-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fhs+NI9n68UL2BItYergHb2Eviotlyr0drfR5XloBusqVPvGSgcB9F+iVRoDSeuX AJyQVOmCxuEaAHIT75zKeA== 0000892569-96-002170.txt : 19961101 0000892569-96-002170.hdr.sgml : 19961101 ACCESSION NUMBER: 0000892569-96-002170 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19961031 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOUBLETREE CORP CENTRAL INDEX KEY: 0000923472 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 860762415 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-13161 FILM NUMBER: 96651452 BUSINESS ADDRESS: STREET 1: 410 N 44TH ST STREET 2: STE 700 CITY: PHOENIX STATE: AR ZIP: 85008 BUSINESS PHONE: 6022206666 S-3/A 1 FORM S-3 AMENDMENT #2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1996 REGISTRATION NO. 333-13161 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ DOUBLETREE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 860762415 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
DOUBLETREE CORPORATION 410 NORTH 44TH STREET, SUITE 700 PHOENIX, ARIZONA 85008 (602) 220-6666 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) WILLIAM L. PEROCCHI EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER DOUBLETREE CORPORATION 410 NORTH 44TH STREET, SUITE 700 PHOENIX, ARIZONA 85008 (602) 220-6666 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies to: WILLIAM J. PHILLIPS, ESQ. RICHARD D. TRUESDELL, JR., ESQ. CURTIS L. MO, ESQ. DAVIS POLK & WARDWELL DEWEY BALLANTINE 450 LEXINGTON AVENUE 1301 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10019-6092 (212) 450-4000 (212) 259-8000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This registration statement contains two forms of prospectus: one to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus") and the other to be used in connection with a concurrent international offering (the "International Prospectus"). The two prospectuses are identical except for the front outside cover page. The form of U.S. Prospectus is included herein, and the front outside cover page to be used in the International Prospectus, labelled "Alternate Page for International Prospectus," is included herein following the form of U.S. Prospectus. 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued October 15, 1996 5,000,000 Shares LOGO COMMON STOCK ------------------------ ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. OF THE 5,000,000 SHARES OF COMMON STOCK BEING OFFERED, 4,000,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 1,000,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET UNDER THE SYMBOL "TREE." ON OCTOBER 14, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK WAS $45 5/8 PER SHARE. ------------------------ The Company will use the net proceeds from the sale of the Shares of Common Stock made hereby to provide a portion of the financing for the acquisition of Red Lion Hotels, Inc. pursuant to the Merger (as defined herein). The offering of Common Stock made hereby is contingent upon the consummation of the Merger, which in turn is subject to certain conditions. See "The Merger and the Financing Plan." ------------------------ SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES 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 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 THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO THE PUBLIC COMMISSIONS(1) COMPANY(2) ---------------- ------------------ ---------------- Per Share..................... $ $ $ Total(3)...................... $ $ $
- ------------ (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $1,000,000. (3) The Company has granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 750,000 additional shares of Common Stock at the price to public, less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to the Company will be $ , $ and $ , respectively. See "Underwriters." ------------------------ The Shares of Common Stock are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein, and subject to approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the Shares of Common Stock will be made on or about , 1996 at the offices of Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor in same day funds. ------------------------ MORGAN STANLEY & CO. Incorporated MONTGOMERY SECURITIES SCHRODER WERTHEIM & CO. November , 1996 4 [Inside cover page] [Photographs of Doubletree hotels and map depicting locations of Doubletree and Red Lion hotels] IN CONNECTION WITH THIS OFFERING, THE U.S. UNDERWRITERS MAY OVER-ALLOT OR THE UNDERWRITERS MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET, SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITERS." ------------------------------ 5 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED OR INCORPORATED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------------ TABLE OF CONTENTS
