,000 for the year ended December 31, 1993. The change also
increased accumulated deficit at December 31, 1991 by approximately
$11.8 million.
- Two of Historical Red Lion's 50 percent owned joint ventures, which
had been previously consolidated, are now accounted for on the
equity method. Historical Red Lion's five other joint ventures
continue to be consolidated in the accompanying financial
statements. There was no effect of this change on net income or
partners' equity in any year.
Prior Year Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. LONG-TERM DEBT
Long-term debt at December 31, 1994 consists of the following (in
thousands):
<TABLE>
<S> <C>
Mortgages, secured by hotel properties, variable rates, 7.13% to
10%, payable in varying installments through 1999............... $390,750
Mortgages, secured by hotel properties, fixed rates, 8.75% to 11%,
payable in varying installments through 2008.................... 4,211
Note payable, fixed rate, 8.69%, payable through 2022............. 4,341
Bank revolving credit lines, unsecured............................ --
Term loan, unsecured, variable rate, 8.06%, payable through
1997............................................................ 98,000
--------
497,302
Current portion of long-term debt................................. (108,358)
--------
Long-term debt, excluding current portion............... $388,944
========
</TABLE>
The annual principal requirements for the five years subsequent to December
31, 1994 are as follows (in thousands):
<TABLE>
<S> <C>
1995............................................................ $108,358
1996............................................................ 110,328
1997............................................................ 215,120
1998............................................................ 46,992
1999............................................................ 15,298
Thereafter...................................................... 1,206
--------
$497,302
========
</TABLE>
The current portion of long-term debt at December 31, 1994 includes $87
million related to balloon payments on four mortgages which are due in 1995.
Management believes that these maturities can be satisfied from existing or
future financing resources.
Loan Extension Options
The above presentation of principal payments due for each of the five years
subsequent to December 31, 1994 and thereafter reflects Historical Red Lion's
plan to exercise certain options under the existing loan agreements to extend
the due dates of various loans.
F-55
<PAGE> 193
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revolving Credit Lines and Term Loan
At December 31, 1993, Historical Red Lion had two revolving credit line
facilities, with a combined total amount available of $105 million, of which
$32,218,000 was outstanding, including amounts due under the cash management
system.
Historical Red Lion's primary credit agreement provided a $100 million
three-year revolving credit line with variable interest rates that varied, at
Historical Red Lion's option, on the bank's prime rate, certificate of deposit
rate or the London Interbank Offering Rate (LIBOR). The weighted average
interest rate for 1993 was 5.4%, with the rate at December 31, 1993, equal to
5.3%. At December 31, 1993, $26 million was outstanding under this line.
The credit agreement, with the same interest rate options, converted to a
three-year term loan on September 1, 1994. At December 31, 1994, $98 million was
outstanding under this term loan. Quarterly principal payments, equal to 2% of
the term loan balance as of September 1, 1994, will be required through 1997 at
which time the remaining principal balance will be due and payable. The weighted
average interest rate for 1994 was 6.92% with the rate at December 31, 1994
equal to 8.06%. Historical Red Lion must maintain, among other things, certain
financial covenants over the term of the loan. As of December 31, 1994,
Historical Red Lion was in compliance with these covenants.
Historical Red Lion also had a $5 million line of credit which was
terminated in 1994.
Historical Red Lion had outstanding letters of credit of $10,762,000 at
December 31, 1994. These letters of credit are unsecured.
Interest Rate Swap Agreements
Historical Red Lion enters into interest rate swap agreements in order to
lessen its exposure to interest rate changes. The agreements have effectively
converted floating rate debt, which is tied to LIBOR, to fixed rate debt. The
interest cost relating to interest rate swap agreements for the years ended
December 31, 1993 and 1994 was $1,345,000 and $743,000, respectively, and
interest income for the seven months ended July 31, 1995 was $353,000.
At December 31, 1994, Historical Red Lion had three interest rate swap
agreements outstanding which have substantially converted $75 million of debt
from floating LIBOR based rates to all-in fixed rates ranging from 7.01% to
7.39% in 1994. The terms of the agreements range from four and one half to five
years.
These agreements are with major commercial banks and the exposure to a
credit loss in the event of nonperformance by the banks is minimal.
Disclosures About Fair Value of Financial Instruments
Based on the borrowing rates currently quoted by financial institutions for
bank loans with terms and maturities similar to Historical Red Lion's long-term
debt, the carrying value of such debt approximates its fair value. Based on
quotes obtained from dealers, Historical Red Lion would have had a gain of
approximately $5,375,000 to settle the interest rate swap agreements at December
31, 1994.
3. LEASES
Certain Historical Red Lion hotels are located on leased land. Two of these
leases contain rental provisions which are based on a percentage of revenues.
All land leases extend over the remaining useful lives of the buildings situated
thereon. Historical Red Lion also leases certain office space and equipment
under operating leases. Total land, office and equipment rent expense was
$1,252,000 and $1,350,000 for the years ended December 31, 1993 and 1994,
respectively and $961,000 for the seven months ended July 31, 1995.
F-56
<PAGE> 194
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments subsequent to December 31, 1994 required
under land, office and equipment leases are as follows (in thousands).
<TABLE>
<S> <C>
1995............................................................... $ 975
1996............................................................... 945
1997............................................................... 898
1998............................................................... 721
1999............................................................... 668
Thereafter......................................................... 12,786
-------
$16,993
=======
</TABLE>
4. EMPLOYEE BENEFIT PLANS
Historical Red Lion has a defined contribution 401(k) retirement plan for
all full time, non-union employees who have completed one year of service and
who have attained the age of 21 years.
Under the 401(k) plan, Historical Red Lion contributes amounts equal to
each participants' elected contributions up to 6% of eligible compensation.
Pension expense under this plan was $1,670,000 and $1,758,000 for the years
ended December 31, 1993 and 1994, respectively, and $1,338,000 for the seven
months ended July 31, 1995.
Historical Red Lion also has a non-qualified supplemental employee
retirement plan ("SERP"). The SERP was designed to complement the 401(k) plan by
restoring participants' benefits otherwise lost by certain employees due to the
statutory limits in the 401(k) plan. The pension expense under the SERP was
$287,000 and $322,000 for the years ended December 31, 1993 and 1994,
respectively, and $126,000 for the seven months ended July 31, 1995.
Certain management employees are participants in an incentive unit plan.
Participation units are awarded at the discretion of Historical Red Lion's
general partner. No units have been awarded since 1991. Awarded units vest five
years after the award date and are payable five years after vesting or earlier
under certain circumstances. Unit values are determined by various formulas tied
to cash flow, as defined, and appreciation in value of Historical Red Lion and
partners' equity. No accrual for this plan was required for the years ended
December 31, 1993 or 1994, or the seven month period ended July 31, 1995.
The Chief Executive Officer of Historical Red Lion has an incentive
compensation agreement, the value of which is tied to the increase, if any, in
the value of Historical Red Lion's partners' equity. No accrual for this
agreement was required for the years ended December 31, 1993 or 1994, or the
seven month period ended July 31, 1995.
5. COMMITMENTS AND CONTINGENCIES
At December 31, 1994, Historical Red Lion had commitments, relating to
capital improvement projects, of $7,994,000.
Historical Red Lion is party to litigation arising in the ordinary course
of business. In the opinion of management, these actions will not have a
material adverse effect, if any, on Historical Red Lion's financial position,
results of operations or liquidity.
6. RELATED PARTY TRANSACTIONS
At December 31, 1994, other assets, net, include $1,483,000 of interest
bearing notes receivable from a joint venturer.
F-57
<PAGE> 195
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other significant related party transactions are discussed in Notes 1 and
7.
7. TRANSACTIONS WITH RED LION INNS LIMITED PARTNERSHIP
As discussed in Note 1, Red Lion Properties, Inc. ("Properties"), a
wholly-owned subsidiary of Historical Red Lion, serves as general partner and
owns 1.99% of the MLP.
Historical Red Lion manages the MLP hotels pursuant to a management
agreement and receives a base management fee equal to 3% of annual gross
revenues plus an incentive management fee based on adjusted gross operating
profit, as defined in the management agreement. The management agreement, which
began in 1987, has a seventy-five year term including renewal options.
Historical Red Lion also charges the MLP hotels for their pro rata share of
support services such as computer, advertising, public relations, promotional
and sales and central reservation services.
All the MLP personnel are employees of Historical Red Lion and its
affiliates. Additionally, auxiliary enterprises owned by Historical Red Lion
sell operating supplies, furnishings and equipment to the MLP. In the opinion of
management, sales to the MLP by the auxiliary enterprises were made at prices
and terms which approximate arms-length transactions.
The aggregate amounts, excluding personnel related expenses, charged to the
MLP under the arrangements described above were as follows (in thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS YEARS ENDED
ENDED DECEMBER 31,
JULY 31, -----------------
1995 1994 1993
------------ ------ ------
<S> <C> <C> <C>
Management fees...................................... $4,956 $7,456 $4,029
Support services..................................... 2,409 3,778 3,653
Purchase from auxiliary enterprises.................. 5,184 9,513 9,409
</TABLE>
Incentive management fees are subordinate to distributions by the MLP to
facilitate current payment of distributions to the limited partners. The
subordinated fees accrue without interest up to a maximum amount of $6 million.
This ceiling was reached in 1988 and, because management does not anticipate it
will be paid during 1995, such amount has been classified as non-current under
the caption other assets, net, in the consolidated balance sheet at December 31,
1994.
At December 31, 1994, other assets, net, include $3,726,000 which
Properties advanced to the MLP under a $4 million credit facility made available
to facilitate cash distributions to partners during the MLP's first 36 months of
operations. The amount outstanding under this facility will be repaid to
Historical Red Lion out of either (i) cash flow after payment of priority
distributions and incentive management fees or (ii) sale or refinancing proceeds
prior to any distribution to limited partners.
In addition to the incentive management fee and general partner loan
discussed above, Historical Red Lion was due $13,482,000 from the MLP for
services, payroll funding and capital expenditure funding provided as of
December 31, 1994. These amounts are included in accounts receivable, affiliates
in the consolidated balance sheet, net of working capital related to the managed
MLP hotels of $1,160,000, at December 31, 1994.
F-58
<PAGE> 196
HISTORICAL RED LION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized income statement information for MLP is as follows (in
thousands):
<TABLE>
<CAPTION>
SEVEN MONTHS YEARS ENDED
ENDED DECEMBER 31,
JULY 31, -------------------
1995 1994 1993
------------ ------- -------
<S> <C> <C> <C>
Revenues........................................... $ 22,258 $35,620 $32,511
======= ======= =======
Income before cumulative effect of change in
accounting principle............................. 2,153 2,929 3,206
Cumulative effect of change in accounting for
income taxes..................................... -- -- (1,351)
------- ------- -------
Net income......................................... $ 2,153 $ 2,929 $ 1,855
======= ======= =======
</TABLE>
Revenues of the MLP represent the gross operating profit (operating
revenues less operating expenses) of the MLP hotels as this amount is similar to
gross rent received from Historical Red Lion to manage the hotels. As discussed
in Note 1, the operating revenues and expenses of the MLP hotels are
consolidated in Historical Red Lion's consolidated financial statements.
Consolidation of the operating revenues and expenses of the MLP does not
affect Historical Red Lion's cash flow or net income except to the extent that
management fees were paid.
Summarized balance sheet information for the MLP, not included in the
accompanying consolidated balance sheet (including amounts due from and owed to
Historical Red Lion) is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Cash.................................................................... $ --
Noncurrent assets, primarily property and equipment..................... 165,205
Current liabilities..................................................... 17,343
Long-term obligations, net of current portion........................... 123,430
Deferred income taxes................................................... 1,401
Partners' equity........................................................ 23,031
</TABLE>
8. LOSS ON SALE OF PROPERTY
During 1993, Historical Red Lion recorded a loss of $1,701,000 which
resulted from the sale of excess land and other assets.
9. SUBSEQUENT EVENTS (UNAUDITED)
On August 1, 1995, Historical Red Lion contributed substantially all of its
assets (excluding 17 hotels (the "Leased Hotels"), certain minority joint
venture interests and certain current assets) and certain liabilities to Red
Lion Hotels, Inc. ("RLHI") in exchange for 20,899,900 shares of RLHI's common
stock. An additional 10,062,500 shares of RLHI's common stock were sold to the
public at the August 1, 1995 closing of RLHI's initial public offering, raising
net proceeds of $173,388,000.
Also on August 1, 1995, Historical Red Lion paid $50,052,000 of the
remaining indebtedness and contributed the Leased Hotels and the remaining
related debt to a new partnership wholly-owned by Historical Red Lion. Such
debt, aggregating approximately $91,136,000, was repaid with proceeds from a
$97,500,000 refinancing of the Leased Hotels.
F-59
<PAGE> 197
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
DOUBLETREE CORPORATION,
RLH ACQUISITION CORP.
AND
RED LION HOTELS, INC.
DATED AS OF SEPTEMBER 12, 1996
<PAGE> 198
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------ ----
<S> <C> <C>
ARTICLE I
THE MERGER
1.1. The Merger................................................................... A-1
1.2. Closing...................................................................... A-1
1.3. Effective Time............................................................... A-2
1.4. Effect of the Merger......................................................... A-2
1.5. Certificate of Incorporation; By-Laws........................................ A-2
1.6. Directors and Officers....................................................... A-2
ARTICLE II
EFFECT OF THE MERGER ON SECURITIES
OF THE CONSTITUENT CORPORATIONS
2.1. Conversion of Securities..................................................... A-2
2.2. Adjustment to Exchange Ratio................................................. A-3
2.3. Exchange of Certificates..................................................... A-4
2.4. Stock Transfer Books......................................................... A-6
2.5. Stock Options................................................................ A-6
2.6. Dissenting Shares............................................................ A-6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1. Organization and Qualification............................................... A-7
3.2. Capitalization............................................................... A-7
3.3. Subsidiaries................................................................. A-8
3.4. Authorization, Validity and Enforceability................................... A-8
3.5. No Conflict or Violation..................................................... A-9
3.6. Consents and Approvals....................................................... A-9
3.7. SEC Documents and Financial Statements....................................... A-10
3.8. No Undisclosed Liabilities................................................... A-10
3.9. Absence of Certain Changes................................................... A-11
3.10. Litigation................................................................... A-11
3.11. Compliance................................................................... A-11
3.12. Employee Benefit Plans....................................................... A-12
3.13. Labor Matters................................................................ A-13
3.14. Tax Matters.................................................................. A-13
3.15. Properties................................................................... A-15
3.16. Environmental Matters........................................................ A-16
3.17. Material Contracts and Commitments........................................... A-16
3.18. Intellectual Property........................................................ A-17
3.19. Opinion of Financial Advisor................................................. A-17
3.20. Brokers...................................................................... A-17
</TABLE>
i
<PAGE> 199
<TABLE>
<CAPTION>
SECTION PAGE
- ------ ----
<S> <C> <C>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARENT
4.1. Organization and Qualification............................................... A-17
4.2. Capitalization............................................................... A-17
4.3. Subsidiaries................................................................. A-18
4.4. Authorization, Validity and Enforceability................................... A-18
4.5. No Conflict or Violation..................................................... A-19
4.6. Consents and Approvals....................................................... A-19
4.7. SEC Documents and Financial Statements....................................... A-19
4.8. No Undisclosed Liabilities................................................... A-20
4.9. Absence of Certain Changes................................................... A-20
4.10. Litigation................................................................... A-21
4.11. Compliance................................................................... A-21
4.12. Employee Benefit Plans....................................................... A-21
4.13. Tax Matters.................................................................. A-22
4.14. Properties................................................................... A-22
4.15. Environmental Matters........................................................ A-23
4.16. Intellectual Property........................................................ A-23
4.17. Labor Matters................................................................ A-23
4.18. Material Contracts and Commitments........................................... A-23
4.19. Financing.................................................................... A-24
4.20. Opinion of Financial Advisor................................................. A-24
4.21. Brokers...................................................................... A-24
ARTICLE V
COVENANTS
5.1. Interim Operations........................................................... A-24
5.2. No Solicitation.............................................................. A-26
5.3. Access to Information........................................................ A-27
5.4. Notice of Certain Matters.................................................... A-27
5.5. Further Actions.............................................................. A-27
5.6. Proxy Statement; Registration Statement...................................... A-28
5.7. Meetings of Stockholders..................................................... A-29
5.8. Nasdaq Quotation of Parent Common Stock...................................... A-29
5.9. Letters of Accountants....................................................... A-29
5.10. Affiliate Letters............................................................ A-31
5.11. Public Announcements......................................................... A-31
5.12. Expenses..................................................................... A-31
5.13. Indemnification.............................................................. A-31
5.14. Employee Benefits Matters.................................................... A-32
5.15. Takeover Statutes............................................................ A-33
5.16. Certification of Stockholder Vote............................................ A-33
5.17. Conveyance Taxes............................................................. A-33
5.18. Gains Tax.................................................................... A-33
5.19. FIRPTA Certificate........................................................... A-34
</TABLE>
ii
<PAGE> 200
<TABLE>
<CAPTION>
SECTION PAGE
- ------ ----
<S> <C> <C>
ARTICLE VI
CONDITIONS
6.1. Conditions to Each Party's Obligation To Effect the Merger................... A-34
6.2. Additional Conditions to Obligations of the Parent........................... A-35
6.3. Additional Conditions to Obligations of the Company.......................... A-35
ARTICLE VII
TERMINATION
7.1. Termination.................................................................. A-36
7.2. Effect of Termination........................................................ A-37
7.3. Extension; Waiver............................................................ A-38
ARTICLE VIII
MISCELLANEOUS
8.1. Nonsurvival of Representations, Warranties and Agreements.................... A-38
8.2. Notices...................................................................... A-39
8.3. Certain Definitions.......................................................... A-39
8.4. Assignment; Binding Effect................................................... A-40
8.5. Entire Agreement............................................................. A-40
8.6. Amendment.................................................................... A-40
8.7. Waivers...................................................................... A-40
8.8. Severability................................................................. A-40
8.9. Governing Law................................................................ A-40
8.10. Enforcement of Agreement..................................................... A-40
8.11. Incorporation of Exhibits.................................................... A-41
8.12. Interpretation............................................................... A-41
8.13. Headings..................................................................... A-41
8.14. Counterparts................................................................. A-41
</TABLE>
<TABLE>
<S> <C> <C> <C>
Exhibit A Form of Affiliate Letter
Exhibit B Form of Registration Rights Agreement
Exhibit C-1 Severance Agreements
Form for Officers
Form for Directors, Employees and Managers
Severance Policy
C-2
Headquarters Severance Plan
C-3
Senior Executive Transition Bonus Plan
C-4
SERP
C-5
Management Bonus Plan
C-6
Exhibit D Form of Partnership Services Agreement
Exhibit E Sample Exchange Ratio Calculations*
</TABLE>
- ---------------
* Attached separately to Proxy Statement/Prospectus as Appendix E.
iii
<PAGE> 201
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
- ---------------------------------------------------------------------------------- --------
<S> <C>
affiliate......................................................................... 8.3(a)
business day...................................................................... 8.3(b)
Agreement......................................................................... Preamble
AICPA Statement................................................................... 5.9(a)
Alternative Transaction........................................................... 5.2
Alternative Transaction Proposal.................................................. 5.2
Blue Sky Laws..................................................................... 3.6
Cash Consideration................................................................ 2.1(a)
Certificates...................................................................... 2.3(b)
Certificate of Merger............................................................. 1.3
Closing........................................................................... 1.2
Code.............................................................................. 2.3(h)
Company........................................................................... Preamble
Company Assets.................................................................... 3.15
Company Common Stock.............................................................. 2.1(a)
Company Confidentiality Agreement................................................. 5.3
Company Disclosure Schedule....................................................... 3.2(b)
Company Employee Plan............................................................. 3.12(a)
Company Incentive Plan............................................................ 3.2(a)
Company Material Adverse Effect................................................... 3.1
Company Options................................................................... 3.2(a)
Company Personnel................................................................. 3.12(a)
Company Preferred Stock........................................................... 3.2(a)
Company SEC Documents............................................................. 3.7(a)
Company Shareholder Support Agreement............................................. Recitals
Company Stockholders' Meeting..................................................... 5.7(a)
Contracts......................................................................... 3.17
Delaware Courts................................................................... 8.9
Dissenting Shares................................................................. 2.6(a)
DGCL.............................................................................. 1.1
Effective Time.................................................................... 1.3
Environmental Laws................................................................ 3.16
ERISA............................................................................. 3.12(a)
ERISA Controlled Group............................................................ 3.12(g)
Exchange Act...................................................................... 3.6
Exchange Agent.................................................................... 2.3(a)
Exchange Fund..................................................................... 2.3(a)
Exchange Ratio.................................................................... 2.1(a)
Final Parent Stock Price.......................................................... 2.2(c)
401(k) Plan....................................................................... 3.12(h)
GAAP.............................................................................. 3.7(b)
Gains Tax......................................................................... 5.18
Governmental Entity............................................................... 3.6
HSR Act........................................................................... 3.6
Indemnified Parties............................................................... 5.13(a)
IRS Letter........................................................................ 3.12(h)
</TABLE>
iv
<PAGE> 202
<TABLE>
<CAPTION>
TERM SECTION
- ---------------------------------------------------------------------------------- --------
<S> <C>
Management Bonus Plan............................................................. 5.14(e)
McClaskey......................................................................... 5.6(e)
McClaskey Shares.................................................................. 5.6(e)
Merger............................................................................ Recitals
Merger Consideration.............................................................. 2.1(a)
Merger Sub........................................................................ Preamble
Merger Sub Common Stock........................................................... 4.2(c)
MLP............................................................................... 3.7(c)
MLP SEC Documents................................................................. 3.7(c)
Nasdaq............................................................................ 2.2(c)
Option Certificates............................................................... 2.3(b)
Parent............................................................................ Preamble
Parent Assets..................................................................... 4.14
Parent Common Stock............................................................... 2.1(a)
Parent Confidentiality Agreement.................................................. 5.2
Parent Contracts.................................................................. 4.18(b)
Parent Disclosure Schedule........................................................ 4.2(a)
Parent Employee Plan.............................................................. 4.12(a)
Parent Material Adverse Effect.................................................... 4.1
Parent Options.................................................................... 4.2(a)
Parent Personnel.................................................................. 4.12(a)
Parent Preferred Stock............................................................ 4.2(a)
Parent SEC Documents.............................................................. 4.7(a)
Parent Shareholder Support Agreements............................................. Recitals
Parent Stockholder Approval....................................................... 4.3
Parent Stockholders' Meeting...................................................... 5.7(b)
Partnership....................................................................... Recitals
Partnership Services Agreement.................................................... 6.3(f)
Permitted Liens................................................................... 3.15
person............................................................................ 8.3(c)
Proxy Statement................................................................... 5.6(a)
Registration Rights Agreement..................................................... 6.3(f)
Registration Statement............................................................ 5.6(a)
Representatives................................................................... 5.2
SEC............................................................................... 3.7(a)
SERP.............................................................................. 5.14(d)
Securities Act.................................................................... 3.6
Severance Agreements.............................................................. 5.14(a)
Severance Policy.................................................................. 5.14(a)
Stay Bonus Plan................................................................... 5.14(c)
Stock Certificates................................................................ 2.3(b)
Stock Consideration............................................................... 2.1(a)
subsidiary........................................................................ 8.3(d)
Surviving Corporation............................................................. 1.1
Tax Return........................................................................ 3.14(a)
Tax Ruling........................................................................ 3.14(i)
</TABLE>
v
<PAGE> 203
<TABLE>
<CAPTION>
TERM SECTION
- ---------------------------------------------------------------------------------- --------
<S> <C>
Taxes............................................................................. 3.14(a)
Transfer Taxes.................................................................... 5.18
Transition Bonus Plan............................................................. 5.14(b)
Transition Severance Plan......................................................... 5.14(a)
VCR Application................................................................... 3.12(h)
</TABLE>
vi
<PAGE> 204
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of September 12, 1996 (this
"Agreement"), by and among DOUBLETREE CORPORATION, a Delaware corporation (the
"Parent"), RLH ACQUISITION CORP., a Delaware corporation and a wholly owned
subsidiary of the Parent formed solely to effectuate the transactions
contemplated hereby ("Merger Sub"), and RED LION HOTELS, INC., a Delaware
corporation (the "Company").