PAGE ---- Incorporation of Certain Documents by Reference........................... 3 Corporate Organization................ 4 Prospectus Summary.................... 5 Risk Factors.......................... 20 The Merger and the Financing Plan..... 28 Use of Proceeds....................... 32 Common Stock Price Range.............. 32 Dividend Policy....................... 32 Capitalization........................ 33 The Combined Company.................. 34 Unaudited Pro Forma Condensed Consolidated Financial Information......................... 37 Selected Consolidated Financial Data of Doubletree.................. 44 Management's Discussion and Analysis of Results of Operations and Financial Condition of Doubletree... 46 Business of Doubletree................ 52 PAGE ---- Selected Pro Forma Financial, Historical Financial and Other Data of Red Lion................................ 67 Management's Discussion and Analysis of Results of Operations and Financial Condition of Red Lion............... 69 Business of Red Lion.................. 74 Management............................ 82 Security Ownership of Certain Beneficial Owners and Management of Doubletree.......................... 85 Description of Capital Stock of Doubletree.......................... 88 Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock..................... 91 Underwriters.......................... 94 Legal Matters......................... 97 Experts............................... 97 Available Information................. 97 Index to Financial Statements......... F-1
------------------------------ INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents which have been filed with the Securities and Exchange Commission (the "Commission") are hereby incorporated by reference in this Prospectus: (1) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995; (2) the Company's Quarterly Report on Form 10-Q for the fiscal quarters ended March 31, 1996 and June 30, 1996; (3) the Company's Current Reports on Form 8-K dated February 27, 1996, September 12, 1996 and October 16, 1996; and (4) the description of the Common Stock contained in the Company's Registration Statement on Form 8-A (File No. 0-24392) filed on June 18, 1994. All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date of this Prospectus and prior to the termination of the offering hereunder shall be deemed incorporated by reference herein and to be a part hereof from the date of filing such documents. 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 of this Prospectus 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 shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered upon written or oral request, a copy of any or all of such documents that have been or may be incorporated by reference herein (other than exhibits to such documents which are not specifically incorporated by reference into such documents). Requests for such documents should be directed to Doubletree Corporation, 410 North 44th Street, Suite 700, Phoenix, Arizona 85008, telephone number (602) 220-6666. 3 6 CORPORATE ORGANIZATION DOUBLETREE Doubletree Corporation (the "Company") 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 the Company's Common Stock), the partners of Doubletree Partners, other than Samantha Hotel Corporation ("Samantha"), contributed their general partnership interests to the Company, and the Samantha owners contributed all the capital stock of Samantha to the Company in consideration for an aggregate of 15,500,000 shares of 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 (as defined below) 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. ------------------------------ Unless otherwise noted, the statistics set forth in "Business of Red Lion" in this 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. ------------------------------ Doubletree(R), Doubletree Guest Suites(R) and Doubletree Club Hotels(R) are registered trademarks of the Company, and Club Hotels by Doubletree(TM) and Sweet Dreams(TM) are trademarks of Doubletree. Red Lion Hotel(R), Red Lion Inn(R) and Red Lion(R) are registered trademarks of Red Lion. 4 7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere or incorporated by reference in this Prospectus. As used in this Prospectus, (i) the "Company" or "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 (as defined herein). For a discussion of the historic corporate organization of Doubletree and Red Lion, see "Corporate Organization." Unless the context otherwise requires, all assumptions relating to the Merger and the Financing Plan (as defined herein), and to share numbers after giving effect thereto, assume that (a) 5,000,000 shares of Common Stock are issued and sold in the Offering (as defined herein) at a price of $45.00 per share (the last reported sale price of the Common Stock on October 4, 1996), (b) 6,925,502 shares of Common Stock are issued in the Merger, based upon (i) an assumed Final Doubletree Stock Price under the Merger Agreement (each as defined herein) of $45.00 and (ii) a resulting adjustment of the Exchange Ratio (as defined herein) from .2398 to .2153 in accordance with the Merger Agreement, and (c) 2,444,988 shares of Common Stock are issued and sold pursuant to the GEPT Equity Investment (as defined below) on the basis of such assumed adjusted Exchange Ratio. See "The Merger and the Financing Plan." Unless otherwise noted, all information in this Prospectus assumes no exercise of the U.S. Underwriters' over-allotment option. See "Underwriters." INTRODUCTION On September 12, 1996, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Red Lion and RLH Acquisition Corp., a wholly-owned subsidiary of the Company ("Merger Sub"), pursuant to which, upon the terms and subject to the conditions thereof, Merger Sub will be merged with and into Red Lion (the "Merger") and Red Lion will become a wholly-owned subsidiary of the Company. The total amount of funds required by Doubletree to consummate the Merger and to pay related fees and expenses is expected to be approximately $919.7 million, which will be financed in part through the sale of the Common Stock offered hereby (the "Offering"). The sale of the shares of the Common Stock in the Offering will occur concurrently with, and is contingent upon, consummation of the Merger, which in turn is subject to certain conditions. See "The Merger and the Financing Plan." THE COMPANIES DOUBLETREE Doubletree is one of the nation's leading hotel management companies. 