RECITALS
WHEREAS, the Board of Directors of the Company has determined that the
merger of Merger Sub with and into the Company, upon the terms and subject to
the conditions set forth in this Agreement (the "Merger"), is fair to, and in
the best interests of, the Company and its stockholders; and
WHEREAS, the Boards of Directors of the Parent and Merger Sub have
determined that the Merger is in the best interests of the Parent and Merger Sub
and their respective stockholders; and
WHEREAS, the Boards of Directors of the Company, the Parent and Merger Sub
have each approved and adopted this Agreement and approved the Merger and the
other transactions contemplated hereby (including the Company Shareholder
Support Agreement and the Parent Shareholder Support Agreements), and
recommended approval and adoption of this Agreement and the Merger by their
respective stockholders; and
WHEREAS, concurrently with the execution of this Agreement, and as an
inducement to the Parent to enter into this Agreement, Red Lion, a California
Limited Partnership (the "Partnership"), which is the majority stockholder of
the Company, has entered into a Shareholder Support Agreement (the "Company
Shareholder Support Agreement") with the Parent, pursuant to which the
Partnership has agreed, among other things, to vote all voting securities of the
Company beneficially owned by it in favor of approval and adoption of this
Agreement and the Merger; and
WHEREAS, concurrently with the execution of this Agreement, and as an
inducement to the Company to enter into this Agreement, certain stockholders of
the Parent have entered into Shareholder Support Agreements (the "Parent
Shareholder Support Agreements") with the Company and the Parent, pursuant to
which such stockholders have agreed, among other things, to vote all voting
securities of the Parent beneficially owned by them in favor of approval and
adoption of this Agreement and the Merger;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1. The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined below), Merger Sub shall be
merged with and into the Company in accordance with the General Corporation Law
of the State of Delaware (the "DGCL"). As a result of the Merger, the separate
corporate existence of Merger Sub shall cease and the Company shall continue as
the surviving corporation of the Merger (the "Surviving Corporation").
Section 1.2. Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section 7.1 and subject to the satisfaction or, if permissible, waiver of the
conditions set forth in Article VI, the closing of the Merger (the "Closing")
shall take place at the offices of Dewey Ballantine, 333 South Hope Street, Los
Angeles, California, as promptly as practicable (and in any event within two
business days) following the satisfaction or, if permissible, waiver of the
conditions set forth in Article VI, unless another place, date or time is agreed
to in writing by the Parent and the Company. At the Closing, the Registration
Rights Agreement, the Partnership Services Agreement and the other documents,
certificates and instruments referred to in Article VI shall be executed and
A-1
<PAGE> 205
delivered, and the Merger Consideration shall be delivered (or transmitted for
delivery) to any holder of Company Common Stock or Company Options who has
delivered such holder's shares of Company Common Stock or certificate or
instrument representing Company Options, together with the letter of transmittal
duly completed as contemplated by Section 2.3(b), to the Exchange Agent prior to
the Effective Time, and all amounts contemplated by Section 5.14 to be paid at
the Closing shall be paid.
Section 1.3. Effective Time. Promptly after the Closing, the parties
hereto will cause a certificate of merger with respect to the Merger (the
"Certificate of Merger") to be executed and filed with the Secretary of State of
the State of Delaware in accordance with the DGCL. The Merger shall become
effective at such time as the Certificate of Merger is filed with the Secretary
of State of the State of Delaware in accordance with the DGCL, or at such later
time as may be agreed to by the Parent and the Company and specified in the
Certificate of Merger in accordance with applicable law. The date and time when
the Merger shall become effective is referred to herein as the "Effective Time".
Section 1.4. Effect of the Merger. Upon becoming effective, the Merger
shall have the effects set forth in the DGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time, all properties,
rights, privileges, powers and franchises of the Company and Merger Sub shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Merger Sub shall become the debts, liabilities and duties of the
Surviving Corporation.
Section 1.5. Certificate of Incorporation; ByLaws. At the Effective Time,
(i) the Certificate of Incorporation of the Company, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation, and (ii) the ByLaws of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the By-Laws of the Surviving
Corporation, in each case until duly amended in accordance with applicable law.
Section 1.6. Directors and Officers. At the Effective Time, the directors
of Merger Sub immediately prior to the Effective Time shall become the
directors, and the officers of the Company immediately prior to the Effective
Time shall become the officers, of the Surviving Corporation, each such director
and officer to hold office from the Effective Time until their respective
successors are duly elected or appointed and qualified in the manner provided in
the Certificate of Incorporation and By-Laws of the Surviving Corporation and
applicable law. The Company shall use reasonable efforts to cause each director
of the Company and of its subsidiaries which are corporations to tender his or
her resignation prior to the Effective Time, each such resignation to be
effective as of the Effective Time.
ARTICLE II
EFFECT OF THE MERGER ON SECURITIES
OF THE CONSTITUENT CORPORATIONS
Section 2.1. Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of any of the parties hereto or
the holders of any of the following securities:
(a) Each share of Common Stock, par value $.01 per share, of the
Company ("Company Common Stock") which is issued and outstanding
immediately prior to the Effective Time (other than any shares of Company
Common Stock to be cancelled pursuant to Section 2.1(b) and any Dissenting
Shares, as defined below) shall be converted into and represent the right
to receive (i) $21.30 in cash, plus, if the Effective Time does not occur
on or prior to November 18, 1996, interest accruing at a fluctuating rate
per annum equal to the prime interest rate from time to time of Bankers
Trust Company, compounded daily, on $30.106 plus such accrued interest, for
the period commencing on November 18, 1996 and ending on the day on which
the Effective Time occurs (the "Cash Consideration"), and (ii) 0.2398
shares (as such number may be adjusted in accordance with this Agreement,
the "Exchange Ratio") of Common Stock, par value $.01 per share, of the
Parent ("Parent Common Stock"), subject to adjustment as provided in
Section 2.2 (the "Stock Consideration" and, collectively together with the
Cash Consideration, the "Merger Consideration"); provided, however, that in
any event, if, between the date of this Agreement and the Effective Time,
the outstanding shares of Parent Common Stock shall
A-2
<PAGE> 206
have been changed, reclassified or converted into a different number of
shares or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination, conversion or
exchange of shares, the Exchange Ratio shall be correspondingly adjusted to
reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination, conversion or exchange of shares. All
such shares of Company Common Stock shall no longer be outstanding and
shall automatically be cancelled, retired and extinguished and shall cease
to exist, and each certificate which immediately prior to the Effective
Time evidenced any such shares (other than any Dissenting Shares) shall
thereafter represent the right to receive, upon surrender of such
certificate in accordance with the provisions of Section 2.3, the Merger
Consideration into which such shares have been converted in accordance
herewith. The holders of certificates previously evidencing shares of
Company Common Stock outstanding immediately prior to the Effective Time
shall cease to have any rights with respect thereto (including, without
limitation, any rights to vote or to receive dividends and distributions in
respect of such shares), except as otherwise provided herein or by law. No
fractional share of Parent Common Stock shall be issued and, in lieu
thereof, a cash payment shall be made pursuant to Section 2.3(e). Except as
specified in clause (i) immediately above, no interest will be paid or will
accrue on any Merger Consideration, any cash in lieu of fractional shares
of Parent Common Stock or any unpaid dividends or distributions in respect
of Parent Common Stock payable upon surrender of certificates of Company
Common Stock pursuant to this Article II.
(b) Each share of Company Common Stock owned by or held in the
treasury of the Company and each share of Company Common Stock owned by the
Parent or any direct or indirect wholly owned subsidiary of the Company or
the Parent immediately prior to the Effective Time shall be automatically
cancelled and extinguished without any conversion thereof and shall cease
to exist and no payment or consideration shall be made or delivered with
respect thereto.
(c) Each share of capital stock of Merger Sub which is issued and
outstanding immediately prior to the Effective Time shall be converted into
and become one validly issued, fully paid and nonassessable share of common
stock, par value $.01 per share, of the Surviving Corporation.
Section 2.2. Adjustment to Exchange Ratio. (a) In the event that the Final
Parent Stock Price (as defined below) is equal to or less than $34.89, or equal
to or greater than $38.56, the Exchange Ratio shall be subject to adjustment as
follows:
(i) if the Final Parent Stock Price is equal to or less than $31.22,
then the Exchange Ratio shall be equal to the sum of 0.2398 plus the
quotient obtained by dividing $0.8806 by the Final Parent Stock Price;
(ii) if the Final Parent Stock Price is greater than $31.22 and equal
to or less than $34.89, then the Exchange Ratio shall be equal to the
quotient obtained by dividing $8.3657 by the Final Parent Stock Price;
(iii) if the Final Parent Stock Price is equal to or greater than
$38.56 but less than $42.23, then the Exchange Ratio shall be equal to the
quotient obtained by dividing $9.2463 by the Final Parent Stock Price;
(iv) if the Final Parent Stock Price is equal to or greater than
$42.23 but less than $44.07, then the Exchange Ratio shall be equal to the
difference of 0.2398 minus the quotient obtained by dividing $0.8806 by the
Final Parent Stock Price;
(v) if the Final Parent Stock Price is equal to or greater than
$44.07, then the Exchange Ratio shall be equal to the quotient obtained by
dividing $9.6866 by the Final Parent Stock Price.
The adjustments required by this Section 2.2(a) based upon various Final
Parent Stock Prices are set forth on Exhibit E hereto. This Section 2.2(a) shall
be interpreted in a manner consistent with Exhibit E.
(b) Notwithstanding anything herein to the contrary, except as specified in
the proviso in Section 2.1(a), the Exchange Ratio shall not be subject to
adjustment based upon the Final Parent Stock Price (whether
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pursuant to this Section 2.2 or otherwise) if the Final Parent Stock Price is
greater than $34.89 and less than $38.56.
(c) For purposes hereof, the "Final Parent Stock Price" shall mean the
"volume-weighted average quote" of the reported sales prices per share of the
Parent Common Stock quoted on The Nasdaq Stock Market's National Market
("Nasdaq"), as reported by Bloomberg L.P., for the ten (10) consecutive trading
days (on which shares of the Parent Common Stock are actually traded)
immediately preceding the second business day prior to the Effective Time.
(d) Promptly after the close of trading on Nasdaq on the tenth day of the
ten trading days referred to in the immediately preceding paragraph, the Parent
and the Company shall issue a joint press release publicly announcing the
Exchange Ratio.
Section 2.3. Exchange of Certificates. (a) Exchange Agent. As of the
Effective Time, the Parent shall deposit, or cause to be deposited, with or for
the account of a bank or trust company to be designated by the Parent, which is
reasonably acceptable to the Company (the "Exchange Agent"), for the benefit of
the holders of shares of the Company Common Stock (other than any Dissenting
Shares), for exchange through the Exchange Agent in accordance with this Article
II, (i) cash in the aggregate amount sufficient to pay the Cash Consideration
for shares of Company Common Stock converted pursuant to Section 2.1, and (ii)
certificates evidencing the shares of Parent Common Stock issuable in exchange
for shares of Company Common Stock pursuant to Section 2.1 (the cash and shares
so deposited, together with any dividends or distributions with respect to such
shares, being hereinafter referred to collectively as the "Exchange Fund"). The
Exchange Agent shall, pursuant to irrevocable instructions, deliver the cash and
shares of Parent Common Stock required to be delivered pursuant to Section 2.1
out of the Exchange Fund to holders of shares of Company Common Stock. Except as
contemplated by Section 2.3(f), the Exchange Fund shall not be used for any
other purpose. The Exchange Agent shall invest cash in the Exchange Fund, on a
daily basis, as directed by the Parent. Any interest, dividends or other income
earned on the investment of cash or other property held in the Exchange Fund
shall be for the account of and payable to the Parent.
(b) Exchange Procedures. As soon as reasonably practicable (and in any
event not later than three (3) business days) after the Effective Time, the
Parent will cause the Exchange Agent to mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
evidenced outstanding shares of Company Common Stock (other than any Dissenting
Shares) (the "Stock Certificates") and to each holder of record of a certificate
or instrument which immediately prior to the Effective Time evidenced any
outstanding Company Options (the "Option Certificates" and, collectively
together with the Stock Certificates, the "Certificates"), (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only at or following the
Effective Time and upon proper delivery of the Certificates to the Exchange
Agent and which shall be in form and substance reasonably satisfactory to the
Parent and the Company) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for the Merger Consideration with respect to the
shares of Company Common Stock or Company Options formerly represented thereby.
The Proxy Statement (as defined below) shall provide that, in lieu of delivery
following the Effective Time as aforesaid, and commencing on the tenth calendar
day prior to the date of the Company Stockholders' Meeting (as defined below),
the foregoing letter of transmittal and instructions for use will be promptly
delivered to each holder of record of a Certificate from whom the Exchange Agent
receives a written request therefor prior to the date of the Company
Stockholders' Meeting, and that each such holder of a Certificate shall be
entitled thereafter to surrender such Certificate in accordance with the
procedures described herein, and the Parent will cause the Exchange Agent to
comply with the foregoing. Upon surrender of a Stock Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, and such other customary documents as may be required pursuant to
such instructions, the holder of such Stock Certificate shall be entitled at or
following the Effective Time to receive in exchange therefor (A) certificates
evidencing that number of whole shares of Parent Common Stock which such holder
has the right to receive in accordance with Section 2.1 in respect of the shares
of Company Common Stock formerly evidenced by such Certificate, (B) cash which
such holder is entitled to receive in accordance with Section 2.1, (C) cash in
lieu of fractional shares of Parent Common Stock to which such holder is
entitled pursuant to Section 2.3(e) and (D) any dividends or other distributions
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to which such holder is entitled pursuant to Section 2.3(c), in each case less
the amount of any withholding taxes which may be required thereon, and the Stock
Certificate so surrendered shall forthwith be cancelled. In the event of a
transfer of ownership of shares of Company Common Stock which is not registered
in the transfer records of the Company, certificates evidencing the proper
number of shares of Parent Common Stock and cash may be issued and paid in
accordance with this Article II to a transferee if the Certificate evidencing
such shares of Company Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence reasonably satisfactory to the Parent that any applicable stock
transfer taxes have been paid. Certificates surrendered for exchange by any
person constituting an "affiliate" of the Company for purposes of Rule 145(c) of
the Securities Act (as defined below), shall not be exchanged until the Parent
has received a written agreement from such person as provided in Section 5.10.
Until surrendered as contemplated by this Section 2.3, each Stock Certificate
shall be deemed at any time after the Effective Time to represent and evidence
only the right to receive upon such surrender the Merger Consideration with
respect to the shares of Company Common Stock formerly represented thereby in
accordance with this Section 2.3.
(c) Distributions with Respect to Unexchanged Shares. Notwithstanding any
other provision of this Agreement, no dividends or other distributions declared
or made after the Effective Time with respect to shares of Parent Common Stock
with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Parent Common Stock
which such holder is entitled to receive, and no Cash Consideration or cash in
lieu of fractional shares shall be paid to any such holder, until the holder of
such Certificate shall surrender such Certificate for exchange as provided
herein. Subject to the effect of applicable laws, following surrender of any
such Certificate, there shall be paid to the holder of the certificates
evidencing whole shares of Parent Common Stock issued in exchange therefor,
without interest, (i) as promptly as reasonably practicable following such
surrender, the amount of any cash payable in lieu of fractional shares of Parent
Common Stock to which such holder is entitled pursuant to Section 2.3(e) and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore payable (and not paid) with respect to such whole
shares of Parent Common Stock, in each case less the amount of any withholding
taxes which may be required thereon, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender payable with respect to such whole shares of Parent Common Stock, less
the amount of any withholding taxes which may be required thereon.
(d) No Further Rights in Company Common Stock. The shares of Parent Common
Stock issued and cash paid upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
made in full satisfaction of all rights pertaining to such shares of Company
Common Stock, subject, however, to the Surviving Corporation's obligation to pay
any dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by the Company on such
shares of Company Common Stock in accordance with the terms of this Agreement or
prior to the date hereof and that remain unpaid at the Effective Time.
(e) No Fractional Shares. No certificates or scrip representing fractional
shares of Parent Common Stock shall be issued in connection with the Merger, and
such fractional share interests will not entitle the owner thereof to vote or to
any rights as a stockholder of the Parent. In lieu of any such fractional
shares, each holder of Company Common Stock upon surrender of a Certificate for
exchange pursuant to this Section 2.3 shall be paid an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying (i) the Final
Parent Stock Price by (ii) the fractional interest to which such holder would
otherwise be entitled (after taking into account all shares of Company Common
Stock then held of record by such holder).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Company Common Stock as of the date
which is twelve months after the Effective Time shall be delivered to the
Parent, upon demand, and any holders of Company Common Stock who have not
theretofore complied with this Article II shall thereafter look only to the
Parent (as unsecured general creditors thereof) for payment of the Merger
Consideration, and any cash in lieu of fractional shares and any unpaid
dividends or distributions with respect to Parent Common Stock, to which they
are entitled pursuant hereto.
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(g) No Liability. Neither the Parent nor the Surviving Corporation shall
be liable to any holder of shares of Company Common Stock for any cash, stock or
other property delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(h) Withholding Rights. The Parent or the Exchange Agent shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of Company Common Stock such amounts as the
Parent or the Exchange Agent is required to deduct and withhold with respect to
the making of such payment under the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations promulgated thereunder (the "Code"), or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by the Parent or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder of
the shares of Company Common Stock in respect of which such deduction and
withholding was made by the Parent or the Exchange Agent.
(i) Lost Certificates. In the event that any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Parent, the posting by such person of a bond in such reasonable
amount as the Parent may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the Merger
Consideration, and any cash in lieu of fractional shares and any unpaid
dividends or distributions with respect to Stock Consideration, to which they
are entitled pursuant hereto.
Section 2.4. Stock Transfer Books. From and after the Effective Time, the
stock transfer books of the Company shall be closed, and there shall be no
further registration of transfers of shares of Company Common Stock on the books
and records of the Company or the Surviving Corporation. If, after the Effective
Time, any Certificates are presented to the Exchange Agent or the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided in
this Article II.
Section 2.5. Stock Options. At the Effective Time, each Company Option (as
defined below) outstanding immediately prior thereto shall be converted into and
represent the right to receive (a) the Merger Consideration into which the share
or shares of Company Common Stock issuable upon exercise of such Company Option
would have been converted if such Company Option had been exercised immediately
prior to the Effective Time, reduced by (b) (i) the aggregate exercise price for
the shares of Company Common Stock then issuable upon exercise of such Company
Option and (ii) the amount of any withholding taxes which may be required
thereon (such reductions to be applied on a pro rata basis against the Cash
Consideration and the Stock Consideration comprising such Merger Consideration,
in the respective proportions which such Cash Consideration and Stock
Consideration bear to such Merger Consideration). All such Company Options shall
no longer be outstanding and shall automatically be cancelled, retired and
extinguished and shall cease to exist, and each Option Certificate shall
thereafter represent the right to receive, upon surrender of such Option
Certificate in accordance with Section 2.3, the Merger Consideration into which
such Company Options have been converted in accordance herewith. The holders of
Option Certificates shall cease to have any rights with respect thereto, except
as required by law. No fractional share of Parent Common Stock shall be issued
and, in lieu thereof, a cash payment shall be made in the same manner as
provided in Section 2.3(e) with respect to exchanges of Stock Certificates. No
interest will be paid or will accrue on any Merger Consideration (except as
specified in Section 2.1(a)(i)), any cash in lieu of fractional shares of Parent
Common Stock or any unpaid dividends or distributions in respect of Parent
Common Stock payable upon surrender of Option Certificates pursuant to this
Article II. From and after the date of this Agreement, the Company shall not
permit any additional options to purchase shares of Company Common Stock to be
issued or granted under the Company's stock option plans or otherwise.
Section 2.6. Dissenting Shares. (a) Notwithstanding any other provision of
this Agreement to the contrary, shares of Company Common Stock that are
outstanding immediately prior to the Effective Time and which are held by
stockholders who shall have not voted in favor of the Merger or consented
thereto in writing and who shall have properly delivered a written demand for
appraisal of such shares in accordance with Section 262 of the DGCL and shall
not have failed to perfect or shall not have effectively withdrawn such
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demand or otherwise lost their appraisal rights (the "Dissenting Shares") shall
not be converted into or represent the right to receive Merger Consideration.
Such stockholders shall be entitled to have such shares of Company Common Stock
held by them appraised in accordance with the provisions of Section 262 of the
DGCL, except that all Dissenting Shares held by stockholders who shall have
failed to perfect or shall have effectively withdrawn or otherwise lost their
right to appraisal of such shares of Company Common Stock under such Section 262
shall thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive, without any
interest thereon, the Merger Consideration therefor, upon surrender in
accordance with Section 2.3 of the Certificate or Certificates that formerly
evidenced such shares of Company Common Stock.
(b) The Company shall give the Parent (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of demands for appraisal, and any
other instruments served pursuant to the DGCL and received by the Company and
(ii) the opportunity to participate in all negotiations and proceedings with
respect to demands for appraisal under the DGCL. The Company will not, except
with the prior written consent of the Parent, make any payment with respect to
any demands for appraisal, or offer to settle, or settle, any such demand for
appraisal rights.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Parent and Merger Sub as
follows:
Section 3.1. Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as it is now being
conducted. The Company is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so
qualified, licensed or in good standing would not have a material adverse effect
on the business, operations, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole ("Company
Material Adverse Effect"). The Company has heretofore delivered to the Parent
true and complete copies of the certificate of incorporation and by-laws, each
as amended to date, of the Company.
Section 3.2. Capitalization. (a) The authorized capital stock of the
Company consists of 100,000,000 shares of Company Common Stock and 10,000,000
shares of Preferred Stock, par value $.01 per share ("Company Preferred Stock").
As of July 1, 1996, (i) 31,312,500 shares of Company Common Stock were issued
and outstanding, (ii) the number of shares of Company Common Stock set forth on
Section 3.2 of the Company Disclosure Schedule (and identified as "Company
Option Shares") were reserved for future issuance upon exercise of outstanding
options to purchase Company Common Stock ("Company Options"), granted to
directors, officers, employees and consultants of the Company pursuant to the
Company's 1995 Equity Participation Plan (the "Company Incentive Plan"), (iii)
no shares of Company Common Stock were held in the treasury of the Company and
(iv) no shares of Company Preferred Stock were issued or outstanding or reserved
for issuance. Since such date, no additional shares of capital stock of the
Company have been issued or reserved for issuance (except for shares of Company
Common Stock issued upon exercise of Company Options granted as aforesaid), and
no options or other rights to purchase or otherwise acquire shares of capital
stock of the Company have been issued or granted (other than the Company Options
identified on Section 3.2 of the Company Disclosure Schedule as having been
granted as aforesaid). Except as set forth above in this paragraph, no shares of
capital stock or other equity or voting securities of the Company are issued,
reserved for issuance, or outstanding. All of the outstanding shares of capital
stock of the Company are, and all shares thereof which may be issued upon
exercise of Company Options will upon issuance be, duly authorized, validly
issued, fully paid and nonassessable and free of any preemptive rights.
(b) Except as set forth in Section 3.2 of the Disclosure Schedule delivered
by the Company to the Parent concurrently with the execution of this Agreement
(the "Company Disclosure Schedule"), (i) no
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bonds, debentures, notes or other indebtedness or obligations of the Company or
any of its subsidiaries entitling the holders thereof to have the right to vote
(or which are convertible into, or exercisable or exchangeable for, securities
entitling the holders thereof to have the right to vote) with the stockholders
of the Company or any of its subsidiaries on any matter are issued, reserved for
issuance, or outstanding, (ii) there are no options, warrants, calls,
subscriptions, convertible or exchangeable securities, or other rights,
agreements or commitments of any character obligating the Company or any of its
subsidiaries to grant, issue, transfer or sell, or cause to be granted, issued,
transferred or sold, any shares of capital stock, or any other equity or voting
security or equity or voting interest, of the Company or any of its subsidiaries
or obligating the Company or any of its subsidiaries to grant, issue, extend or
enter into any right, agreement or commitment with respect to the foregoing,
(iii) there are no obligations (absolute, contingent or otherwise) of the
Company or any of its subsidiaries to repurchase, redeem or otherwise acquire
any shares of capital stock, or other equity or voting security or equity or
voting interest, of the Company or any of its subsidiaries, and (iv) other than
this Agreement, there are no voting trusts, proxies or other agreements or
understandings to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound with respect to the voting
of any shares of capital stock, or any other equity or voting security or
interest, of the Company or any of its subsidiaries.
(c) The Company has heretofore delivered to the Parent a true and complete
copy of the Company Incentive Plan, as amended to date. Section 3.2 of the
Company Disclosure Schedule contains a true and complete list of (i) all Company
Options outstanding on the date hereof, (ii) the identity of the holders or
optionees thereof, (iii) the number of shares of Company Common Stock covered by
each such Company Option, and the exercise price per share thereof, and (iv) the
number of shares for which each such Company Option will be exercisable at the
Effective Time. The Compensation Committee of the Board of Directors of the
Company has taken all action necessary under the Company Incentive Plan to duly
and validly authorize the conversion of all Company Options in accordance with
Section 2.5, and no other proceedings on the part of the Company are necessary
to duly and validly authorize the transactions contemplated by Section 2.5.
Section 3.3. Subsidiaries. (a) Section 3.3 of the Company Disclosure
Schedule accurately sets forth (i) the name and jurisdiction of incorporation or
organization of each subsidiary of the Company, (ii) the authorized and
outstanding capital stock of, or other equity interest in, each such subsidiary,
(iii) the amount of capital stock of, or other equity interest in, each such
subsidiary owned directly or indirectly by the Company or any of its
subsidiaries. Except as set forth in Section 3.3 of the Company Disclosure
Schedule (including the subsidiaries of the Company disclosed therein), the
Company does not directly or indirectly own any equity interest or equity
investment in any other person.
(b) Each of the subsidiaries of the Company is duly formed, validly
existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite power and authority to own, lease and operate
its properties and to carry on its business as it is now being conducted. Each
of the subsidiaries of the Company is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so
qualified, licensed or in good standing would not have a Company Material
Adverse Effect. The Company has heretofore made available to the Parent true and
complete copies of the certificate of incorporation, by-laws, partnership
agreement and all other charter or organization documents, each as amended to
date, of each subsidiary of the Company.
(c) All of the outstanding shares of capital stock of, or other equity
interests in, each of the subsidiaries of the Company are duly authorized and
validly issued and (in the case of shares of capital stock) are fully paid and
nonassessable, and (except as set forth in Section 3.3 of the Company Disclosure
Schedule) all such shares or other equity interests owned directly or indirectly
by the Company are owned free and clear of all liens, security interests,
claims, pledges, rights of first refusal, limitations on voting rights, charges
or other encumbrances of any nature whatsoever.
Section 3.4. Authorization, Validity and Enforceability. The Company has
all requisite corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and (subject only, with respect
to the Merger, to the approval and adoption of this Agreement by the holders of
a majority
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of the outstanding shares of Company Common Stock in accordance with the DGCL)
to consummate the Merger and the other transactions contemplated hereby to be
consummated by the Company. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the Merger and
the other transactions contemplated hereby have been duly and validly authorized
by all necessary corporate action on the part of the Company and no other
corporate proceedings on the part of the Company are necessary to authorize the
execution, delivery and performance of this Agreement or the consummation of the
Merger or the other transactions contemplated hereby (other than, with respect
to the Merger, the approval and adoption of this Agreement by the holders of a
majority of the outstanding shares of Company Common Stock in accordance with
the DGCL). This Agreement has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by any applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally, and except as the availability of equitable
remedies may be limited by the application of general principles of equity
(regardless of whether such equitable principles are applied in a proceeding at
law or in equity).
Section 3.5. No Conflict or Violation. Subject to (i) making the filings
and obtaining the approvals identified in Section 3.6 and (ii) obtaining the
material non-governmental consents identified in Section 3.5 of the Company
Disclosure Schedule and (iii) the approval and adoption of this Agreement by the
holders of a majority of the outstanding shares of Company Common Stock in
accordance with the DGCL, the execution and delivery of this Agreement by the
Company do not, and the performance by the Company of its obligations hereunder
and the consummation by the Company of the Merger and the other transactions
pursuant hereto will not, (a) conflict with or violate the certificate of
incorporation, by-laws, partnership agreement or other charter or organization
document of the Company or any of its subsidiaries, (b) conflict with or violate
any material law, statute, rule, regulation, order, judgment, writ, injunction
or decree applicable to the Company or any of its subsidiaries or any of their
respective properties or assets, or (c) result in a violation or breach of or
constitute a default under (or an event which with the giving of notice or the
lapse of time or both would constitute a default under), require any consent,
approval or authorization under, result in the loss of a material benefit or
result in any provision becoming applicable or effective under, or give rise to
any right of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or other encumbrance on any property or asset of the
Company or any of its subsidiaries pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or any material
property or asset of the Company or any of its subsidiaries may be bound or
affected, except in the case of each of clauses (b) and (c) for any such
conflicts, violations, breaches, defaults or other occurrences which would not,
individually or in the aggregate, be reasonably likely to result in a Company
Material Adverse Effect or prevent the Company from performing its obligations
under this Agreement in any material respect.
Section 3.6. Consents and Approvals. The execution and delivery of this
Agreement by the Company do not, and the performance by the Company of its
obligations hereunder and the consummation by the Company of the Merger and the
other transactions contemplated hereby will not, require the Company to obtain
any consent, approval, authorization or permit of, or to make any filing with or
notification to, any federal, state, local, foreign or other governmental,
judicial or regulatory authority (each a "Governmental Entity"), except (a) for
(i) applicable requirements, if any, of the Securities Act of 1933, as amended
(the "Securities Act"), the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), state securities or "blue sky" laws ("Blue Sky Laws"), and
state antitakeover laws, (ii) the pre-merger notification and report
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act"), (iii) filing
and recordation of the Certificate of Merger as required by the DGCL, (iv)
consents, approvals, authorizations, orders, permits, filings or registrations
related to, or arising out of, compliance with statutes, rules or regulations
regulating the consumption, sale or serving of alcoholic beverages and (v)
filings relating to the matters set forth in Section 5.17 or 5.18, and (b) where
the failure to obtain such consents, approvals, authorizations and permits, or
to make such filings or notifications, would not, individually or in the
aggregate, prevent the Company from performing its obligations under this
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Agreement in any material respect or from consummating the Merger or any other
transaction pursuant hereto.
Section 3.7. SEC Documents and Financial Statements. (a) The Company has
filed all forms, reports, statements and other documents required to be filed by
it with the Securities and Exchange Commission (the "SEC") since July 26, 1995
(such forms, reports, statements and other documents, excluding the Proxy
Statement referred to below, are hereinafter referred to as the "Company SEC
Documents"). The Company SEC Documents filed by the Company with the SEC prior
to and after the date of this Agreement (i) complied, or will comply, when
filed, in all material respects with the applicable requirements of the
Securities Act, the Exchange Act, and the rules and regulations thereunder, and
(ii) did not, or will not, when filed, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes or schedules thereto) contained in or incorporated by
reference in the Company SEC Documents filed prior to and after the date of this
Agreement (i) have been or will be prepared in accordance with the published
rules and regulations of the SEC and United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited consolidated quarterly statements, as permitted by Form 10-Q of the
SEC) and (ii) fairly present or will fairly present in all material respects the
consolidated financial position of the Company and its subsidiaries as of the
respective dates thereof and the consolidated results of operations and cash
flows of the Company and its subsidiaries for the periods indicated therein
(subject, in the case of unaudited interim financial statements, to normal
recurring year-end audit adjustments which would not be material in amount or
effect).
(c) No subsidiary of the Company is required to file any report, form or
other document with the SEC. Red Lion Inns Limited Partnership, a Delaware
limited partnership (the "MLP"), has filed all forms, reports, statements and
other documents required to be filed by it with the SEC since January 1, 1993
(such forms, reports, statements and other documents are hereinafter referred to
as the "MLP SEC Documents"). The MLP SEC Documents filed by the MLP with the SEC
prior to and after the date of this Agreement (i) complied, or will comply, when
filed, in all material respects with the applicable requirements of the
Securities Act, the Exchange Act, and the rules and regulations thereunder, and
(ii) did not, or will not, when filed, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Each of the
consolidated financial statements (including, in each case, any related notes or
schedules thereto) contained in or incorporated by reference in the MLP SEC
Documents filed prior to and after the date of this Agreement (A) have been or
will be prepared in accordance with the published rules and regulations of the
SEC and GAAP applied on a consistent basis throughout the periods involved
(except, in the case of MLP SEC Documents filed prior to the date of this
Agreement, as may be indicated in the notes thereto or, in the case of unaudited
consolidated quarterly statements, as permitted by Form 10-Q of the SEC) and (B)
fairly present or will fairly present in all material respects the consolidated
financial position of the MLP and its subsidiaries as of the respective dates
thereof and the consolidated results of operations and cash flows of the MLP and
its subsidiaries for the periods indicated therein (subject, in the case of
unaudited interim financial statements, to normal recurring year-end audit
adjustments which would not be material in amount or effect).
Section 3.8. No Undisclosed Liabilities. Neither the Company nor any of
its subsidiaries has any debts, liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise) that would be required to
be reflected on, or disclosed or reserved against in, a consolidated balance
sheet of the Company and its subsidiaries or in the notes thereto, prepared in
accordance with GAAP consistently applied, except for (a) debts, liabilities and
obligations that were so reserved on, or disclosed or reflected in, the
consolidated balance sheet of the Company and its subsidiaries as of June 30,
1996 and the notes thereto, included in the Quarterly Report on Form 10-Q of the
Company for the quarter then ended, or the consolidated balance sheet of the
Company and its subsidiaries as of December 31, 1995 and the notes thereto,
included in the Annual
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Report on Form 10-K of the Company for the year then ended, and (b) debts,
liabilities or obligations arising in the ordinary course of business since June
30, 1996.
Section 3.9. Absence of Certain Changes. Since December 31, 1995, except
as disclosed in the Company SEC Documents filed with the SEC prior to the date
of this Agreement or as specifically contemplated by this Agreement or as set
forth in Section 3.9 of the Company Disclosure Schedule, (a) the Company and its
subsidiaries have conducted their respective businesses only in the ordinary
course and in a manner consistent with past practice and (b) there has not been
(i) any change, event, occurrence or circumstance in the business, operations,
properties, financial condition or results of operations of the Company or any
of its subsidiaries which, individually or in the aggregate, has had or is
reasonably likely to have a Company Material Adverse Effect (except for changes,
events, occurrences or circumstances (A) with respect to general economic or
industry conditions and (B) arising as a result of the transactions contemplated
hereby), (ii) any material change by the Company in its accounting methods,
principles or practices, (iii) any declaration, setting aside or payment of any
dividend or distribution or capital return in respect of any capital stock of,
or other equity interest in, the Company or any of its subsidiaries (other than
dividends by such subsidiaries in accordance with their respective charters or
partnership agreements, as the case may be, (iv) any material revaluation for
financial statement purposes by the Company or any of its subsidiaries of any
asset (including, without limitation, any writing down of the value of any
property, investment or asset or writing off of notes or accounts receivable),
(v) other than payment of compensation for services rendered to the Company or
any of its subsidiaries in the ordinary course of business or the grant of
Company Options as described in Section 3.2 or any transactions described in
Section 3.12 of the Company Disclosure Schedule, any material transactions
between the Company or any of its subsidiaries, on the one hand, and any (A)
officer or director of the Company or any of its subsidiaries, (B) record or
beneficial owner of five percent (5%) or more of the voting securities of the
Company, or (C) affiliate of any such officer, director or beneficial owner, on
the other hand, or (vi) other than pursuant to the terms of the plans, programs
or arrangements specifically referred to in Section 3.12 or Section 5.14 or in
the ordinary course of business consistent with past practice, any increase in
or establishment of any bonus, insurance, welfare, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards or restricted stock awards), stock purchase or other employee
benefit plan, or any other increase in the compensation payable or to become
payable to any employees, officers, directors or consultants of the Company or
any of its subsidiaries, which increase or establishment, individually or in the
aggregate, will result in a material liability.
Section 3.10. Litigation. Except as disclosed in the Company SEC Documents
filed with the SEC prior to the date of this Agreement, there is no action,
suit, claim, proceeding or investigation pending or, to the knowledge of the
Company, threatened against the Company or any of its subsidiaries or any
properties or assets of the Company or any of its subsidiaries by or before any
court, other Governmental Entity or arbitrator which is material or which could
reasonably be expected to prevent or substantially delay consummation of the
Merger or any of the other transactions contemplated hereby in any material
respect, or otherwise prevent the Company from performing its obligations under
this Agreement in any material respect. Except as disclosed in the Company SEC
Documents filed with the SEC prior to the date of this Agreement, neither the
Company nor any of its subsidiaries nor any property or asset of the Company or
any of its subsidiaries is subject to any order, writ, injunction, judgment,
decree or award which is material or which could reasonably be expected to
prevent or substantially delay consummation of the Merger or any of the other
transactions pursuant hereto in any material respect, or otherwise prevent the
Company from performing its obligations under this Agreement in any material
respect.
Section 3.11. Compliance. The Company is not in conflict with, or in
default or violation of, and none of its subsidiaries is in conflict in any
material respect with, or in default or violation in any material respect of,
its respective certificate of incorporation, by-laws, partnership agreement or
other charter or organization documents. Neither the Company nor any of its
subsidiaries is in conflict with, or in default or violation of, (a) any
material law, statute, rule, regulation, order, judgment, writ, injunction or
decree applicable to the Company or any of its subsidiaries or any of their
respective properties or assets (excluding any law, statute, rule, regulation or
order relating to the consumption, sale or serving of alcoholic beverages), or
(b) any
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material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any material property or asset of the Company or any of its
subsidiaries may be bound or affected. The Company and its subsidiaries hold all
material licenses, permits, approvals and other authorizations of Governmental
Entities, and are in substantial compliance with all applicable laws and
governmental regulations in connection with their businesses as now being
conducted.
Section 3.12. Employee Benefit Plans. (a) Section 3.12(a) of the Company
Disclosure Schedule sets forth each plan which is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and each other
material agreement, arrangement or commitment which is an employment or
consulting agreement, executive or incentive compensation plan, bonus plan,
deferred compensation agreement, employee pension, profit sharing, savings or
retirement plan, employee stock option or stock purchase plan, group life,
health, or accident insurance or other employee benefit plan, agreement,
arrangement or commitment, including, without limitation, any commitment arising
under the laws of any jurisdiction, severance, holiday, vacation, Christmas or
other bonus plans, maintained by the Company or any of its subsidiaries for any
present or former employees, officers or directors of the Company or any of its
subsidiaries ("Company Personnel") or with respect to which the Company or any
of its subsidiaries has liability or makes or has an obligation to make
contributions (each, a "Company Employee Plan").
(b) The Company has made available to the Parent (i) copies of all Company
Employee Plans or in the case of an unwritten plan, a written description
thereof, (ii) copies of the most recent annual, financial or actuarial reports
and Internal Revenue Service determination letters relating to such Company
Employee Plans and (iii) copies of all summary plan descriptions (whether or not
required to be furnished under ERISA) and employee communications relating to
such Company Employee Plans and distributed to Company Personnel, in each case
under this clause (iii), existing or in effect during or within the past five
years.
(c) There are no Company Personnel who are entitled to any medical, dental
or life benefit to be paid after termination of employment other than required
by Section 601 of ERISA, Section 4980B of the Code or applicable state law.
(d) Each Company Employee Plan that is an employee welfare benefit plan
under Section 3(1) of ERISA is either (i) funded through an insurance company
contract and is not a "welfare benefit fund" within the meaning of Section 419
of the Code or (ii) is unfunded. There is no material liability in the nature of
a retroactive rate adjustment or loss-sharing or similar arrangement, with
respect to any Company Employee Plan which is an employee welfare benefit plan.
(e) All contributions or payments due with respect to any periods prior to
the Effective Time under any Company Employee Plan have been made or appropriate
charges have been made on the financial statements. Except as described in
Section 3.12(h), each Company Employee Plan by its terms and operation is in
substantial compliance with all applicable laws (including, but not limited to,
ERISA, the Code and the Age Discrimination in Employment Act of 1967, as
amended).
(f) There are no actions, suits or claims pending or threatened (other than
routine noncontested claims for benefits) and, to the knowledge of the Company,
no set of circumstances exist which may reasonably give rise to such a claim
against any Company Employee Plan or administrator or fiduciary of any such
Company Employee Plan which reasonably likely to result in a Company Material
Adverse Effect. As to each Company Employee Plan for which an annual report is
required to be filed under ERISA or the Code, all such filings, including
schedules, have been made on a timely basis.
(g) Other than the multiemployer plan identified as such in Section 3.12(g)
of the Company Disclosure Schedule, neither the Company nor any of its
subsidiaries (or any entity that is or was at any time required to be aggregated
with the Company or any of its subsidiaries under Section 414(b), (c), (m) or
(o) of the Code) (the "ERISA Controlled Group") has at any time maintained,
contributed to or been required to contribute to any plan subject to Title IV of
ERISA or Section 412 of the Code. The withdrawal liability that the Company, any
of its subsidiaries or any member of their respective ERISA Controlled Groups
would incur
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if any such entity were to completely withdraw as of the date hereof from the
foregoing multiemployer plan to which it is required to contribute would not
exceed $1,000,000.
(h) The Employee Retirement Savings Plan maintained by the Company (the
"401(k) Plan") has received a favorable determination letter from the Internal
Revenue Service which provides that the 401(k) Plan is qualified under Sections
401(a) and 401(k) of the Code (the "IRS Letter"). The liability of the Company
and its subsidiaries in connection with the application for a compliance
statement pursuant to Revenue Procedure 94-62 (the "VCR Application") does not
exceed $600,000. Other than items for which relief has been requested pursuant
to the VCR Application, nothing has occurred since the date of the most recent
IRS Letter to cause such letter to be no longer valid or effective.
(i) Neither the Company nor any of its subsidiaries (or, to the knowledge
of the Company, any other person, including any fiduciary) has engaged in any
"prohibited transaction" (as defined in Section 4975 of the Code or Section 406
of ERISA), which could subject any of the Company Employee Plans (or their
trusts), the Company, any of its subsidiaries or any person whom, the Company or
any of its subsidiaries has an obligation to indemnify, to any material tax or
penalty imposed under Section 4975 of the Code or Section 502 of ERISA.
(j) None of the assets of the Company Employee Plans is invested in any
property constituting employer real property or an employer security within the
meaning of Section 407(d) of ERISA.
(k) Except as set forth on Section 3.12(k) of the Company Disclosure
Schedule or as required under this Agreement, the events contemplated by this
Agreement (either alone or together with any other event) will not (i) entitle
any Company Personnel to severance pay or other similar payments under any
Company Employee Plan or law, (ii) accelerate the time of payment or vesting or
increase the amount of benefits due under any Company Employee Plan or
compensation to any Company Personnel, (iii) result in any payments (including
parachute payments) under any Company Employee Plan or law becoming due to any
Company Personnel, or (iv) terminate or modify or give a third party a right to
terminate or modify the provisions or terms of any Company Employee Plan.