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 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." 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. 5 8 After the Merger, the principal executive offices of Doubletree will continue to be 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." 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). THE COMBINED COMPANY After the consummation of the Merger, 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 $60.0 million and $45.8 million and net income of $20.2 million and $14.6 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. In addition to the Merger, 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 6 9 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. 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. 7 10 - 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. - 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 12.0% 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 together beneficially own an aggregate of approximately 23.7% of the Doubletree Common Stock upon consummation of the Merger and the Financing Plan (as defined below). See "The Merger -- The Financing Plan" and "Security Ownership of Certain Beneficial Owners and Management of Doubletree." 8 11 THE OFFERING Common Stock offered United States offering..................... 4,000,000 shares(1) International offering..................... 1,000,000 shares Total................................... 5,000,000 shares(1) Common Stock to be outstanding after the Offering................................... 37,459,076 shares(1)(2)(3) Use of proceeds.............................. To provide a portion of the financing for the Merger. See "Use of Proceeds" and "The Merger and the Financing Plan." The Nasdaq Stock Market's National Market Symbol..................................... TREE
- --------------- (1) Excludes 750,000 shares of Common Stock subject to the U.S. Underwriters' over-allotment option. See "Underwriters". (2) Excludes an aggregate of 1,760,275 shares of Common Stock subject to issuance upon the exercise of options outstanding at August 15, 1996 under the Company's 1994 Equity Participation Plan, as amended (the "Incentive Plan"). (3) Assumes 6,925,502 shares of Common Stock are issued in the Merger and 2,444,988 shares of Common Stock are sold pursuant to the GEPT Equity Investment, based on the assumptions set forth in the first paragraph of "Prospectus Summary." THE MERGER AND THE FINANCING PLAN GENERAL On September 12, 1996, the Company entered into the Merger Agreement with Red Lion and Merger Sub, pursuant to which, upon the terms and subject to the conditions thereof, Merger Sub will be merged with and into Red Lion in the Merger and Red Lion will become a wholly-owned subsidiary of the Company. The obligations of the Company and Red Lion to consummate the Merger are subject to the satisfaction (or waiver) of certain conditions, including, among others, the approval of the stockholders of Red Lion. The approval of the Merger by Red Lion stockholders requires the affirmative vote of the holders of a majority of the outstanding shares of Red Lion Common Stock entitled to vote thereon. The Partnership has agreed to vote its shares of Red Lion Common Stock (constituting approximately 66.7% of the total number of shares so entitled 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 Agreement may also be terminated under certain circumstances. If the Merger is approved by the requisite vote of the Red Lion stockholders and the other conditions to the Merger are satisfied or waived, the Merger will be consummated and become effective at the time specified in the Merger Agreement (the "Effective Time"). See "The Merger and the Financing Plan." Assuming the conditions to the Merger are met, the closing of the Offering hereby will occur concurrently with, and will be contingent upon the consummation of, the Merger at the Effective Time and will provide a portion of the financing for the Merger. MERGER CONSIDERATION Upon consummation of the Merger, 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, plus interest if the Merger does not occur on or prior to November 18, 1996 (as further described herein, the "Cash Consideration"), and (ii) 0.2398 shares (the "Exchange Ratio") 9 12 of the Company's Common Stock, subject to adjustment under certain circumstances (collectively together with the Cash Consideration, and as further described herein, the "Merger Consideration"). In addition, upon consummation of the Merger, 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 of the Merger, 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. See "The Merger and the Financing Plan." THE FINANCING PLAN The total amount of funds required by Doubletree to consummate the Merger and to pay related fees and expenses is expected to be approximately $919.7 million, including approximately $685.2 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 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 Senior Funding, Inc. and the Bank of Nova Scotia (the "New Credit Facility"), (ii) approximately $215.0 million in proceeds from the Offering hereby, net of underwriting discounts and commissions and estimated offering expenses, at or prior to the Effective Time, (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.