Section 3.13. Labor Matters. Except as set forth in Section 3.13 of the
Company Disclosure Schedule, neither the Company nor any of its subsidiaries is
a party to any collective bargaining or other labor union contracts applicable
to any person employed by the Company or any of its subsidiaries. There is no
pending or, to the knowledge of the Company, threatened material labor dispute,
strike or work stoppage against the Company or any of its subsidiaries. Neither
the Company nor its subsidiaries, nor their respective representatives or
employees, has committed any material unfair labor practices in connection with
the operation of the respective businesses of the Company or its subsidiaries,
and there is no pending or, to the knowledge of the Company, threatened charge
or complaint against the Company or its subsidiaries by the National Labor
Relations Board or any comparable state agency which, if adversely determined,
would have a Company Material Adverse Effect.
Section 3.14. Tax Matters. (a) For purposes of this Agreement: (i) "Taxes"
means any federal, state, county, local or foreign taxes, charges, fees, levies,
or other assessments, including, without limitation, all net income, gross
income, sales and use, ad valorem, transfer, gains, profits, excise, franchise,
real and personal property, gross receipt, capital stock, business and
occupation, disability, employment, payroll, license, estimated, or withholding
taxes or charges imposed by any governmental entity, and includes any interest
and penalties on or additions to any such taxes (and, in the case of the Company
and the Parent, Taxes for which the Company, the Parent, and/or any of their
subsidiaries, as the case may be, may be liable in its own right, or as the
transferee of the assets of, or as successor to, any other corporation,
association, partnership, joint venture, or other entity, or under Treasury
Regulation Section 1.1502-6 or any similar provision of state or local law); and
(ii) "Tax Return" means a report, return or other information required to be
supplied to a governmental entity with respect to Taxes including, where
permitted or required, (A) in the case of the Company, combined or consolidated
returns for any group of entities that includes the Company or any of its
subsidiaries, and (B) in the case of the Parent, combined or consolidated
returns for any group of entities that includes the Parent or any of its
subsidiaries.
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(b) The Company and each of its subsidiaries, the MLP (which for purposes
of this Section 3.14 includes Red Lion Inns Operating L.P.), and any affiliated
group (within the meaning of Code Section 1504) of which the Company or any of
its subsidiaries is or was a member, have (i) filed all federal income and
material state Tax Returns required to be filed by applicable law and all such
federal income and material state Tax Returns (A) were true, complete and
correct in all respects (and as to Tax Returns not filed as of the date hereof
but filed at or prior to the Effective Time, will be true, complete and correct
in all respects) (B) reflect the liability for Taxes of the Company and each of
its subsidiaries and the MLP, and (C) were filed on a timely basis and (ii)
within the time and in the manner prescribed by law, paid (and until the
Effective Time will pay within the time and in the manner prescribed by law) all
Taxes that were or are due and payable as set forth in such Tax Returns.
(c) Each of the Company, the MLP and, where applicable, the Company's
subsidiaries has established (and until the Effective Time will maintain) on its
books and records reserves adequate to pay all Taxes of the Company, the MLP or
such respective subsidiary, as the case may be, in accordance with GAAP, which
are reflected in the most recent consolidated financial statements of the
Company and its subsidiaries and the MLP contained in the Company SEC Documents
and/or the MLP SEC Documents, as applicable, to the extent required by GAAP.
(d) There are no, and, as of the Effective Time, there will be no liens for
Taxes, which in the aggregate exceed $500,000 upon the assets of the Company
and/or any of its subsidiaries and/or the MLP except liens for Taxes not yet due
or payable, or not yet delinquent.
(e) Each of the Company and its subsidiaries and the MLP has complied (and
until the Effective Time will comply) in all material respects with the
provisions of the Code relating to the payment and withholding of Taxes,
including, without limitation, the withholding and reporting requirements under
Code Sections 1441 through 1464, 3401 through 3406, and 6041 through 6049, as
well as similar provisions under any other laws, and has, within the time and in
the manner prescribed by law, withheld from employee wages and paid over to the
proper governmental authorities all amounts required.
(f) Except as disclosed in Section 3.14(f) of the Company Disclosure
Schedule, neither the Company nor any subsidiary thereof nor the MLP has
requested any extension of time within which to file any federal income Tax
Return or any state income or franchise Tax Return, which Tax Return has not
been filed as of the date hereof.
(g) Neither the Company nor any subsidiary thereof nor the MLP has executed
any outstanding waivers or comparable consents regarding the application of the
statute of limitations with respect to any federal income Taxes, federal income
Tax Returns, state income or franchise Taxes or state income or franchise Tax
Returns.
(h) No deficiency for any Tax which, alone or in the aggregate with any
other deficiency or deficiencies, would exceed $500,000, has been proposed,
asserted, or assessed against the Company and/or any subsidiary thereof and/or
the MLP that has not been resolved and paid in full or otherwise settled, no
audits or other administrative proceedings are presently in progress or pending
or threatened in writing with regard to any Taxes or Tax Returns of the Company
and/or any subsidiary thereof and/or the MLP, and no written claim is currently
being made by any authority in a jurisdiction where any of the Company or any
subsidiary thereof or the MLP, as the case may be, does not file Tax Returns
that it is or may be subject to Tax in that jurisdiction.
(i) Except as disclosed on Section 3.14(i) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries nor the MLP has
received a Tax Ruling (as defined below) or entered into a Closing Agreement (as
defined below) with the Internal Revenue Service that would have any continuing
effect after the Effective Time. "Tax Ruling" shall mean a written ruling of the
Internal Revenue Service or a state taxing authority relating to Taxes. "Closing
Agreement" shall mean a written and legally binding agreement with a Taxing
authority relating to Taxes.
(j) The Company and each of its subsidiaries and the MLP have made
available (or, in the case of Tax Returns filed after the date hereof, will make
available at such time and place as the Parent may reasonably
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request) to the Parent complete and accurate copies of such Tax Returns, and
amendments thereto, filed by the Company and/or its subsidiaries and/or the MLP
as the Parent may reasonably request.
(k) Except as disclosed on Section 3.14(k) of the Company Disclosure
Schedule, neither the Company nor any of its subsidiaries nor the MLP is a party
to any agreement relating to allocating or sharing of the payment of, or
liability for, Taxes.
(l) Neither the Company nor any of its subsidiaries nor the MLP is required
to include in income any adjustment pursuant to Code Section 481.
(m) Neither the Company nor any of its subsidiaries nor the MLP has made or
entered into, or holds any assets subject to, a consent filed pursuant to
Section 341(f) of the Code and the regulations thereunder.
(n) Except as set forth in Section 3.14(n) of the Company Disclosure
Schedule, the disallowance of a deduction under Section 162(m) of the Code for
the employee remuneration will not apply to any amount paid or payable by the
Company or any of its subsidiaries or the MLP under any contract, plan, program,
arrangements or understanding currently in effect.
(o) Assuming that the Effective Time occurs in 1996, the total aggregate
amounts that may be characterized as excess parachute payments (within the
meaning of Code Section 280(G)(b)(1)), and the related Excise Tax Gross Up
Payments (within the meaning of the Severance Agreements and the SERP), with
respect to the Company and/or any subsidiary thereof and/or the MLP will not
exceed $12,400,000 and $7,200,000, respectively, provided that any amount under
the Management Bonus Plan (or any similar plan maintained by Parent and/or any
subsidiary thereof) shall not be considered a parachute payment.
(p) Except as disclosed on Section 3.14(p) of the Company Disclosure
Schedule, there is no unresolved issue of law or fact arising out of a notice of
deficiency, proposed deficiency or assessment from the Internal Revenue Service
or any other taxing authority with respect to Taxes of the Company or any of its
subsidiaries or the MLP.
(q) To the best of the knowledge of the Company, there are no deferred
intercompany gains, intercompany gains that have not yet been taken into
account, or excess loss accounts (within the meaning of the Treasury Regulations
under Code Section 1502) with respect to the Company or any of its subsidiaries.
(r) To the best of the knowledge of the Company, no foreign person directly
or indirectly holds (within the meaning of Code section 897(c)(3)) more than 5
percent of the stock of the Company.
Section 3.15. Properties. Section 3.15 of the Company Disclosure Schedule
contains a true and complete list (identifying the relevant owners, lessors and
lessees) of all real properties owned or leased by the Company or any of its
subsidiaries. Each of the Company and its subsidiaries has good and marketable
title to all properties, assets and rights of any kind whatsoever (whether real,
personal or mixed, and whether tangible or intangible) owned by it
(collectively, the "Company Assets"), in each case free and clear of any
mortgage, security interest, deed of trust, claim, charge, title defect or other
lien or encumbrance, except (a) as shown on the consolidated balance sheet of
the Company and its subsidiaries dated June 30, 1996 and the notes thereto, and
the consolidated balance sheet of the Company and its subsidiaries dated as of
December 31, 1995 and the notes thereto, each as contained in the Company SEC
Documents, (b) for any mortgage, security interest, deed of trust, claim,
charge, title defect or other lien or encumbrance arising by reason of (i)
taxes, assessments or governmental charges not yet delinquent or which are being
contested in good faith, (ii) deposits to secure public or statutory obligations
in lieu of surety or appeal bonds entered into in the ordinary course of
business, and (iii) operation of law in favor of carriers, warehousemen,
landlords, mechanics, materialmen, laborers, employees or suppliers, incurred in
the ordinary course of business for sums which are not yet delinquent or are
being contested in good faith by negotiations or by appropriate proceedings
which suspend the collection thereof ("Permitted Liens"), or (c) as set forth on
Section 3.15 of the Company Disclosure Schedule. Except as set forth in Section
3.15 of the Company Disclosure Schedule, there are no pending or, to the
knowledge of the Company, threatened condemnation proceedings against or
affecting any material Company Assets, and none of the material Company Assets
is subject to any commitment or other arrangement for its sale to a third party
outside the ordinary course of business.
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Section 3.16. Environmental Matters. Neither the Company nor any of its
subsidiaries is the subject of any federal, state, local or foreign
investigation, and neither the Company nor any of its subsidiaries has received
any notice or claim, nor entered into any negotiations or agreements with any
third party, relating to any material liability or remedial action or potential
material liability or remedial action under any Environmental Laws (as defined
below). There are no pending or, to the knowledge of the Company, threatened
actions, suits, claims or proceedings against or affecting the Company or any of
its subsidiaries or any of their properties, assets or operations in connection
with any such Environmental Laws. The properties, assets and operations of the
Company and its subsidiaries are in compliance in all material respects with all
applicable federal, state, local and foreign laws, rules and regulations,
orders, decrees, judgments, permits and licenses relating to public and worker
health and safety and to the protection and clean-up of natural environment and
activities or conditions relating thereto, including, without limitation, those
relating to the generation, handling, disposal, transportation or release of
hazardous materials (collectively, "Environmental Laws"), except as disclosed in
the "Phase I" and other reports identified in Section 3.16 of the Company
Disclosure Schedule (true and complete copies of which have been made available
to the Parent).
Section 3.17. Material Contracts and Commitments. (a) Section 3.17 of the
Company Disclosure Schedule contains a true and complete list of all of the
following contracts, agreements and commitments, whether oral or written
("Contracts"), to which the Company or any of its subsidiaries is a party or by
which any of them or any of their material Company Assets is bound, as each such
contract or commitment may have been amended, modified or supplemented:
(i) all Contracts pursuant to which the Company or its subsidiaries
holds a leasehold interest in one or more hotel facilities;
(ii) all Contracts providing for management of any hotel by the
Company or any of its subsidiaries or management by any other person of a
hotel owned or leased by the Company or any of its subsidiaries;
(iii) all Contracts granting a franchise or license to utilize a brand
name or other rights of a hotel chain or system;
(iv) all partnership, joint venture or limited liability company
Contracts with any person;
(v) all loan agreements, notes, bonds, debentures, debt instruments,
evidences of indebtedness, debt securities, or other Contracts relating to
any indebtedness of the Company or any of its subsidiaries in an amount in
excess of $1,000,000, or involving the direct or indirect guaranty or
suretyship by the Company or any of its subsidiaries of any indebtedness in
an amount in excess of $1,000,000;
(vi) all Contracts (entered into since the formation of the Company)
relating to any merger, consolidation, business combination, share
exchange, business acquisition, or for the purchase, acquisition, sale or
disposition of any Company Assets outside the ordinary course of business;
and
(vii) all stockholder Contracts to which the Company or any of its
subsidiaries is a party; and all other Contracts entered into by the
Company or any of its subsidiaries with stockholders of the Company who are
beneficial owners of five percent or more of the voting securities of the
Company.
(b) The Company has heretofore made available to the Parent true and
complete copies of all of the Contracts required to be set forth in Section 3.17
of the Company Disclosure Schedule. Each such Contract is valid and binding in
accordance with its terms, and is in full force and effect (except as set forth
in Section 3.17 of the Company Disclosure Schedule). Neither the Company nor any
of its subsidiaries is in default in any material respect with respect to any
such Contract, nor (to the knowledge of the Company) does any condition exist
that with notice or lapse of time or both would constitute such a material
default thereunder. To the knowledge of the Company, no other party to any such
Contract is in default in any material respect with respect to any such
Contract. Except as set forth in Section 3.17 of the Company Disclosure
Schedule, no party has given any written or (to the knowledge of the Company)
oral notice of termination or cancellation of any such Contract or that it
intends to assert a breach of, or seek to terminate or cancel, any such Contract
as a result of the transactions contemplated hereby.
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Section 3.18. Intellectual Property. The Company and its subsidiaries own
or possess adequate licenses or other valid rights to use all material
trademarks, trademark rights, trade names, trade name rights, copyrights,
patents, patent rights, service marks, trade secrets, applications for
trademarks and for service marks, and other proprietary rights and information
used or held for use in connection with the business of the Company and its
subsidiaries as currently conducted, and the Company has no knowledge of any
assertion or claim challenging the validity of any of the foregoing.
Section 3.19. Opinion of Financial Advisor. The Company has received the
opinion of Smith Barney Inc. to the effect that the Merger Consideration to be
received by the stockholders of the Company (other than the Parent and its
affiliates) is fair to such stockholders from a financial point of view.
Section 3.20. Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its affiliates, other than Smith Barney Inc.
(the fees and expenses of which shall be paid in full by the Company). The
Company has heretofore furnished to the Parent a true and complete copy of all
agreements between the Company and such firm pursuant to which such firm would
be entitled to any payment relating to the Merger or the transactions
contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARENT
The Parent hereby represents and warrants to the Company as follows:
Section 4.1. Organization and Qualification. Each of the Parent and Merger
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted. The Parent is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the property
owned, leased or operated by it or the nature of the business conducted by it
makes such qualification or licensing necessary, except where the failure to be
so qualified, licensed or in good standing would not have a material adverse
effect on the business, operations, properties, financial condition or results
of operations of the Parent and its subsidiaries, taken as a whole (a "Parent
Material Adverse Effect"). The Parent has heretofore delivered to the Company
true and complete copies of the certificate of incorporation, by-laws and all
other charter or similar organization documents, each as amended to date, of the
Parent and Merger Sub.
Section 4.2. Capitalization. (a) The authorized capital stock of the
Parent consists of 100,000,000 shares of Parent Common Stock and 5,000,000
shares of Preferred Stock, par value $.01 per share ("Parent Preferred Stock").
As of July 15, 1996, (i) 23,077,461 shares of Parent Common Stock were issued
and outstanding, (ii) 1,760,275 shares of Parent Common Stock were reserved for
future issuance upon exercise of outstanding options to purchase Parent Common
Stock ("Parent Options"), granted to directors, officers, employees and
consultants of the Parent pursuant to the Parent's 1994 Equity Participation
Plan, (iii) no shares of Parent Common Stock were held in the treasury of the
Parent and (iv) no shares of Parent Preferred Stock were issued or outstanding
or reserved for issuance. Since such date, no additional shares of capital stock
of the Parent have been issued or reserved for issuance, and no options or other
rights to purchase or otherwise acquire shares of capital stock of the Parent
have been issued or granted, other than (A) shares of Parent Common Stock issued
upon exercise of Parent Options granted as aforesaid, (B) as contemplated hereby
and (C) as described in Section 4.2 of the Disclosure Schedule delivered by the
Parent to the Company concurrently with the execution of this Agreement (the
"Parent Disclosure Schedule"). Except as set forth above in this paragraph, no
shares of capital stock or other equity or voting securities of the Parent are
issued, reserved for issuance, or outstanding. All of the outstanding shares of
capital stock of the Parent are, and all shares thereof which may be issued upon
exercise of Parent Options will upon issuance be, duly authorized, validly
issued, fully paid and nonassessable and free of any preemptive rights. The
shares of Parent Common Stock to be issued to holders of Company Common Stock in
connection with the Merger have been
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duly authorized and, when issued and delivered to such holders in accordance
with this Agreement, will be validly issued, fully paid and nonassessable and
free of any preemptive rights.
(b) Except as contemplated hereby or as set forth in Section 4.2 of the
Parent Disclosure Schedule, (i) no bonds, debentures, notes or other
indebtedness or obligations of the Parent or any of its subsidiaries entitling
the holders thereof to have the right to vote (or which are convertible into, or
exercisable or exchangeable for, securities entitling the holders thereof to
have the right to vote) with the stockholders of the Parent or any of its
subsidiaries on any matter are issued, reserved for issuance, or outstanding,
(ii) there are no options, warrants, calls, subscriptions, convertible or
exchangeable securities, or other rights, agreements or commitments of any
character obligating the Parent or any of its subsidiaries to grant, issue,
transfer or sell, or cause to be granted, issued, transferred or sold, any
shares of capital stock, or any other equity or voting security or equity or
voting interest, of the Parent or any of its subsidiaries or obligating the
Parent or any of its subsidiaries to grant, issue, extend or enter into any
right, agreement or commitment with respect to the foregoing, (iii) there are no
obligations (absolute, contingent or otherwise) of the Parent or any of its
subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock, or other equity or voting security or equity or voting interest, of the
Parent or any of its subsidiaries, and (iv) there are no voting trusts, proxies
or other agreements or understandings to which the Parent or any of its
subsidiaries is a party or by which the Parent or any of its subsidiaries is
bound with respect to the voting of any shares of capital stock, or any other
equity or voting security or interest, of the Parent or any of its subsidiaries.
(c) The authorized capital stock of Merger Sub consists of 1,000 shares of
Common Stock, par value $.01 per share ("Merger Sub Common Stock"), of which 100
shares are issued and outstanding. The Parent owns directly all the outstanding
shares of Merger Sub Common Stock. The outstanding shares of Merger Sub Common
Stock are duly authorized, validly issued, fully paid and nonassessable and free
of any preemptive rights.
Section 4.3. Subsidiaries. (a) Section 4.3 of the Parent Disclosure
Schedule accurately sets forth the name and jurisdiction of incorporation or
organization of each subsidiary of the Parent. Each of the subsidiaries of the
Parent is duly formed, validly existing and in good standing under the laws of
the jurisdiction of its organization and has all requisite power and authority
to own, lease and operate its properties and to carry on its business as it is
now being conducted. Each of the subsidiaries of the Parent is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so qualified, licensed or in good standing would not have a
Parent Material Adverse Effect. The Parent has heretofore made available to the
Company true and complete copies of the certificate of incorporation, by-laws,
partnership agreement and all other charter or organization documents, each as
amended to date, of each subsidiary of the Parent.
(b) All of the outstanding shares of capital stock of, or other equity
interests in, each of the subsidiaries of the Parent are duly authorized and
validly issued and (in the case of shares of capital stock) are fully paid and
nonassessable, and (except as set forth in Section 4.3 of the Parent Disclosure
Schedule) all such shares or other equity interests owned directly or indirectly
by the Parent are owned free and clear of all liens, security interests, claims,
pledges, rights of first refusal, limitations on voting rights, charges or other
encumbrances of any nature whatsoever.
Section 4.4. Authorization, Validity and Enforceability. Each of the
Parent and Merger Sub has all requisite corporate power and authority to execute
and deliver this Agreement, to perform its obligations hereunder and (subject
only to the approval, by the holders of a majority of the total votes cast in
person or by proxy at a duly called and held meeting of holders of Parent Common
Stock, of the issuance of Parent Common Stock pursuant to this Agreement, as
required under the rules and requirements of Nasdaq (the "Parent Stockholder
Approval")) to consummate the Merger and the other transactions contemplated
hereby to be consummated by the Parent. The execution, delivery and performance
of this Agreement by the Parent and Merger Sub and the consummation by the
Parent and the Merger Sub of the Merger and the other transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of the Parent and Merger Sub and no other corporate proceedings on
the part of the Parent or Merger
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Sub are necessary to authorize the execution, delivery and performance of this
Agreement or the consummation of the Merger or the other transactions
contemplated hereby (other than the Parent Stockholder Approval). This Agreement
has been duly executed and delivered by each of the Parent and Merger Sub and
constitutes the legal, valid and binding obligation of each of the Parent and
Merger Sub, enforceable against each of the Parent and Merger Sub in accordance
with its terms, except as such enforceability may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, and except as the
availability of equitable remedies may be limited by the application of general
principles of equity (regardless of whether such equitable principles are
applied in a proceeding at law or in equity).
Section 4.5. No Conflict or Violation. Subject to (i) making the filings
and obtaining the approvals identified in Section 4.6 and (ii) obtaining the
material non-governmental consents identified in Section 4.5 of the Parent
Disclosure Schedule and (iii) the Parent Stockholder Approval, the execution and
delivery of this Agreement by the Parent and Merger Sub do not, and the
performance by each of the Parent and Merger Sub of its obligations hereunder
and the consummation by the Parent and Merger Sub of the Merger and the other
transactions pursuant hereto will not, (a) conflict with or violate the
certificate of incorporation, by-laws or other charter or organization document
of the Parent, Merger Sub or any other subsidiary of the Parent, (b) conflict
with or violate any material law, statute, rule, regulation, order, judgment,
writ, injunction or decree applicable to the Parent, Merger Sub or any other
subsidiary of the Parent or any of their respective properties or assets, or (c)
result in a violation or breach of or constitute a default under (or an event
which with the giving of notice or the lapse of time or both would constitute a
default under), require any consent, approval or authorization under, result in
the loss of a material benefit or result in any provision becoming applicable or
effective under, or give rise to any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of the Parent, Merger Sub or any other
subsidiary of the Parent pursuant to, any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Parent, Merger Sub or any other subsidiary
of the Parent is a party or by which the Parent, Merger Sub or any other
subsidiary of the Parent or any material property or asset of the Parent, Merger
Sub or any other subsidiary of the Parent may be bound or affected, except in
the case of each of clauses (b) and (c) for any such conflicts, violations,
breaches, defaults or other occurrences which would not, individually or in the
aggregate, be reasonably likely to result in a Parent Material Adverse Effect or
prevent the Parent or Merger Sub from performing its obligations under this
Agreement in any material respect.
Section 4.6. Consents and Approvals. The execution and delivery of this
Agreement by the Parent and Merger Sub do not, and the performance by each of
the Parent and Merger Sub of its obligations hereunder and the consummation by
the Parent and Merger Sub of the transactions contemplated hereby will not,
require the Parent or Merger Sub to obtain any consent, approval, authorization
or permit of, or to make any filing with or notification to, any Governmental
Entity, except (a) for (i) applicable requirements, if any, of the Securities
Act, the Exchange Act, Blue Sky Laws, and state antitakeover laws, (ii) the
pre-merger notification and report requirements of the HSR Act, (iii) filing and
recordation of the Certificate of Merger as required by the DGCL, (iv) consents,
approvals, authorizations, orders, permits, filings or registrations related to,
or arising out of, compliance with statutes, rules or regulations regulating the
consumption, sale or serving of alcoholic beverages and (v) filings relating to
the matters set forth in Section 5.17 or 5.18, and (b) where the failure to
obtain such consents, approvals, authorizations and permits, or to make such
filings or notifications, would not, individually or in the aggregate, prevent
the Parent or Merger Sub from performing its obligations under this Agreement in
any material respect or from consummating the Merger or any other transaction
pursuant hereto.
Section 4.7. SEC Documents and Financial Statements. (a) The Parent has
filed all forms, reports, statements and other documents required to be filed by
it with the SEC since December 13, 1994 (such forms, reports, statements and
other documents, excluding the Registration Statement referred to below, are
hereinafter referred to as the "Parent SEC Documents"). The Parent SEC Documents
filed by the Parent with the SEC prior to and after the date of this Agreement
(i) complied, or will comply, when filed, in all material respects with the
applicable requirements of the Securities Act, the Exchange Act, and the rules
and
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regulations thereunder, and (ii) did not, or will not, when filed, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes or schedules thereto) contained in or incorporated by
reference in the Parent SEC Documents filed prior to and after the date of this
Agreement (i) have been or will be prepared in accordance with the published
rules and regulations of the SEC and GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes thereto
or, in the case of unaudited consolidated quarterly statements, as permitted by
Form 10-Q of the SEC) and (ii) fairly present or will fairly present in all
material respects the consolidated financial position of the Parent and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows of the Parent and its subsidiaries for the periods
indicated therein (subject, in the case of unaudited interim financial
statements, to normal recurring year-end audit adjustments which would not be
material in amount or effect).
Section 4.8. No Undisclosed Liabilities. Neither the Parent nor any of its
subsidiaries has any debts, liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on, or disclosed or reserved against in, a consolidated balance sheet
of the Parent and its subsidiaries or in the notes thereto, prepared in
accordance with GAAP consistently applied, except for (a) debts, liabilities and
obligations that were so reserved on, or disclosed or reflected in, the
consolidated balance sheet of the Parent and its subsidiaries as of June 30,
1996 and the notes thereto, included in the Quarterly Report on Form 10-Q of the
Parent for the quarter then ended, or the consolidated balance sheet of the
Parent and its subsidiaries as of December 31, 1995 and the notes thereto,
included in the Annual Report on Form 10-K of the Parent for the year then
ended, (b) debts, liabilities or obligations arising in the ordinary course of
business since June 30, 1996 and (c) debts, liabilities and obligations
contemplated hereby or as set forth on Section 4.8 of the Parent Disclosure
Schedule.
Section 4.9. Absence of Certain Changes. Since December 31, 1995, except
as disclosed in the Parent SEC Documents filed with the SEC prior to the date of
this Agreement or as specifically contemplated by this Agreement or as set forth
in Section 4.2 or Section 4.9 of the Parent Disclosure Schedule, (a) the Parent
and its subsidiaries have conducted their respective businesses only in the
ordinary course and in a manner consistent with past practice and (b) there has
not been (i) any change, event, occurrence or circumstance in the business,
operations, properties, financial condition or results of operations of the
Parent or any of its subsidiaries which, individually or in the aggregate, has
had or is reasonably likely to have a Parent Material Adverse Effect (except for
changes, events, occurrences or circumstances (A) with respect to general
economic or industry conditions or (B) arising as a result of the transactions
contemplated hereby), (ii) any material change by the Parent in its accounting
methods, principles or practices, (iii) any declaration, setting aside or
payment of any dividend or distribution or capital return in respect of any
capital stock of, or other equity interest in, the Parent or any of its
subsidiaries (other than dividends by such subsidiaries in accordance with their
respective charters or partnership agreements, as the case may be, (iv) any
material revaluation for financial statement purposes by the Parent or any of
its subsidiaries of any asset (including, without limitation, any writing down
of the value of any property, investment or asset or writing off of notes or
accounts receivable), (v) other than payment of compensation for services
rendered to the Parent or any of its subsidiaries in the ordinary course of
business or the grant of Parent Options as described in Section 4.2 or any
transactions described in Section 4.12 of the Parent Disclosure Schedule, any
material transactions between the Parent or any of its subsidiaries, on the one
hand, and any (A) officer or director of the Parent or any of its subsidiaries,
(B) record or beneficial owner of five percent (5%) or more of the voting
securities of the Parent, or (C) affiliate of any such officer, director or
beneficial owner, on the other hand, or (vi) other than pursuant to the terms of
the plans, programs or arrangements specifically referred to in Section 4.12 or
in the ordinary course of business consistent with past practice, any material
increase in or establishment of any bonus, insurance, welfare, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan, or any other material increase in the
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compensation payable or to become payable to any employees, officers, directors
or consultants of the Parent or any of its subsidiaries.
Section 4.10. Litigation. Except as disclosed in the Parent SEC Documents
filed with the SEC prior to the date of this Agreement, there is no action,
suit, claim, proceeding or investigation pending or, to the knowledge of the
Parent, threatened against the Parent or any of its subsidiaries or any
properties or assets of the Parent or any of its subsidiaries by or before any
court, other Governmental Entity or arbitrator which could reasonably be
expected to prevent or substantially delay consummation of the Merger or any of
the other transactions contemplated hereby in any material respect, or otherwise
prevent the Parent or Merger Sub from performing its obligations under this
Agreement in any material respect. Except as disclosed in the Parent SEC
Documents filed with the SEC prior to the date of this Agreement, neither the
Parent nor any of its subsidiaries nor any property or asset of the Parent or
any of its subsidiaries is subject to any order, writ, injunction, judgment,
decree or award which could reasonably be expected to prevent or substantially
delay consummation of the Merger or any of the other transactions pursuant
hereto in any material respect, or otherwise prevent the Parent or Merger Sub
from performing its obligations under this Agreement in any material respect.
Section 4.11. Compliance. The Parent is not in conflict with, or in
default or violation of, and none of its subsidiaries is in conflict in any
material respect with, or in default or violation in any material respect of,
its respective certificate of incorporation, by-laws or other charter or
organization documents. Neither the Parent nor any of its subsidiaries is in
conflict with, or in default or violation of, (a) any material law, statute,
rule, regulation, order, judgment, writ, injunction or decree applicable to the
Parent or any of its subsidiaries or any of their respective properties or
assets (excluding any law, statute, rule, regulation or order relating to the
consumption, sale or serving of alcoholic beverages), or (b) any material note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Parent or any of its
subsidiaries is a party or by which the Parent or any of its subsidiaries or any
material property or asset of the Parent or any of its subsidiaries may be bound
or affected. The Parent and its subsidiaries hold all licenses, permits,
approvals and other authorizations of Governmental Entities, and are in
substantial compliance with all applicable laws and governmental regulations in
connection with their businesses as now being conducted.
Section 4.12. Employee Benefit Plans. (a) The Parent has made available to
the Company copies of all summary plan descriptions (whether or not required to
be furnished under ERISA) existing or in effect during or within the past five
years, which have been distributed to any present or former employees, officers
or directors of the Parent or any of its subsidiaries ("Parent Personnel"), with
respect to each plan which is subject to ERISA and each other material
agreement, arrangement or commitment which is an employment or consulting
agreement, executive or incentive compensation plan, bonus plan, deferred
compensation agreement, employee pension, profit sharing, savings or retirement
plan, employee stock option or stock purchase plan, group life, health, or
accident insurance or other employee benefit plan, agreement, arrangement or
commitment, including, without limitation, any commitment arising under the laws
of any jurisdiction, severance, holiday, vacation, Christmas or other bonus
plans, maintained by the Parent or any of its subsidiaries or with respect to
which the Parent or any of its subsidiaries has liability or makes or has an
obligation to make contributions (each, a "Parent Employee Plan").
(b) Except as disclosed in Section 4.12 of the Parent Disclosure Schedule,
there are no Parent Personnel who are entitled to any medical, dental or life
benefit to be paid after termination of employment other than required by
Section 601 of ERISA, Section 4980B of the Code or applicable state law.
(c) There is no material liability in the nature of a retroactive rate
adjustment or loss-sharing or similar arrangement, with respect to any Parent
Employee Plan which is an employee welfare benefit plan.
(d) All contributions or payments due with respect to any periods prior to
the Effective Time under any Parent Employee Plan have been made or appropriate
charges have been made on the financial statements. Each Parent Employee Plan by
its terms and operation is in substantial compliance with all applicable laws
(including, but not limited to, ERISA, the Code and the Age Discrimination in
Employment Act of 1967, as amended).
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(e) There are no actions, suits or claims pending or threatened (other than
routine noncontested claims for benefits) and, to the knowledge of the Parent,
no set of circumstances exist which may reasonably give rise to such a claim
against any Parent Employee Plan or administrator or fiduciary of any such
Parent Employee Plan which is reasonably likely to result in a Parent Material
Adverse Effect. As to each Parent Employee Plan for which an annual report is
required to be filed under ERISA or the Code, all such filings, including
schedules, have been made on a timely basis.
(f) Except as disclosed in Section 4.12 of the Parent Disclosure Schedule,
neither the Parent nor any of its subsidiaries (or any entity that is or was at
any time required to be aggregated with the Parent or any of its subsidiaries
under Section 414(b), (c), (m) or (o) of the Code) has at any time maintained,
contributed to or been required to contribute to any plan subject to Title IV of
ERISA or Section 412 of the Code.
(g) The Parent has applied for a determination letter from the Internal
Revenue Service to the effect that the Employee Retirement Savings Plan
maintained by the Parent is qualified under Sections 401(a) and 401(k) of the
Code.
(h) Neither the Parent nor any of its subsidiaries (or, to the knowledge of
the Parent, any other person, including any fiduciary) has engaged in any
"prohibited transaction" (as defined in Section 4975 of the Code or Section 406
of ERISA), which could subject any of the Parent Employee Plans (or their
trusts), the Parent, any of its subsidiaries or any person whom the Parent or
any of its subsidiaries has an obligation to indemnify, to any material tax or
penalty imposed under Section 4975 of the Code or Section 502 of ERISA.
(i) None of the assets of the Parent Employee Plans is invested in any
property constituting employer real property or an employer security within the
meaning of Section 407(d) of ERISA.
(j) Except as required under this Agreement, the events contemplated by
this Agreement (either alone or together with any other event) will not (i)
entitle any Parent Personnel to severance pay or other similar payments under
any Parent Employee Plan or law, (ii) accelerate the time of payment or vesting
or increase the amount of benefits due under any Parent Employee Plan or
compensation to any Parent Personnel, (iii) result in any payments (including
parachute payments) under any Parent Employee Plan or law becoming due to any
Parent Personnel, or (iv) terminate or modify or give a third party a right to
terminate or modify the provisions or terms of any Parent Employee Plan.
Section 4.13. Tax Matters. (a) The Parent and each of its subsidiaries,
and any affiliated group (within the meaning of Code Section 1504) of which the
Parent or any of its subsidiaries is or was a member, have (i) filed all federal
income and material state Tax Returns required to be filed by applicable law and
all such federal income and material state Tax Returns (A) were true, complete
and correct in all respects (and as to Tax Returns not filed as of the date
hereof but filed at or prior to the Effective Time, will be true, complete and
correct in all respects) (B) reflect the liability for Taxes of the Parent and
each of its subsidiaries, and (C) were filed on a timely basis and (ii) within
the time and in the manner prescribed by law, paid (and until the Effective Time
will pay within the time and in the manner prescribed by law) all Taxes that
were or are due and payable as set forth in such Tax Returns.
(b) Each of the Parent and, where applicable, its subsidiaries has
established (and until the Effective Time will maintain) on its books and
records reserves adequate to pay all Taxes of the Parent or any such subsidiary,
as the case may be, in accordance with GAAP, which are reflected in the most
recent consolidated financial statements of the Parent and its subsidiaries
contained in the Parent SEC Documents, to the extent required by GAAP.
(c) No deficiency for any Tax which, alone or in the aggregate with any
other deficiency or deficiencies, would exceed $500,000, has been proposed,
asserted, or assessed against the Parent and/or any subsidiary thereof that has
not been resolved and paid in full or otherwise settled.
Section 4.14. Properties. Each of the Parent and its subsidiaries has good
and marketable title to all properties, assets and rights of any kind whatsoever
(whether real, personal or mixed, and whether tangible or intangible) owned by
it (collectively, the "Parent Assets"), in each case free and clear of any
mortgage, security interest, deed of trust, claim, charge, title defect or other
lien or encumbrance, except (a) as shown on
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the consolidated balance sheet of the Parent and its subsidiaries dated June 30,
1996 and the notes thereto, and the consolidated balance sheet of the Parent and
its subsidiaries dated as of December 31, 1995 and the notes thereto, each as
contained in the Parent SEC Documents, (b) for Permitted Liens or (c) as set
forth in Section 4.14 of the Parent Disclosure Schedule. Except as set forth in
Section 4.14 of the Parent Disclosure Schedule, there are no pending or, to the
knowledge of the Parent, threatened condemnation proceedings against or
affecting any material Parent Assets, and none of the material Parent Assets is
subject to any commitment or other arrangement for its sale to a third party
outside the ordinary course of business.
Section 4.15. Environmental Matters. Neither the Parent nor any of its
subsidiaries is the subject of any federal, state, local or foreign
investigation, and neither the Parent nor any of its subsidiaries has received
any notice or claim, nor entered into any negotiations or agreements with any
third party, relating to any material liability or remedial action or potential
material liability or remedial action under any Environmental Laws. There are no
pending or, to the knowledge of the Parent, threatened actions, suits, claims or
proceedings against or affecting the Parent or any of its subsidiaries or any of
their properties, assets or operations in connection with any such Environmental
Laws. The properties, assets and operations of the Parent and its subsidiaries
are in compliance in all material respects with all applicable Environmental
Laws, except as disclosed in the "Phase I" and other reports identified in
Section 4.15 of the Parent Disclosure Schedule (true and complete copies of
which have been made available to the Company).
Section 4.16. Intellectual Property. The Parent and its subsidiaries own
or possess adequate licenses or other valid rights to use all material
trademarks, trademark rights, trade names, trade name rights, copyrights,
patents, patent rights, service marks, trade secrets, applications for
trademarks and for service marks, and other proprietary rights and information
used or held for use in connection with the business of the Parent and its
subsidiaries as currently conducted, and the Parent has no knowledge of any
assertion or claim challenging the validity of any of the foregoing, except as
set forth in Section 4.16 of the Parent Disclosure Schedule.
Section 4.17. Labor Matters. There is no pending or, to the knowledge of
the Parent, threatened material labor dispute, strike or work stoppage against
the Parent or any of its subsidiaries. Neither the Parent nor its subsidiaries,
nor their respective representatives or employees, has committed any material
unfair labor practices in connection with the operation of the respective
businesses of the Parent or its subsidiaries, and there is no pending or, to the
knowledge of the Parent, threatened charge or complaint against the Parent or
its subsidiaries by the National Labor Relations Board or any comparable state
agency which, if adversely determined, would have a Parent Material Adverse
Effect.
Section 4.18. Material Contracts and Commitments. (a) Section 4.18 of the
Parent Disclosure Schedule contains a true and complete list of all of the
following contracts, agreements and commitments, whether oral or written, to
which the Parent is a party, as each such contract, agreement or commitment may
have been amended, modified or supplemented:
(i) contracts, agreements or commitments granting any person the right
to require that the Parent register any securities of the Parent under the
Securities Act; and
(ii) contracts, agreements or commitments granting any shareholder of
the Parent the (i) right to have any designees nominated as directors, (ii)
pre-emptive rights, rights of first refusal, rights of first offer or
similar rights with respect to the Parent's capital stock, or (iii) any
other rights or privileges not possessed by all common stockholders of the
Company.
(b) Except as set forth in Section 4.18 of the Parent Disclosure Schedule,
each of the Parent's management contracts, franchise agreements and leases of
real property (the "Parent Contracts") is valid and binding in accordance with
its terms, and is in full force and effect. Except as set forth in Section 4.18
of the Parent Disclosure Schedule, neither the Parent or any of its subsidiaries
is in default in any material respect with respect to any such Parent Contracts,
nor (to the knowledge of the Parent) does any condition exist that with notice
or lapse of time or both would constitute such a material default thereunder.
Except as set forth in Section 4.18 of the Parent Disclosure Schedule, no party
has given any written or (to the knowledge of the Company) oral notice of
termination or cancellation of any such Parent Contract or that it intends to
assert a breach of, or seek to terminate or cancel, any such Parent Contract, in
each case as a result of the transactions
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contemplated hereby. The Parent has no knowledge of any existing facts or
circumstances that have given rise to any right of RFS Partnership, L.P. to
terminate any of the leases between the Parent or its subsidiaries and RFS
Partnership, L.P.
Section 4.19. Financing. The Parent has heretofore furnished to the
Company true and complete copies of all written commitments (including a
commitment from GE Investment Management Incorporated, or an affiliate thereof,
to purchase $100,000,000 of Parent Common Stock) to obtain financing in
contemplation of the Merger.
Section 4.20. Opinion of Financial Advisor. The Parent has received the
opinion of Morgan Stanley & Co. Incorporated, to the effect that the Merger
Consideration to be paid to the stockholders of the Company is fair to the
Parent from a financial point of view.
Section 4.21. Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its affiliates, other than Morgan Stanley &
Co. Incorporated (the fees and expenses of which shall be paid in full by the
Parent).
ARTICLE V
COVENANTS
Section 5.1. Interim Operations. (a) From the date of this Agreement until
the Effective Time, except as set forth in Section 5.1 of the Company Disclosure
Schedule or as expressly contemplated by any other provision of this Agreement,
unless the Parent has consented in writing thereto, the Company shall, and shall
cause each of its subsidiaries to:
(i) conduct its business and operations only in the ordinary course of
business consistent with past practice;
(ii) use its reasonable efforts to preserve intact the business
organizations, goodwill, rights, licenses, permits and franchises of the
Company and its subsidiaries, and maintain their existing relationships
with customers, suppliers and other persons having business dealings with
them;
(iii) use its commercially reasonable efforts to keep in full force
and effect adequate insurance coverages and maintain and keep its
properties and assets in good repair, working order and condition, normal
wear and tear excepted;
(iv) not amend or modify its respective certificate of incorporation,
by-laws, partnership agreement or other charter or organization documents;
(v) not authorize for issuance, issue, sell, grant, deliver, pledge or
encumber or agree or commit to issue, sell, grant, deliver, pledge or
encumber any shares of any class or series of capital stock of the Company
or any of its subsidiaries or any other equity or voting security or equity
or voting interest in the Company or any of its subsidiaries, any
securities convertible into or exercisable or exchangeable for any such
shares, securities or interests, or any options, warrants, calls,
commitments, subscriptions or rights to purchase or acquire any such
shares, securities or interests (other than issuances of Company Common
Stock upon exercise of Company Options granted prior to the date of this
Agreement to directors, officers, employees and consultants of the Company
in accordance with the Company Incentive Plan as currently in effect);
(vi) not (A) split, combine or reclassify any shares of its capital
stock or issue or authorize or propose the issuance of any other securities
in respect of, in lieu of, or in substitution for, shares of its capital
stock, (B) in solely the case of the Company, declare, set aside or pay any
dividends on, or make other distributions in respect of, any of the
Company's capital stock, or (C) repurchase, redeem or otherwise acquire, or
agree or commit to repurchase, redeem or otherwise acquire, any shares of
capital stock or other equity or debt securities or equity interests of the
Company or any of its subsidiaries;
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(vii) not amend or otherwise modify the terms of any Company Options
or the Company Incentive Plan the effect of which shall be to make such
terms more favorable to the holders thereof or persons eligible for
participation therein;
(viii) other than in the ordinary course of business consistent with
past practice, not increase the compensation payable or to become payable
to any directors, officers or employees of the Company or any of its
subsidiaries, or grant any severance or termination pay to, or enter into
any employment or severance agreement with any director or officer of the
Company or any of its subsidiaries, or establish, adopt, enter into or
amend in any material respect or take action to accelerate any material
rights or benefits under any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
director, officer of employee of the Company of any of its subsidiaries;
(ix) not acquire or agree to acquire (including, without limitation,
by merger, consolidation, or acquisition of stock, equity securities or
interests, or assets) any corporation, partnership, joint venture,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets of any other person outside the
ordinary course of business consistent with past practice or any interest
in any real properties (whether or not in the ordinary course of business);
(x) not incur, assume or guarantee any indebtedness for borrowed money
(including draw-downs on letters or lines of credit) or issue or sell any
notes, bonds, debentures, debt instruments, evidences of indebtedness or
other debt securities of the Company or any of its subsidiaries or any
options, warrants or rights to purchase or acquire any of the same, except
for (A) renewals of existing bonds and letters of credit in the ordinary
course of business not to exceed $10,000,000 and (B) advances, loans or
other indebtedness in the ordinary course of business consistent with past
practice in an aggregate amount not to exceed $5,000,000;
(xi) not sell, lease, license, encumber or otherwise dispose of, or
agree to sell, lease, license, encumber or otherwise dispose of, any
properties or assets of the Company or any of its subsidiaries (other than
in the ordinary course of business consistent with past practice);
(xii) not authorize or make any capital expenditures (including by
lease) in excess of $10,000,000 in the aggregate through December 31, 1996
(and not in excess of $2,500,000 during January 1997) for the Company and
all of its subsidiaries;
(xiii) not make any material change in any of its accounting or
financial reporting (including Tax accounting and reporting) methods,
principles or practices, except as may be required by GAAP;
(xiv) not make any tax election or settle or compromise any federal,
state, local or foreign income tax liability either not in accordance with
prior practice or which could reasonably be expected to have a Company
Material Adverse Effect;
(xv) except in the ordinary course of business consistent with past
practice, not amend, modify or terminate any Contract required to be listed
in Section 3.17 of the Company Disclosure Schedule or waive, release or
assign any material rights or claims thereunder;
(xvi) not adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other reorganization of the Company or any of its subsidiaries;
(xvii) not take any action that would, or would be reasonably likely
to, result in any of the representations and warranties set forth in this
Agreement not being true and correct in any material respect or any of the
conditions set forth in Article VI not being satisfied; and
(xviii) not agree or commit in writing or otherwise to do (or, in the
case of clauses (i) through (iii), to do anything inconsistent with) any of
the foregoing.
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(b) From the date of this Agreement until the Effective Time, except as set
forth in Section 5.1 of the Parent Disclosure Schedule or as expressly
contemplated by any other provision of this Agreement, unless the Company has
consented in writing thereto, the Parent shall, and shall cause each of its
subsidiaries to:
(i) not amend or modify its certificate of incorporation, by-laws, or
other charter or organization documents in any manner which adversely
affects the rights, powers or privileges of holders of the Parent Common
Stock;
(ii) not (A) split, combine or reclassify any shares of its capital
stock or issue or authorize or propose the issuance of any other securities
in respect of, in lieu of, or in substitution for, shares of its capital
stock, (B) declare, set aside or pay any dividends on, or make other
distributions in respect of, any of the Parent's capital stock (other than
regular quarterly cash dividends consistent with past practice);
(iii) not take any action that would, or would be reasonably likely
to, result in any of the representations and warranties set forth in this
Agreement not being true and correct in any material respect or any of the
conditions set forth in Article VI not being satisfied; and
(iv) not agree or commit in writing or otherwise to do any of the
foregoing.
(c) The parties hereto shall perform the provisions set forth in Section
5.1 of the Parent Disclosure Schedule relating to the Red Lion La Posada and
Village Motor Inn joint ventures.
Section 5.2. No Solicitation. Prior to the Effective Time, the Company
agrees (a) that neither it nor any of its subsidiaries shall, nor shall it or
any of its subsidiaries authorize or permit their respective officers,
directors, employees, agents and representatives (including, without limitation,
any investment banker, financial advisor, attorney, accountant, consultant or
other expert retained by or acting on behalf of it or any of its subsidiaries)
(collectively, "Representatives") to, directly or indirectly, initiate or
solicit any inquiries or the making of any proposal or offer (including, without
limitation, any proposal or offer to any of its stockholders) concerning, or
that may reasonably be expected to lead to, an Alternative Transaction (any such
proposal or offer being hereinafter referred to as an "Alternative Transaction
Proposal"), and (b) that it will notify the Parent as soon as practicable (and
in any event within 48 hours) if any such inquiries or proposals are received
by, any information or documents is requested from, or any negotiations or
discussions are sought to be initiated or continued with, the Company or any of
its subsidiaries; provided, however, that nothing contained in this Section 5.2
shall prohibit the Board of Directors of the Company from, to the extent
applicable, complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Alternative Transaction Proposal. The Company agrees that prior to
furnishing any such information to, or entering into any discussions or
negotiations with, any person or entity concerning an Alternative Transaction
Proposal, the Company shall (i) receive from such person or entity an executed
confidentiality agreement in customary form on terms not less favorable to the
Company than the terms of the confidentiality agreement dated June 25, 1996
between the Parent and the Company, providing for confidentiality of information
furnished by the Company to the Parent and its Representatives in connection
with the transactions contemplated hereby (the "Parent Confidentiality
Agreement"), and (ii) provide written notice to the Parent to the effect that it
is furnishing information to, or entering into discussions or negotiations with,
such person or entity. Notwithstanding anything herein to the contrary, nothing
in this Section 5.2 shall (x) permit the Company to terminate this Agreement
(except as specifically provided in Article VII hereof), or (y) permit the
Company to enter into any binding agreement (other than a confidentiality
agreement as aforesaid) with respect to an Alternative Transaction Proposal for
as long as this Agreement remains in effect, or (z) affect any other obligation
of the Company under this Agreement. For purposes of this Agreement,
"Alternative Transaction" shall mean any of the following involving the Company
or any of its subsidiaries: (i) any merger, consolidation, share exchange,
business combination or other similar transaction; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 15% or more of the
assets of the Company and its subsidiaries, determined on a consolidated basis
in accordance with GAAP; (iii) any tender offer or exchange offer for 15% of the
outstanding shares of capital stock of the Company or the filing of a
registration statement under the Securities Act in connection therewith; (iv)
the acquisition by any person or entity of beneficial ownership or the right to
acquire beneficial ownership of, or the formation or existence of any "group"
(as such term is defined under Section 13(d) of the Exchange Act and the rules
and regulations promulgated
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thereunder) which beneficially owns, or has the right to acquire beneficial
ownership of, 15% or more of the then outstanding shares of capital stock of the
Company (other than through the vesting of Company Options granted to directors,
officers, employees and consultants of the Company in accordance with the
Company Incentive Plan as currently in effect); or (v) any public announcement
of a proposal, plan or intention to do any of the foregoing or any agreement or
commitment to engage in any of the foregoing.
Section 5.3. Access to Information. (a) From the date of this Agreement
until the Effective Time, upon reasonable prior notice to the other, each of the
Company and the Parent shall (and shall cause each of its subsidiaries to) give
the other such party and its Representatives reasonable access at reasonable
hours to the officers, employees, agents, books, records, properties, offices,
hotels and other facilities of it and its subsidiaries, and shall furnish
promptly to the other such party and its Representatives such financial and
operating data and other information concerning the business, operations,
properties, contracts, records and personnel of it and its subsidiaries as the
other such party may from time to time reasonably request. All information
obtained by the Company or the Parent pursuant to this Section 5.3(a) shall be
kept confidential in accordance with the Parent Confidentiality Agreement and
the confidentiality agreement dated August 12, 1996 between the Company and the
Parent, providing for confidentiality of information furnished by the Parent to
the Company and its Representatives in connection with the transactions
contemplated hereby (the "Company Confidentiality Agreement"). No
representations and warranties or conditions to the consummation of the Merger
contained herein or in any certificate or instrument delivered in connection
herewith shall be deemed waived or otherwise affected by any such investigation
made by the parties or their respective Representatives.
(b) From the date of this Agreement until the Effective Time, upon
reasonable prior notice to the Company, the Company shall (and shall cause each
of its subsidiaries to) give the investment banks, commercial banks, financial
institutions and other persons providing debt or equity financing to the Parent
in connection with the transactions contemplated hereby or retained by the
Parent in connection with any securities offerings contemplated by the Parent,
and their respective Representatives, reasonable access at reasonable hours to
the officers, employees, agents, books, records, properties, offices, hotels and
other facilities of the Company and its subsidiaries, and shall furnish promptly
to such persons and their respective Representatives such financial and
operating data and other information concerning the business, operations,
properties, contracts, records and personnel of the Company and its subsidiaries
as such persons may from time to time reasonably request for such purposes
(provided that such investment banks, commercial banks, financial institutions
and other persons shall enter into confidentiality agreements upon terms similar
to the Parent Confidentiality Agreement or otherwise in customary form).
Section 5.4. Notice of Certain Matters. The Company shall give prompt
notice to the Parent, and the Parent and Merger Sub shall give prompt notice to
the Company, of (a) the occurrence or non-occurrence of any event which would be
likely to cause (i) any representation or warranty contained in this Agreement
to be untrue or inaccurate in any material respect or (ii) any covenant,
condition or agreement contained in this Agreement not to be complied with or
satisfied in all material respects and (b) any failure of the Company or of the
Parent or Merger Sub, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder in any material respect; provided that the delivery of any notice
pursuant to this Section shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
Section 5.5. Further Actions. (a) Each of the parties hereto shall use all
commercially reasonable good faith efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations, and consult and fully cooperate
with and provide reasonable assistance to each other party hereto and their
respective Representatives in order, to consummate and make effective the Merger
and the other transactions contemplated by this Agreement as promptly as
practicable hereafter, including, without limitation, (i) using all commercially
reasonable good faith efforts to make all filings, applications, notifications,
reports, submissions and registrations with, and to obtain all consents,
approvals, authorizations or permits of, Governmental Entities or other persons
or entities as are necessary for the consummation of the Merger and the other
transactions contemplated hereby (including, without limitation, pursuant to the
HSR Act, the Securities Act, the Exchange Act, Blue Sky Laws and other
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applicable laws and regulations), and (ii) taking such actions and doing such
things as any other party hereto may reasonably request in order to cause any of
the conditions to such other party's obligation to consummate the Merger as
specified in Article VI of this Agreement to be fully satisfied. Prior to making
any application to or filing with any Governmental Entity or other person or
entity in connection with this Agreement, the Company, on the one hand, and the
Parent and Merger Sub, on the other hand, shall provide the other with drafts
thereof and afford the other a reasonable opportunity to comment on such drafts.
At the Closing, each of the parties hereto shall execute each agreement or
instrument to which it is a party.
(b) Without limiting the generality of the foregoing, each of the Parent
and the Company agree to cooperate and use all commercially reasonable efforts
to vigorously contest and resist any action, suit, proceeding or claim, and to
have vacated, lifted, reversed or overturned any injunction, order, judgment or
decree (whether temporary, preliminary or permanent), that delays, prevents or
otherwise restricts the consummation of the Merger or any other transaction
contemplated by this Agreement, and to take any and all actions (including,
without limitation, the disposition of assets, divestiture of businesses, or the
withdrawal from doing business in particular jurisdictions) as may be required
by Governmental Entities as a condition to the granting of any such necessary
approvals or as may be required to avoid, vacate, lift, reverse or overturn any
injunction, order, judgment, decree or regulatory action (provided, however,
that in no event shall any party hereto take, or be required to take, any action
that would have a Company Material Adverse Effect or that, individually or in
the aggregate, would have a Parent Material Adverse Effect).
(c) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
the Surviving Corporation with full title to all properties, assets, rights,
privileges, immunities and franchises of either the Company or Merger Sub, the
proper officers and directors of each party to this Agreement shall take all
such necessary action.
Section 5.6. Proxy Statement; Registration Statement. (a) As promptly as
practicable after the execution of this Agreement, (i) the Company shall prepare
and file with the SEC (with appropriate requests for confidential treatment)
under the Exchange Act a proxy statement/prospectus and a form of proxy (or, to
the extent a Parent Stockholders' Meeting, as defined below, is required to be
held, the Company and the Parent shall prepare and file with the SEC under the
Exchange Act a joint proxy statement/prospectus and forms of proxies) (such
proxy statement/prospectus or joint proxy statement/prospectus, as the case may
be, together with any amendments thereof or supplements thereto, in each case in
the form or forms delivered to the stockholders of the Company and, if
applicable, the stockholders of the Parent, the "Proxy Statement") relating to
the Company Stockholders' Meeting and the vote of the stockholders of the
Company with respect to the Merger (and, if applicable, the Parent Stockholders'
Meeting and the vote of the stockholders of the Parent with respect to the
issuance of Parent Common Stock in connection with the Merger) and (ii)
following clearance by the SEC of the Proxy Statement, the Parent shall prepare
and file with the SEC under the Securities Act a registration statement on Form
S-4 (such registration statement, together with any amendments thereof or
supplements thereto, the "Registration Statement"), in which the Proxy Statement
will be included as a prospectus, in connection with the registration under the
Securities Act of the shares of Parent Common Stock to be distributed to holders
of shares of Company Common Stock and Company Options pursuant to the Merger.
The Parent and the Company will cause the Registration Statement and the Proxy
Statement to comply in all material respects with the Securities Act, the
Exchange Act and the rules and regulations thereunder. Each of the Parent and
the Company shall use all commercially reasonable efforts to have or cause the
Registration Statement to become effective (including clearing the Proxy
Statement with the SEC) as promptly as practicable thereafter, and shall take
any and all actions required under any applicable federal or state securities or
Blue Sky Laws in connection with the issuance of shares of Parent Common Stock
pursuant to the Merger. Without limiting the generality of the foregoing, each
of the Parent and the Company agrees to use all commercially reasonable efforts,
after consultation with the other such party, to respond promptly to any
comments made by the SEC with respect to the Proxy Statement (including each
preliminary version thereof) and the Registration Statement (including each
amendment thereof and supplement thereto). Each of the Parent and the Company
shall, and shall cause its respective representatives to, fully cooperate with
the other such party and its respective representatives in the preparation of
the Proxy Statement and the Registration Statement, and shall, upon request,
furnish the other such party with all
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information concerning it and its affiliates, directors, officers and
stockholders as the other may reasonably request in connection with the
preparation of the Proxy Statement and the Registration Statement. The Proxy
Statement shall include the determination and recommendation of the Board of
Directors of the Company that the stockholders of the Company vote in favor of
the approval and adoption of this Agreement and the Merger and, if applicable,
the determination and recommendation of the Board of Directors of the Parent
that the stockholders of the Parent vote in favor of the approval of the
issuance of Parent Common Stock pursuant to this Agreement; provided, however,
that the Board of Directors of the Company or the Parent may withdraw, modify or
change such respective recommendation if either such Board of Directors
determines in good faith, based upon the advice of outside counsel, that making
such recommendation, or the failure to so withdraw, modify or change its
recommendation, or the failure to recommend any other offer or proposal, could
reasonably be deemed to cause the members of such Board of Directors to breach
their fiduciary duties under applicable law. As promptly as practicable after
the Registration Statement shall have become effective, the Company shall (and,
to the extent a Parent Stockholders' Meeting is required to be held, the Parent
shall) cause the Proxy Statement to be mailed to its stockholders.
(b) Without limiting the generality of the foregoing, (i) the Company and
the Parent shall each notify the other as promptly as practicable upon becoming
aware of any event or circumstance which should be described in an amendment of,
or a supplement to, the Proxy Statement or the Registration Statement, and (ii)
the Company and the Parent shall each notify the other as promptly as
practicable after the receipt by it of any written or oral comments of the SEC
on, or of any written or oral request by the SEC for amendments or supplements
to, the Proxy Statement or the Registration Statement, and shall promptly supply
the other with copies of all correspondence between it or any of its
representatives and the SEC with respect to any of the foregoing filings.
(c) The information supplied by the Company for inclusion or incorporation
by reference in the Proxy Statement and the Registration Statement shall not (i)
at the time the Registration Statement is declared effective, (ii) at the time
the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to holders of Company Common Stock (or, if applicable, holders of Parent
Common Stock), (iii) at the time of the Company Stockholders' Meeting or, if
applicable, the Parent Stockholder's Meeting and (iv) at the Effective Time,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to the
Company or any of its affiliates or its or their respective officers or
directors should be discovered by the Company which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
the Company shall promptly inform the Parent of such event or circumstance.
(d) The information supplied by the Parent for inclusion or incorporation
by reference in the Proxy Statement and the Registration Statement shall not (i)
at the time the Registration Statement is declared effective, (ii) at the time
the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to holders of Company Common Stock (or, if applicable, holders of Parent
Common Stock), (iii) at the time of the Company Stockholders' Meeting or, if
applicable, the Parent Stockholder's Meeting and (iv) at the Effective Time,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to the
Parent or any of its affiliates or its or their respective officers or directors
should be discovered by the Parent which should be set forth in an amendment to
the Registration Statement or a supplement to the Proxy Statement, the Parent
shall promptly inform the Company of such event or circumstance.
(e) The Parent agrees to file a post-effective amendment to the
Registration Statement as soon as practicable after the Effective Time to
register the offer and sale or other distribution by Mr. Tod McClaskey or his
successors, assigns, heirs or legal representatives ("McClaskey") of all the
shares (the "McClaskey Shares") of Parent Common Stock that McClaskey may
receive as a distribution from the Partnership following its receipt of the
Stock Consideration. The Parent agrees to use its best efforts to cause such
post-
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effective amendment to thereafter become effective and to remain effective and
usable for a period of at least six months in the aggregate (excluding any
"blackout" periods provided in the next sentence). The Parent may, upon written
notice to McClaskey at his address as it appears on the records of the Company,
suspend the offering and sale of securities owned by McClaskey pursuant to such
post-effective amendment, for a period not to exceed 90 days if there exists at
the time material non-public information relating to the Company (including,
without limitation, the planned release of any earnings statements or other
financial information) that, in the reasonable opinion of the Parent, should not
be disclosed. The Parent shall pay all expenses incident to the registration of
the McClaskey Shares under this Section 5.6(e).
Section 5.7. Meetings of Stockholders. (a) As promptly as practicable
after the date of this Agreement, the Company and its Board of Directors will
(i) duly call and hold a special meeting of stockholders of the Company (the
"Company Stockholders' Meeting") for the purpose of considering and voting upon
the approval and adoption of this Agreement and the approval of the Merger
(which Company Stockholders' Meeting shall, to the extent feasible, be held on
the same day or as soon as practicable after the date on which the Registration
Statement becomes effective and on the same day or as soon as practicable after
the date on which the Parent Stockholders' Meeting is held, if one is held) and
(ii) use all commercially reasonable efforts to solicit from the stockholders of
the Company proxies in favor of such approvals and to secure the vote or consent
of stockholders required by the DGCL to effect the Merger.
(b) As promptly as practicable after the date of this Agreement, the Parent
will use all commercially reasonable efforts to solicit letters from holders of
a majority of the outstanding shares of Parent Common Stock containing such
holders' support for the issuance of Parent Common Stock pursuant to this
Agreement, and, if the Parent is able to secure such letters, to apply for, and
obtain an exemption from, any and all requirements of the Nasdaq for the Parent
to obtain the Parent Stockholder Approval. In the event that the Parent is
unable to obtain such exemption on or before fifteen (15) business days after
the date hereof, it and its Board of Directors will, as promptly as practicable
thereafter, (i) duly call and hold a meeting of its stockholders (the "Parent
Stockholders' Meeting") for the purpose of considering and voting upon the
approval of such issuance (which Parent Stockholders' Meeting shall, to the
extent feasible, be held on the same day or as soon as practicable after the
date on which the Registration Statement becomes effective and on the same day
or as soon as practicable after the date on which the Company Stockholders'
Meeting is held) and (ii) use all commercially reasonable efforts to solicit
from the stockholders of the Parent proxies in favor of such approval and to
secure the vote or consent of stockholders required by the rules of Nasdaq to
obtain the Parent Stockholder Approval.
Section 5.8. Nasdaq Quotation of Parent Common Stock. The Parent shall use
all commercially reasonable efforts to cause the Parent Common Stock to be
issued in the Merger to be approved for quotation on Nasdaq (subject to official
notice of issuance) prior to the Effective Time.
Section 5.9. Letters of Accountants. (a) The Company shall use all
commercially reasonable efforts to cause to be delivered to the Parent "comfort"
letters of Deloitte & Touche, LLP, the Company's independent public accountants,
of the kind contemplated by the Statement of Auditing Standards with respect to
Letters to Underwriters promulgated by the American Institute of Certified
Public Accountants (the "AICPA Statement"), dated the date on which the
Registration Statement shall become effective and as of the Effective Time, each
addressed to the Parent, in form and substance reasonably satisfactory to the
Parent, concerning the procedures undertaken by them with respect to the
financial statements and information of the Company and its subsidiaries
contained in the Registration Statement and the other matters contemplated by
the AICPA Statement and otherwise reasonably customary in scope and substance
for letters delivered by independent public accountants in connection with
transactions such as those contemplated by this Agreement.
(b) The Parent shall use all commercially reasonable efforts to cause to be
delivered to the Company "comfort" letters of KPMG Peat Marwick LLP, the
Parent's independent public accountants, of the kind contemplated by the AICPA
Statement, dated the date on which the Registration Statement shall become
effective and as of the Effective Time, each addressed to the Company, in form
and substance reasonably satisfactory to the Company, concerning the procedures
undertaken by them with respect to the financial
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statements and information of the Parent and its subsidiaries contained in the
Registration Statement and the other matters contemplated by the AICPA Statement
and otherwise reasonably customary in scope and substance for letters delivered
by independent public accountants in connection with transactions such as those
contemplated by this Agreement.
Section 5.10. Affiliate Letters. At least thirty (30) days prior to the
Effective Time, as well as at the Closing, the Company shall deliver to the
Parent a list of names and addresses of all persons who may be deemed
"affiliates" of the Company within the meaning of Rule 145 promulgated under the
Securities Act, including without limitation all directors and executive
officers of the Company. The Company shall use all commercially reasonable
efforts to deliver or cause to be delivered to the Parent, at or prior to the
Closing, an affiliate letter agreement, in the form attached hereto as Exhibit
A, from each of the affiliates of the Company identified in the foregoing lists
and each person who may be deemed to have become an "affiliate" of the Company
within the meaning of such Rule 145 after delivery of the first such list
delivered hereunder and prior to the Effective Time. The Surviving Company shall
be entitled to place legends as specified in such affiliate letter agreements on
the certificates evidencing any Parent Common Stock to be received by such
affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Parent Common Stock,
consistent with the terms of such affiliate letter agreements.
Section 5.11. Public Announcements. Unless otherwise required by
applicable law or stock exchange requirements or requirements of Nasdaq, at all
times prior to the earlier of the Effective Time or the termination of this
Agreement, no party hereto shall or shall permit any of its subsidiaries to (and
each party shall use its reasonable best efforts to cause its affiliates and
Representatives not to) issue any press release concerning this Agreement, the
Merger or any other transaction contemplated hereby, without prior consultation
with the other parties hereto.
Section 5.12. Expenses. Whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby (including, without limitation, fees and
disbursements of Representatives) shall be borne by the party which incurs such
cost or expense; provided, however, that (a) the filing fee in connection with
the filings under the HSR Act required in connection herewith, and (b) all
out-of-pocket costs and expenses related to the printing, filing and mailing (as
applicable) of the Proxy Statement and the Registration Statement and all SEC
and other regulatory filing fees incurred in connection with the Proxy Statement
and the Registration Statement shall be borne equally by the Company, on the one
hand, and the Parent and Merger Sub, on the other hand.
Section 5.13. Indemnification. (a) From and after the Effective Time, the
Parent shall, and shall cause the Surviving Corporation to, indemnify and hold
harmless each person who is now, or has been at any time prior to the date
hereof, an officer or director of the Company or any of its subsidiaries (the
"Indemnified Parties") against any losses, claims, damages, judgments,
settlements, liabilities, costs or expenses (including without limitation
reasonable attorneys' fees and out-of-pocket expenses) incurred in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to acts or omissions, or alleged acts or omissions, by them in their
capacities as such occurring at or prior to the Effective Time (including,
without limitation, in connection with the Merger and the other transactions
contemplated by this Agreement), to the fullest extent that the Company or such
subsidiaries would have been permitted, under applicable law and the Certificate
of Incorporation or By-laws of the Company or the organizational documents of
such subsidiaries each as in effect on the date of this Agreement, to indemnify
such person (and the Parent or the Surviving Corporation shall also advance
expenses as incurred to the fullest extent permitted under applicable law upon
receipt from the Indemnified Party to whom expenses are advanced of a written
undertaking to repay such advances as contemplated by Section 145(e) of the
DGCL). The Parent and Surviving Corporation shall pay all reasonable expenses,
including reasonable attorneys' fees, that may be incurred by any Indemnified
Party in enforcing this Section 5.13. If the indemnity provided by this Section
5.13(a) is not available with respect to any Indemnified Party, then the Parent
and Surviving Corporation, on the one hand, and the Indemnified Party, on the
other hand, shall contribute to the amount payable in such proportion as is
appropriate to reflect relative faults and benefits.
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(b) In the event of any such claim, action, suit, proceeding or
investigation, (i) any Indemnified Party wishing to claim indemnification under
this Section 5.13 shall, upon becoming aware of any such claim, action, suit,
proceeding or investigation, promptly notify the Surviving Corporation thereof
(provided that the failure to provide such notice shall not relieve the Parent
or the Surviving Corporation of any liability or obligation it may have to such
Indemnified Party under this Section unless such failure materially prejudices
the Parent or the Surviving Corporation), and shall deliver to the Parent and
the Surviving Corporation the undertaking contemplated by Section 145(e) of the
DGCL, (ii) the Parent or the Surviving Corporation shall pay the reasonable fees
and expenses of counsel selected by the Indemnified Parties, which counsel shall
be reasonably acceptable to the Parent and the Surviving Corporation, (iii) the
Parent and the Surviving Corporation shall cooperate in the defense of any such
matter; provided, however, that neither the Parent nor the Surviving Corporation
shall be liable for any settlement effected without its prior written consent
(not to be unreasonably withheld); and provided, further, that neither the
Parent nor the Surviving Corporation shall be liable under this Section 5.13 for
the fees and expenses of more than one counsel for all Indemnified Parties in
any single claim, action, suit, proceeding or investigation, except to the
extent that, in the opinion of counsel for the Indemnified Parties, two or more
of such Indemnified Parties have conflicting interests in the outcome of such
claim, action, suit, proceeding or investigation such that additional counsel is
required to be retained by such Indemnified Parties under applicable standards
of professional conduct.
(c) Unless otherwise required by law, (i) at the Effective Time, the
Certificate of Incorporation and By-Laws of the Surviving Corporation shall
contain provisions providing for exculpation of director and officer liability
and indemnification by the Surviving Corporation of the Indemnified Parties not
less favorable to the Indemnified Parties than those provisions providing for
exculpation of director and officer liability and indemnification by the Company
of the Indemnified Parties contained in the Certificate of Incorporation and
By-Laws of the Company as in effect on the date of this Agreement, and (ii) the
Surviving Corporation and the Company's subsidiaries shall not amend, repeal or
modify any such provisions contained in their respective certificates of
incorporation and by-laws, or other organizational documents of such
subsidiaries, to reduce or adversely affect the rights of Indemnified Parties
thereunder in respect of actions or omissions by them occurring at or prior to
the Effective Time.
(d) From and after the Effective Time until the sixth anniversary thereof,
the Parent shall cause the Surviving Corporation to maintain, without any gaps
or lapses in coverage, directors' and officers' liability insurance covering the
Indemnified Parties who are covered, in their capacities as directors and
officers of the Company, by the existing directors' and officers' liability
insurance of the Company in force on the date of this Agreement, with respect to
losses or claims arising out of acts or omissions, or alleged acts or omissions,
by them in their capacities as such occurring at or prior to the Effective Time,
and upon terms no less favorable to the Indemnified Parties than such existing
directors' and officers' liability insurance; provided, however, that the
Surviving Corporation shall not be required in order to maintain or procure such
coverage to pay an annual premium in excess of 150% of the current annual
premium paid by the Company for its existing coverage (which current annual
premium the Company represents and warrants to be $474,000), and that if
equivalent coverage cannot be obtained, or can be obtained only by paying an
annual premium in excess of such limit, the Surviving Corporation shall only be
required to obtain as much coverage as can be obtained by paying an annual
premium equal to such limit. The Company hereby represents and warrants to the
Parent that it has heretofore furnished to the Parent a true and complete copy
of the existing directors' and officers' liability insurance policy in force on
the date of this Agreement (including a list of the named insureds and
beneficiaries thereunder).
(e) This covenant is intended to be for the benefit of, and shall be
enforceable by, each of the Indemnified Parties and their respective heirs and
legal representatives.
Section 5.14. Employee Benefits Matters. (a) The Parent shall require the
Surviving Corporation to (i) honor the terms of the Severance Agreements in the
forms attached hereto as Exhibit C-1 for the officers, general managers and
director-level employees who will be party thereto (the "Severance Agreements"),
(ii) maintain the Company severance policy, the terms of which are attached
hereto as Exhibit C-2 (the "Severance Policy"), and (iii) maintain the
Headquarters Severance Plan, the terms of which are attached as Exhibit C-3.
Such Headquarters Severance Plan shall terminate in accordance with its terms,
and the
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Severance Policy shall terminate on the first anniversary of the Effective Time
(except that such plans and policies shall be effective with respect to any
layoff or terminations resulting from a reorganization or consolidation on or
after the first anniversary and before the second anniversary). Upon termination
of the Severance Policy, the Parent shall require the Surviving Corporation to
provide severance benefits no less favorable than those provided from time to
time to similarly situated employees of Parent.
(b) A copy of the Company's Senior Executive Transition Bonus Plan is
attached hereto as Exhibit C-4 (the "Transition Bonus Plan"). The Parent
acknowledges that the Company shall make payments under such Transition Bonus
Plan to the persons, and in the respective amounts, specified in Exhibit C-4 at
the Effective Time; provided, however, that in no event shall such amounts, in
the aggregate, exceed $2,000,000.
(c) The Company shall have the right to pay bonuses in order to retain the
services of certain employees in an amount not to exceed $100,000 in the
aggregate at or prior to the Effective Time. Such bonuses shall be awarded in
the sole discretion of the Company's Chief Executive Officer, after consultation
with the Parent.
(d) A copy of the Supplemental Retirement Income Agreement with David
Johnson, as amended, is attached hereto as Exhibit C-5 (the "SERP"). The Parent
acknowledges that the Company shall make the payments to Mr. Johnson under the
SERP at the Effective Time.
(e) The Parent shall require the Company to maintain the Red Lion Hotel,
Inc. Management Bonus Plan as attached hereto as Exhibit C-6 (the "Management
Bonus Plan"), to calculate the amounts payable under such Management Bonus Plan
on a basis consistent with the terms and past practice of the Company, including
terms relating to proration of bonuses upon employee layoffs, and to make
payments under such Management Bonus Plan with respect to the Company's fiscal
year ending December 31, 1996.
(f) For purposes of determining eligibility to participate, vesting,
entitlement to benefits and in all other respects where length of service is
relevant under any employee benefit plan or arrangement of the Company or its
subsidiaries (including for severance but not for pension benefit accruals to
the extent not permitted by law), employees of the Company and its subsidiaries
as of the Effective Time shall receive service credit for service with the
Company and any of its subsidiaries to the same extent such service was credited
under the Company's employee benefit plans immediately prior to the Effective
Time.
Section 5.15. Takeover Statutes. The Company and the Parent will cooperate
and take all actions reasonably necessary to (a) exempt the Merger from the
requirements of any applicable "fair price", "moratorium", "control share
acquisition" or other form of antitakeover law or regulation and (b) render
inapplicable the prohibitions on business combinations contained in Section 203
of the DGCL and eliminate or minimize the validity or applicability to the
Merger of any state takeover law.
Section 5.16. Certification of Stockholder Vote. At or prior to the
Closing, the Company shall deliver to the Parent a certificate executed by the
Secretary of the Company setting forth (a) the number of shares of Company
Common Stock voted in favor of approval and adoption of this Agreement and the
Merger and the number of shares of Company Common Stock voted against approval
and adoption of this Agreement and the Merger and (b) the number of Dissenting
Shares.
Section 5.17. Conveyance Taxes. The Company and the Parent shall cooperate
in the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar Taxes which become
payable in connection with the transactions contemplated by this Agreement that
are required or permitted to be filed at or before the Effective Time.
Section 5.18. Gains Tax. The Company shall pay, without deduction or
withholding from any amount payable to the holders of Company Common Stock, any
New York State Tax on Gains Derived from Certain Real Property Transfers (the
"Gains Tax"), New York State Real Estate Transfer Tax, New York City Real
Property Transfer Tax and New York State Stock Transfer Tax (the "Transfer
Taxes") and any similar Taxes imposed upon stockholders by any other State of
the United States, including pursuant to Revised Code of Washington Section
82.45.060 (and any penalties and interest with respect to such taxes), which
become payable in connection with the transactions contemplated by this
Agreement, on behalf of the stockholders of
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the Company. The Company and the Parent shall cooperate in the preparation,
execution and filing of any required returns with respect to such taxes
(including returns on behalf of the stockholders of the Company) and in the
determination of the portion of the consideration allocable to the real property
of the Company and its subsidiaries in New York State and City (or in any other
jurisdiction, if applicable). The terms of the Proxy Statement shall provide
that the stockholders of the Company shall be deemed to have agreed to be bound
by the allocation established pursuant to this Section 5.18 in the preparation
of any return with respect to the Gains Tax and the Transfer Taxes and any
similar taxes, if applicable.
Section 5.19. FIRPTA Certificate. At the Closing, the Company shall cause
the Partnership to provide to the Parent a valid certification of non-foreign
status of the Partnership pursuant to Section 1445(b)(2) of the Code and
Treasury Regulation Section 1.1445-2(b)(2). Such certification shall conform to
the model certification provided in Treasury Regulation Section
1.1445-2(b)(2)(iii)(B), or shall be in a form otherwise acceptable to the
Parent.
ARTICLE VI
CONDITIONS
Section 6.1. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of each party hereto to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions, any or all of which may be waived, in whole or in part, to
the extent permitted by applicable law:
(a) Effective Registration Statement. The Registration Statement
shall have been declared effective by the SEC under the Securities Act, and
no stop order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and no proceedings for that purpose shall
have been initiated or, to the knowledge of the Parent or the Company,
threatened by the SEC, and all necessary approvals under Blue Sky Laws
relating to the issuance or trading of the Parent Common Stock to be issued
to the stockholders of the Company in connection with the Merger shall have
been received.
(b) Stockholder Approvals. This Agreement shall have been approved
and adopted by the requisite vote of the stockholders of the Company, and
the Parent Stockholder Approval shall have been obtained or the Parent
shall have received an exemption from the requirements of Nasdaq to obtain
the Parent Stockholder Approval in form and substance reasonably
satisfactory to the Parent and the Company.
(c) HSR Act. The waiting period (and any extension thereof) under the
HSR Act applicable to the Merger shall have expired or been terminated.
(d) Governmental and Regulatory Consents. All consents, approvals,
authorizations, orders or permits required to be obtained by the Company,
the Parent, Merger Sub or their respective subsidiaries prior to the
Effective Time from, or filings or registrations required to be made by any
of the same prior to the Effective Time with, any Governmental Entity in
connection with the execution, delivery and performance of this Agreement
shall have been obtained or made, except (i) where the failure to have
obtained or made any such consent, approval, authorization, order, permit,
filing or registration would not have a Company Material Adverse Effect or
a Parent Material Adverse Effect following the Effective Time and (ii) for
any such consent, approval, authorization, order, permit, filing or
registration related to, or arising out of, compliance with statutes, rules
or regulations regulating the consumption, sale or serving of alcoholic
beverages.
(e) Nasdaq Quotation of Parent Common Stock. The Parent Common Stock
to be issued to the stockholders of the Company in connection with the
Merger shall have been approved for quotation on Nasdaq subject only to
official notice of issuance.
(f) No Order. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is in
effect and
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which prohibits the consummation of the Merger or any other material
transaction pursuant to this Agreement; provided, however, that the parties
shall use their best efforts to cause any such decree, judgment or other
order to be vacated or lifted.
Section 6.2. Additional Conditions to Obligations of the Parent. The
obligation of the Parent to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Company contained in this Agreement (without giving
effect to any qualification contained therein as to materiality, including
without limitation the phrases "material", "in all material respects",
"substantial" or "substantially", and "Company Material Adverse Effect")
shall be true and correct as of the Effective Time as though made on and as
of the Effective Time, except (i) for changes specifically permitted or
required by this Agreement, (ii) that those representations and warranties
which address matters only as of a particular date (other than the date of
this Agreement) shall remain true and correct as of such particular date,
and (iii) where the failure to be so true and correct would not,
individually or in the aggregate, have or be reasonably likely to have a
Company Material Adverse Effect.
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it at or
prior to the Effective Time.
(c) No Material Adverse Change. From the date of this Agreement until
the Effective Time, there shall not have occurred any change, event,
occurrence or circumstance in the business, operations, properties,
financial condition or results of operations of the Company or any of its
subsidiaries which, individually or in the aggregate, has had or is
reasonably likely to have a Company Material Adverse Effect (except for
changes, events, occurrences or circumstances (i) with respect to general
economic or industry conditions or (ii) arising as a result of the
transactions contemplated hereby).
(d) Third Party Consents. The Company shall have obtained, and hereby
agrees to exercise diligent efforts to obtain, the written consent, in form
and substance reasonably satisfactory to the Parent, of the Partnership
and/or RLH Partnership, L.P. to the change in the name under which the
hotel properties, which are subject to the Master Lease dated as of August
1, 1995 between the Company, as tenant, and RLH Partnership, L.P., as
landlord, are operated to "Doubletree" or a variation thereof designated by
the Parent.
(e) Certificate. The Parent shall have received a certificate
executed on behalf of the Company by the Chief Executive Officer or Chief
Financial Officer of the Company to the effect set forth in clauses (a)
through (d) of this Section 6.2.
(f) Comfort Letter. The Parent shall have received the "comfort"
letter from the Company's independent public accountant, dated as of the
Effective Time, as described in Section 5.9(a).
(g) Company Shareholder Support Agreement. The Company Shareholder
Support Agreement shall be in full force and effect in accordance with its
terms. The Partnership shall have performed and complied with all covenants
and agreements required to be performed or complied with by the
Partnership.
(h) Dissenting Stockholders. Holders of not more than 10% of the
outstanding shares of Company Common Stock shall have demanded appraisal
rights for their shares of Company Common Stock in accordance with the
DGCL.
Section 6.3. Additional Conditions to Obligations of the Company. The
obligation of the Company to effect the Merger is also subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of the Parent contained in this Agreement (without giving effect
to any qualification contained therein as to materiality, including without
limitation the phrases "material", "in all material respects",
"substantial" or "substantially", and "Parent Material Adverse Effect")
shall be true and correct in all material
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respects, as of the Effective Time as though made on and as of the
Effective Time, except (i) for changes specifically permitted or required
by this Agreement, and (ii) that those representations and warranties which
address matters only as of a particular date (other than the date of this
Agreement) shall remain true and correct as of such particular date, and
(iii) where the failure to be so true and correct would not, individually
or in the aggregate, have or be reasonably likely to have a Parent Material
Adverse Effect.
(b) Agreements and Covenants. The Parent shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it at or
prior to the Effective Time.
(c) No Material Adverse Change. From the date of this Agreement until
the Effective Time, there shall not have occurred any change, event,
occurrence or circumstance in the business, operations, properties,
financial condition or results of operations of the Parent or any of its
subsidiaries which, individually or in the aggregate, has had or is
reasonably likely to have a Parent Material Adverse Effect (except for
changes, events, occurrences or circumstances (i) with respect to general
economic or industry conditions or (ii) arising as a result of the
transactions contemplated hereby).
(d) Certificate. The Company shall have received a certificate
executed on behalf of the Parent by the Chief Executive Officer or Chief
Financial Officer of the Parent to the effect set forth in clauses (a)
through (c) of this Section 6.3.
(e) Comfort Letter. The Company shall have received the "comfort"
letter from the Parent's independent public accountant, dated as of the
Effective Time, as described in Section 5.9(b).
(f) Registration Rights Agreement; Partnership Services
Agreement. The Parent shall have entered into (i) a registration rights
agreement, substantially in the form attached hereto as Exhibit B (the
"Registration Rights Agreement"), with each affiliate of the Company
identified therein and (ii) a Partnership Services Agreement, substantially
in the form attached hereto as Exhibit D (the "Partnership Services
Agreement"), with the Partnership.
(g) Parent Shareholder Support Agreements. Each of the Parent
Shareholder Support Agreements shall be in full force and effect in
accordance with its terms. Each stockholder of the Parent that is a party
to a Parent Shareholder Support Agreement shall have performed and complied
with all covenants and agreements required to be performed or complied with
by such party thereunder.
(h) Dissenting Stockholders. Holders (other than the Partnership and
all other directors, officers and affiliates of the Company) of not more
than 10% of the outstanding shares of Company Common Stock shall have
demanded appraisal rights for their shares of Company Common Stock in
accordance with the DGCL.
ARTICLE VII
TERMINATION
Section 7.1. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after the approval and adoption of this Agreement by the stockholders of the
Company or any Parent Stockholder Approval (or exemption therefrom as
contemplated hereunder):
(a) by mutual consent of the Parent and the Company; or
(b) by action of the Board of Directors of either the Parent or the
Company if:
(i) the Merger shall not have been consummated by January 31, 1997
(provided that the right to terminate this Agreement under this clause
(i) shall not be available to any party whose breach of any
representation or warranty or failure to fulfill any covenant or
agreement under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date); or
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(ii) the Parent shall not have received an exemption from the
requirements of Nasdaq to obtain the Parent Stockholder Approval, and
the Parent Stockholder Approval shall not have been obtained upon a vote
at a Parent Stockholders' Meeting duly convened therefor or at any
adjournment thereof; or
(iii) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory
or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have
become final and non-appealable (provided, that the party seeking to
terminate this Agreement pursuant to this clause (iii) shall have used
all reasonable efforts to remove such injunction, order or decree); or
(c) by action of the Board of Directors of the Company (i) if, by
reason of an Alternative Transaction Proposal being made, the Board of
Directors of the Company determines that it will not recommend approval of
the Merger by the stockholders of the Company, or withdraws such
recommendation, whether before or after approval and adoption of this
Agreement by the stockholders of the Company, or (ii) if the Final Parent
Stock Price is equal to or less than $29.38; or
(d) by action of the Board of Directors of the Parent, if (i) the
Board of Directors of the Company shall have withdrawn or modified in a
manner materially adverse to the Parent its approval or recommendation of
this Agreement or the Merger or shall have recommended an Alternative
Transaction Proposal to the stockholders of the Company, or (ii) all of the
conditions to the Merger set forth in Section 6.1 and 6.2 have been
satisfied, and the Parent is unable to consummate the Merger or to pay the
Merger Consideration as a result of its failure to obtain financing in an
amount necessary to consummate the Merger or to pay the Merger
Consideration due to the nonfulfillment of (A) either of the conditions
precedent set forth in paragraphs (vi) and (xv) of the section entitled
"Conditions Precedent: A. To the Initial Loans" contained in the senior
debt commitment letter dated September 12, 1996 by and among Morgan Stanley
Senior Funding, Inc., The Bank of Nova Scotia and the Parent or (B) either
of the conditions precedent set forth in paragraphs 8 or 9 of the section
entitled "Conditions to Funding" contained in the bridge loan commitment
letter dated September 10, 1996 by and among Morgan Stanley Group, Inc.,
The Bank of Nova Scotia, First Union Corporation, Societe Generale
Investment Corporation and the Parent; or (iii) the Final Parent Stock
Price is equal to or less than $25.71.
Notwithstanding the foregoing, if any fee would be due under Section 7.2 as a
result of any such termination, the ability of the Company to terminate this
Agreement pursuant to Section 7.1(c)(i) and the ability of the Parent to
terminate this Agreement pursuant to Section 7.1(b)(ii) or 7.1(d)(ii) is
conditioned upon the payment by the Company or the Parent, as the case may be,
of any amounts owed by it in accordance with Section 7.2(a).
Section 7.2. Effect of Termination. (a) In the event that this Agreement
is terminated pursuant to Section 7.1(c)(i) or 7.1(d)(i), then the Company shall
pay the Parent a cash fee of $25,000,000, which amount shall be payable by wire
transfer of immediately available funds simultaneously with any such termination
pursuant to Section 7.1(c)(i) and no later than two (2) business days after such
termination pursuant to Section 7.1(d)(i). The Company acknowledges that the
agreements contained in this Section 7.2(a) are an integral part of the
transactions contemplated in this Agreement, and that, without these agreements,
the Parent and Merger Sub would not enter into this Agreement; accordingly, if
the Company fails to promptly pay the amount due pursuant to this Section
7.2(a), and, in order to obtain such payment, the Parent or Merger Sub commences
a suit which results in a judgment against the Company for the fee set forth in
this Section 7.2(a), the Company shall pay to the Parent its costs and expenses
(including attorneys' fees) in connection with such suit.
(b) In the event that this Agreement is terminated pursuant to Section
7.1(b)(ii) (other than primarily as a result of the breach of this Agreement by
the Company), then the Parent shall pay the Company a cash fee of $25,000,000,
which amount shall be payable by wire transfer of immediately available funds
simultaneously with any such termination, if the terminating party is the
Parent, and in no event later than two
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business (2) days after any such termination, if the terminating party is the
Company. In the event that this Agreement is terminated pursuant to Section
7.1(d)(ii) (other than primarily as a result of the breach of this Agreement by
the Company), then the Parent shall pay the Company a cash fee of $12,000,000,
which fee shall be the sole and exclusive remedy of the Company for the failure
of the parties to consummate the Merger, and which fee shall be payable by wire
transfer of immediately available funds simultaneously with any such
termination. The Parent acknowledges that the agreements contained in this
Section 7.2(b) are an integral part of the transactions contemplated in this
Agreement, and that, without these agreements, the Company would not enter into
this Agreement; accordingly, if the Parent fails to promptly pay any amounts due
pursuant to this Section 7.2(b), and, in order to obtain such payment, the
Company commences a suit which results in a judgment against the Parent for the
fee set forth in this Section 7.2(b), the Parent shall pay to the Company its
costs and expenses (including attorneys' fees) in connection with such suit.
(c) In the event of termination of this Agreement and the abandonment of
the Merger pursuant to this Article VII, all obligations and liabilities of the
parties hereto shall terminate, except the obligations of the parties pursuant
to this Section 7.2 and Section 5.12 and except for the provisions of Article
VIII, the Company Confidentiality Agreement and the Parent Confidentiality
Agreement. Nothing herein shall prejudice the ability of the non-breaching party
to seek damages from any other party for any willful breach of this Agreement,
including without limitation, attorneys' fees and the right to pursue any remedy
at law or in equity.
Section 7.3. Extension; Waiver. At any time prior to the Effective Time,
any party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by or on behalf of the party or parties to be bound
thereby.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Nonsurvival of Representations, Warranties and
Agreements. All representations, warranties and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall be deemed to the
extent expressly provided herein to be conditions to the Merger and shall not
survive the Merger and thereafter neither the Parent, Merger Sub or the Company,
nor any affiliate, officer, director, employee or shareholder shall have any
liability with respect thereto; provided, however, that the agreements contained
in Articles I and II, Sections 5.13 and 5.14, this Article VIII, the
Registration Rights Agreement, the Affiliate Letters, the Partnership Services
Agreement, the Company Shareholder Support Agreement, the Parent Shareholder
Support Agreements and any other covenant or agreement which contemplates
performance after the Effective Time shall survive the Merger.
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Section 8.2. Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
(a) if to the Parent or Merger Sub, to
Doubletree Corporation
410 North 44th Street
Suite 700
Phoenix, Arizona 85008
Attention: Chief Financial Officer
Telecopier: (602) 220-6602
with a copy to:
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019-6092
Attention: William J. Phillips, Esq.
Telecopier: (212) 295-6333
(b) if to the Company, to
Red Lion Hotels, Inc.
4001 Main Street
Vancouver, Washington 98663
Attention: Chief Executive Officer
Telecopier: (360) 693-1739
with a copy to:
Latham & Watkins
505 Montgomery Street, Suite 1900
San Francisco, California 94111-2586
Attention: Peter F. Kerman, Esq.
Telecopier: (415) 395-8095
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated or personally delivered or on the fifth business day after
being deposited in the United States mail, if mailed.
Section 8.3. Certain Definitions. The following terms shall, when used in
this Agreement, have the following respective meanings:
(a) "affiliate" shall have the meaning assigned to such term in
Section 12(b)-2 of the Exchange Act.
(b) "business day" shall have the meaning set forth in Rule
14d-1(c)(6) under the Exchange Act.
(c) "person" means any natural person, corporation, limited liability
company, partnership, unincorporated organization, government or department
or agency thereof, or other legal entity.
(d) "subsidiary" of any person means any corporation, partnership,
joint venture or other organization, whether incorporated or
unincorporated, of which such person directly or indirectly owns or
controls at least 50% of the securities or other interests having by their
terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions with respect to such corporation or
other organization, or any partnership or other organization of which such
person directly or indirectly owns a 50% or greater equity interest.
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Section 8.4. Assignment; Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Sections 2.3(f), 5.13 and 8.6 nothing in this Agreement, expressed or implied,
is intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
Section 8.5. Entire Agreement. This Agreement (including the Exhibits
hereto), the Company Disclosure Schedule, the Parent Disclosure Schedule, the
Parent Confidentiality Agreement, the Parent Shareholder Support Agreements, the
Company Confidentiality Agreement, the Company Shareholder Support Agreement,
the Registration Rights Agreement, the Partnership Services Agreement and any
documents delivered by the parties in connection herewith constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with respect
thereto. No addition to or modification of any provision of this Agreement shall
be binding upon any party hereto unless made in writing and signed by all
parties hereto.
Section 8.6. Amendment. This Agreement may be amended by the parties
hereto, by action taken by their respective Boards of Directors, at any time
before or after approval and adoption of this Agreement by the stockholders of
the Company or the Parent Stockholder Approval is obtained, but, after any such
approval or any Parent Stockholder Approval, no amendment shall be made which by
law requires further approval by the stockholders of the Company or the Parent
without obtaining such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto. After the Effective Time, none of the Sections or Articles specified in
Section 8.1 may be amended.
Section 8.7. Waivers. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including, without limitation, any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
Section 8.8. Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
Section 8.9. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
its rules of conflict of laws. Each of the parties hereto hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the courts
of the State of Delaware and of the United States of America located in the
State of Delaware (the "Delaware Courts") for any litigation arising out of or
relating to this Agreement and the transactions contemplated hereby (and agrees
not to commence any litigation relating thereto except in the Delaware Courts),
waives any objection to the laying of venue of any such litigation in the
Delaware Courts and agrees not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
Section 8.10. Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware Court, this
being in addition to any other remedy to which they are entitled at law or in
equity.
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Section 8.11. Incorporation of Exhibits. The Company Disclosure Schedule,
the Parent Disclosure Schedule and the Exhibits attached hereto and referred to
herein are hereby incorporated herein and made a part hereof for all purposes as
if fully set forth herein. Inclusion of information in the Company Disclosure
Schedule or the Parent Disclosure Schedule does not constitute an admission or
acknowledgement of the materiality of such information.
Section 8.12. Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders.
Section 8.13. Headings. The headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
Section 8.14. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all which counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
IN WITNESS WHEREOF, the Parent, Merger Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized as
of the date first written above.
DOUBLETREE CORPORATION
By: /s/ RICHARD FERRIS
------------------------------------
Name: Richard Ferris
Title: Co-Chairman
RLH ACQUISITION CORP.
By: /s/ DAVID HEUCK
------------------------------------
Name: David Heuck
Title: Vice President
RED LION HOTELS, INC.
By: /s/ DAVID J. JOHNSON
------------------------------------
Name: David J. Johnson
Title: President, CEO and Chairman
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APPENDIX B
OPINION OF SMITH BARNEY INC.
September 12, 1996
The Board of Directors
Red Lion Hotels, Inc.
4001 Main Street
Vancouver, Washington 98663
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of Red Lion Hotels, Inc. ("Red Lion"),
of the consideration to be received by such holders pursuant to the terms and
subject to the conditions set forth in the Agreement and Plan of Merger, dated
as of September 12, 1996 (the "Merger Agreement"), by and among Doubletree
Corporation ("Doubletree"), RLH Acquisition Corp., a wholly owned subsidiary of
Doubletree ("Merger Sub"), and Red Lion. As more fully described in the Merger
Agreement, (i) Merger Sub will be merged with and into Red Lion (the "Merger")
and (ii) each outstanding share of the common stock, par value $0.01 per share,
of Red Lion (the "Red Lion Common Stock") will be converted into the right to
receive (A) $21.30 in cash, plus if the effective time of the Merger (the
"Effective Time") does not occur on or prior to November 18, 1996, interest
accruing at a fluctuating rate per annum equal to the prime interest rate from
time to time of Bankers Trust Company, compounded daily, on $30.106 plus such
accrued interest, for the period commencing on November 18, 1996 and ending the
day on which the Effective Time occurs (the "Cash Consideration") and (B) 0.2398
shares (the "Exchange Ratio") of the common stock, par value $0.01 per share, of
Doubletree (the "Doubletree Common Stock") (such number of shares of the
Doubletree Common Stock, the "Stock Consideration," and together with the Cash
Consideration, the "Merger Consideration"); provided, however, that (a) if the
Final Doubletree Stock Price (as defined below) is equal to or less than $31.22,
the Exchange Ratio shall be equal to the sum of 0.2398 plus the quotient
obtained by dividing $0.8806 by the Final Doubletree Stock Price; (b) if the
Final Doubletree Stock Price is greater than $31.22 and equal to or less than
$34.89, then the Exchange Ratio shall be equal to the quotient obtained by
dividing $8.3657 by the Final Doubletree Stock Price; (c) if the Final
Doubletree Stock Price is equal to or greater than $38.56 but less than $42.23,
then the Exchange Ratio shall be equal to the quotient obtained by dividing
$9.2463 by the Final Doubletree Stock Price; (d) if the Final Doubletree Stock
Price is equal to or greater than $42.23 but less than $44.07, then the Exchange
Ratio shall be equal to the difference of 0.2398 minus the quotient obtained by
dividing $0.8806 by the Final Doubletree Stock Price; and (e) if the Final
Doubletree Stock Price is equal to or greater than $44.07, then the Exchange
Ratio shall be equal to the quotient obtained by dividing $9.6866 by the Final
Doubletree Stock Price. As used herein, the "Final Doubletree Stock Price" means
the "volume-weighted average quote" of the reported sales prices per share of
the Doubletree Common Stock quoted on The Nasdaq Stock Market's National Market,
as reported by Bloomberg, L.P., for the ten consecutive trading days (on which
shares of the Doubletree Common Stock are actually traded) immediately preceding
the second business day prior to the Effective Time.
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of Red Lion and certain senior officers and other representatives
and advisors of Doubletree concerning the businesses, operations and prospects
of Red Lion and Doubletree. We examined certain publicly available business and
financial information relating to Red Lion and Doubletree as well as certain
financial forecasts and other data for Red Lion and Doubletree which were
provided to or otherwise discussed with us by the respective managements of Red
Lion and Doubletree,
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The Board of Directors
Red Lion Hotels, Inc.
September 12, 1996
Page 2
including information relating to certain strategic implications and operational
benefits anticipated to result from the Merger. We reviewed the financial terms
of the Merger as set forth in the Merger Agreement in relation to, among other
things: current and historical market prices and trading volumes of the Red Lion
Common Stock and the Doubletree Common Stock; the respective companies'
historical and projected earnings and operating data; and the capitalization and
financial condition of Red Lion and Doubletree. We also considered, to the
extent publicly available, the financial terms of certain other transactions
effected which we considered relevant in evaluating the Merger and analyzed
certain financial, stock market and other publicly available information
relating to the businesses of other companies whose operations we considered
relevant in evaluating those of Red Lion and Doubletree. We also evaluated the
potential pro forma financial impact of the Merger on Doubletree. In addition to
the foregoing, we conducted such other analyses and examinations and considered
such other financial, economic and market criteria as we deemed appropriate in
arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the managements of Red Lion and Doubletree that such forecasts and
other information and data were prepared on bases reflecting reasonable
estimates and judgments as to the future financial performance of Red Lion and
Doubletree and the strategic implications and operational benefits anticipated
to result from the Merger. We are not expressing any opinion as to what the
value of the Doubletree Common Stock actually will be when issued to Red Lion
stockholders pursuant to the Merger or the prices at which the Doubletree Common
Stock will trade subsequent to the Merger. We have not made or been provided
with an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Red Lion and Doubletree nor have we made any
physical inspection of the properties or assets of Red Lion and Doubletree. In
arriving at our opinion, we did consider unsolicited proposals received by Red
Lion, but we were not authorized to solicit, and did not solicit, interest from
any other party with respect to any alternative business strategies or
transaction involving Red Lion. Our opinion is necessarily based upon
information available to us, and financial, stock market and other conditions
and circumstances existing and disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to Red Lion
in connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation of the Merger.
In the ordinary course of our business, we and our affiliates may actively trade
or hold the securities of Red Lion and Doubletree for our own account or for the
account of our customers and, accordingly, may at any time hold a long or short
position in such securities. We have in the past provided financial advisory and
investment banking services to Red Lion unrelated to the proposed Merger, for
which services we have received compensation. In addition, we and our affiliates
(including Travelers Group Inc. and its affiliates) may maintain relationships
with Red Lion and Doubletree.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Red Lion in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Smith Barney be made, without our prior
written consent; provided that our opinion may be included in its entirety in
any filing made by Red Lion or Doubletree with the Securities and Exchange
Commission with respect to the Merger.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above
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<PAGE> 247
The Board of Directors
Red Lion Hotels, Inc.
September 12, 1996
Page 3
and other factors we deemed relevant, we are of the opinion that, as of the date
hereof, the Merger Consideration to be received by holders of the Red Lion
Common Stock in the Merger is fair, from a financial point of view, to such
holders.
Very truly yours,
/s/ SMITH BARNEY INC.
SMITH BARNEY INC.
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<PAGE> 248
APPENDIX C
OPINION OF MORGAN STANLEY & CO. INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
SEPTEMBER 12, 1996
BOARD OF DIRECTORS
DOUBLETREE CORPORATION
410 NORTH 44TH STREET, SUITE 700
PHOENIX, ARIZONA 85008
MEMBERS OF THE BOARD:
We understand that Red Lion Hotels, Inc. ("Target" or the "Company"),
Doubletree Corporation ("Buyer") and RLH Acquisition Corp., a wholly owned
subsidiary of Buyer ("Acquisition Sub"), propose to enter into an Agreement and
Plan of Merger, substantially in the form of the draft dated September 11, 1996
(the "Merger Agreement"), which provides, among other things, for the merger
(the "Merger") of Acquisition Sub with and into Target. Pursuant to the Merger,
Target will become a wholly owned subsidiary of Buyer, and each outstanding
share of common stock, par value $.01 per share, of Target (the "Target Common
Stock"), other than shares held in treasury or held by Buyer or any affiliate of
Buyer or as to which dissenters' rights have been perfected and not withdrawn or
lost, will be converted into the right to receive (i) $21.30 in cash, plus
interest under certain circumstances as provided in the Merger Agreement, and
(ii) 0.2398 shares of common stock, par value $.01 per share, of Buyer (the
"Buyer Common Stock"), subject to adjustment in certain circumstances pursuant
to a formula set forth in the Merger Agreement. The terms and conditions of the
Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be paid
to the holders of shares of Target Common Stock pursuant to the Merger Agreement
is fair from a financial point of view to the Buyer.
For purposes of the opinion set forth herein, we have:
(i) analyzed certain publicly available financial statements and other
information of the Company and the Buyer, respectively;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management
of the Company;
(iii) reviewed certain 1996 budget information prepared by the management
of the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
(v) analyzed certain internal financial statements and other financial
operating data concerning the Buyer prepared by the management of the
Buyer;
(vi) reviewed certain financial projections concerning Target and Buyer
prepared by the management of the Buyer;
(vii) discussed the past and current operations and financial condition
and the prospects of the Buyer with senior executives of the Buyer,
and analyzed the pro forma impact of the Merger on the Buyer's
earnings per share, consolidated capitalization and financial
ratios;
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(viii) reviewed and discussed with the management of the Buyer and their
legal and other advisors their assessment of certain due diligence,
legal and other issues relating to the Merger;
(ix) reviewed and discussed with the management of the Buyer the synergies
and other long-term benefits expected to result from the Merger;
(x) reviewed the reported prices and trading activity for the Target
Common Stock and the Buyer Common Stock;
(xi) compared the financial performance of the Company and the Buyer and
the prices and trading activity of the Target Common Stock and the
Buyer Common Stock with that of certain other comparable
publicly-traded companies and their securities;
(xii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(xiii) participated in certain discussions and negotiations among
representatives of the Company and the Buyer and their financial and
legal advisors;
(xiv) reviewed the Merger Agreement and certain related documents; and
(xv) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections and budget information,
including the synergies and other long-term benefits expected to result from the
Merger, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company and the Buyer. We have not conducted a
physical inspection of the properties or facilities of the Company for the
Buyer, or made any independent valuation or appraisal of the assets or
liabilities of the Company or the Buyer, nor have we been furnished with any
such appraisals. We have assumed, with the Buyer's consent, that in connection
with the receipt of all necessary third-party consents and other appraisals for
the proposed Merger, the failure to receive any of such consents or approvals
will not have a material adverse impact on the Company or the Buyer. In
addition, we have assumed that the Merger will be consummated on the terms set
forth in the Merger Agreement. Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of the Buyer
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated ("Morgan Stanley") and its
affiliates have provided financial advisory and financing services for the
Target and the Buyer and have received fees for the rendering of these services.
In addition, Morgan Stanley or its affiliates (i) have received a mandate to act
as lead manager in connection with the proposed issuance of common stock or debt
securities of the Buyer (ii) together with the Bank of Nova Scotia, have
provided a commitment with respect to Senior Bank Financing to the Buyer in an
aggregate principal amount up to $736 million and Morgan Stanley will act as
arranger and syndication agent in connection with such Senior Bank Financing and
(iii) together with certain other purchasers, have provided a commitment with
respect to the purchase of up to $150 million in principal amount of Senior
Subordinated Bridge Notes of the Buyer.
It is understood that this letter is for the information of the Board of
Directors of the Buyer and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Buyer with the Securities and Exchange Commission with
respect to the Merger. In addition, we express no opinion and make no
recommendation as to how the stockholders of the Buyer should vote at the
stockholders' meeting, if any, held in connection with the Merger.
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Based on the foregoing, we are of the opinion on the date hereof that the
consideration to be paid to the holders of shares of Target Common Stock of the
Company pursuant to the Merger Agreement is fair from a financial point of view
to the Buyer.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ MAHMOUD A. MAMDANI
------------------------------------
Mahmoud A. Mamdani
Managing Director
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APPENDIX D
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.sec. 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) or (g) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale
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of all or substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, the surviving or resulting corporation, either
before the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such
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petition by registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the addresses therein
stated. Such notice shall also be given by 1 or more publications at least 1
week before the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
D-3
<PAGE> 254
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-4
<PAGE> 255
APPENDIX E
SAMPLE EXCHANGE RATIO ADJUSTMENTS
<TABLE>
<S> <C>
Base Doubletree Stock Price: $36.7253
Base Value of Stock Consideration: $8.8060
</TABLE>
<TABLE>
<CAPTION>
FINAL DOUBLETREE PERCENT OF BASE EXCHANGE VALUE OF STOCK PERCENT OF
STOCK PRICE DOUBLETREE STOCK PRICE RATIO CONSIDERATION BASE VALUE
- ---------------- ---------------------- -------- -------------- ----------
<S> <C> <C> <C> <C>
$25.7077 70.0% 0.2740 $ 7.0448 80.0%
26.0750 71.0% 0.2736 7.1329 81.0%
26.4422 72.0% 0.2731 7.2209 82.0%
26.8095 73.0% 0.2726 7.3090 83.0%
27.1767 74.0% 0.2722 7.3970 84.0%
27.5440 75.0% 0.2718 7.4851 85.0%
27.9112 76.0% 0.2713 7.5732 86.0%
28.2785 77.0% 0.2709 7.6612 87.0%
28.6457 78.0% 0.2705 7.7493 88.0%
29.0130 79.0% 0.2701 7.8373 89.0%
29.3802 80.0% 0.2698 7.9254 90.0%
29.7475 81.0% 0.2694 8.0135 91.0%
30.1147 82.0% 0.2690 8.1015 92.0%
30.4820 83.0% 0.2687 8.1896 93.0%
30.8493 84.0% 0.2683 8.2776 94.0%
31.2165 85.0% 0.2680 8.3657 95.0%
31.5838 86.0% 0.2649 8.3657 95.0%
31.9510 87.0% 0.2618 8.3657 95.0%
32.3183 88.0% 0.2589 8.3657 95.0%
32.6855 89.0% 0.2559 8.3657 95.0%
33.0528 90.0% 0.2531 8.3657 95.0%
33.4200 91.0% 0.2503 8.3657 95.0%
33.7873 92.0% 0.2476 8.3657 95.0%
34.1545 93.0% 0.2449 8.3657 95.0%
34.5218 94.0% 0.2423 8.3657 95.0%
34.8890 95.0% 0.2398 8.3657 95.0%
35.2563 96.0% 0.2398 8.4538 96.0%
35.6235 97.0% 0.2398 8.5418 97.0%
35.9908 98.0% 0.2398 8.6299 98.0%
36.3580 99.0% 0.2398 8.7179 99.0%
36.7253 100.0% 0.2398 8.8060 100.0%
37.0926 101.0% 0.2398 8.8941 101.0%
37.4598 102.0% 0.2398 8.9821 102.0%
37.8271 103.0% 0.2398 9.0702 103.0%
38.1943 104.0% 0.2398 9.1582 104.0%
38.5616 105.0% 0.2398 9.2463 105.0%
38.9288 106.0% 0.2375 9.2463 105.0%
39.2961 107.0% 0.2353 9.2463 105.0%
39.6633 108.0% 0.2331 9.2463 105.0%
40.0306 109.0% 0.2310 9.2463 105.0%
40.3978 110.0% 0.2289 9.2463 105.0%
40.7651 111.0% 0.2268 9.2463 105.0%
41.1323 112.0% 0.2248 9.2463 105.0%
41.4996 113.0% 0.2228 9.2463 105.0%
41.8668 114.0% 0.2209 9.2463 105.0%
42.2341 115.0% 0.2189 9.2463 105.0%
42.6013 116.0% 0.2191 9.3344 106.0%
42.9686 117.0% 0.2193 9.4224 107.0%
43.3359 118.0% 0.2195 9.5105 108.0%
43.7031 119.0% 0.2196 9.5985 109.0%
44.0704 120.0% 0.2198 9.6866 110.0%
44.4376 121.0% 0.2180 9.6866 110.0%
44.8049 122.0% 0.2162 9.6866 110.0%
45.1721 123.0% 0.2144 9.6866 110.0%
45.5394 124.0% 0.2127 9.6866 110.0%
45.9066 125.0% 0.2110 9.6866 110.0%
46.2739 126.0% 0.2093 9.6866 110.0%
46.6411 127.0% 0.2077 9.6866 110.0%
47.0084 128.0% 0.2061 9.6866 110.0%
47.3756 129.0% 0.2045 9.6866 110.0%
47.7429 130.0% 0.2029 9.6866 110.0%
</TABLE>
E-1
<PAGE> 256
RED LION HOTELS, INC.
4001 MAIN STREET
VANCOUVER, WASHINGTON 98663
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF STOCKHOLDERS OF RED LION HOTELS, INC. TO BE HELD ON NOVEMBER 8, 1996.
The undersigned hereby appoints David J. Johnson and Beth A. Ugoretz, each
with full power of substitution, as proxy of the undersigned, to attend the
Special Meeting of Stockholders of RED LION HOTELS, INC. (the "Company") to be
held at Le Parker Meridien Hotel, Salon Concorde, 119 West 56th Street, New
York, New York 10019, on November 8, 1996, commencing at 8:00 a.m. local time,
and at any and all adjournments thereof, and to vote all Common Stock of the
Company, as designated on the reverse side of this proxy, with all powers the
undersigned would possess if personally present at the meeting.
This Proxy will be voted or withheld from being voted in accordance with the
instructions specified. Where no choice is specified, the Proxy will confer
discretionary authority and will be voted FOR approval of Proposal 1. This Proxy
confers authority for the above named persons to vote in his or her discretion
with respect to amendments or variations to the matters identified in the notice
of meeting accompanying this Proxy and other matters which may properly come
before this meeting.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 257
<TABLE>
<S> <C>
/X/ PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE
</TABLE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE
FOLLOWING PROPOSAL:
1. APPROVAL AND ADOPTION of the Agreement and Plan of Merger dated as of
September 12, 1996, by and among the Company, Doubletree Corporation and
RLH Acquisition Corp. ("RLH"), and the merger of RLH with and into the
Company.
/ / FOR / / AGAINST / / ABSTAIN
Date: , 1996.
Please sign, date and return
the proxy card promptly in
the enclosed envelope.
-----------------------------
Please Sign Here
-----------------------------
Signature (if held jointly)
NOTE: Please sign exactly as name appears on stock certificate. When signing
as executor, administrator, attorney, trustee or guardian, please give your 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 person. If a joint tenancy, please have both tenants sign.