AMOUNT -------------- (IN MILLIONS) Sources of Funds: Borrowings under the New Credit Facility....................... $600.0 Net proceeds from the Offering................................. 215.0 Proceeds from the GEPT Equity Investment....................... 100.0 Cash on hand................................................... 4.7 ------ Total sources of funds.................................... $919.7 ====== Uses of Funds: Cash Consideration in the Merger............................... $685.2 Repayment of existing indebtedness of Red Lion................. 213.3 Estimated fees and expenses, excluding underwriting discounts and commissions and estimated offering expenses in connection with the Offering............................................ 21.2 ------ Total uses of funds....................................... $919.7 ======
In the event that the Offering is not consummated at or prior to the Effective Time, Doubletree currently intends to finance the Merger 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 various institutions, including Morgan Stanley Group Inc. (the "Bridge Loan"). See "The Merger and the Financing Plan -- The Financing Plan." RISK FACTORS See "Risk Factors" beginning on page 20 hereof for information that should be considered by prospective investors. 10 13 FORWARD LOOKING INFORMATION The statements contained in this 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. 11 14 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 Prospectus.
YEAR ENDED SIX MONTHS ENDED JUNE DECEMBER 31, 30, ------------ ----------------------- PRO FORMA PRO FORMA PRO FORMA 1995 1995 1996 ------------ --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenues......................................... $599,309 $ 286,670 $ 327,888 Total operating costs and expenses..................... 539,358 250,944 282,127 Operating income....................................... 59,951 35,726 45,761 Interest, net.......................................... (37,050) (18,819) (18,838) Income before income taxes and minority interest....... 22,901 16,907 26,923 Net income............................................. 20,225 9,352 14,597 Earnings per share(1).................................. 0.55 0.26 0.39 Weighted average common and common equivalent shares(1)........................................... 36,590 36,355 37,220 OTHER DATA: Operating Data Excluding Non-Recurring Items Operating income.................................... $ 77,178(2) $ 35,726 $ 45,761 Net income.......................................... 21,266(3) 8,816(3) 14,597 Earnings per share(1)............................... 0.58(3) 0.24(3) 0.39 EBITDA(4).............................................. $119,296 $ 64,836 $ 75,747
AS OF JUNE 30, 1996 ------------------- BALANCE SHEET DATA: Cash and cash equivalents............................................... $ 62,254 Total assets............................................................ 1,789,450 Long-term debt, net of current portion.................................. 595,000 Stockholders' equity.................................................... 781,047 Book value per common share............................................. $ 20.86
- --------------- (1) Pro forma per share information assumes that the approximately 14.4 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. 12 15 (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
AS OF AS OF DECEMBER 31, JUNE 30, ----------------- ----------------- 1994 1995 1995 1996 ------ ------ ------ ------ 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 ====== ====== ====== ======
13 16
AS OF AS OF DECEMBER 31, JUNE 30, ----------------- ----------------- 1994 1995 1995 1996 ------ ------ ------ ------ 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
- --------------- (1) 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 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. 14 17 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."
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) 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
AS OF JUNE 30, 1996 -------- 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
15 18
AS OF DECEMBER 31, AS OF JUNE 30, ------------------- ----------------- 1994 1995 1995 1996 ------ ------- ------ ------ 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 ====== ====== ====== ======
AS OF DECEMBER 31, AS OF JUNE 30, ------------------- ----------------- 1994 1995 1995 1996 ------ ------- ------ ------ 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 ====== ======= ====== ======
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------- ----------------- 1994 1995 1995 1996 ------ ------- ------ ------ 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
- --------------- (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 16 19 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. 17 20 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."
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) 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
AS OF JUNE 30, 1996 ------------------- 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
18 21
AS OF DECEMBER 31, AS OF JUNE 30, ------------------ ----------------- 1994 1995 1995 1996 ------ ------ ------ ------ 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 ====== ====== ====== ======
- --------------- (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. 19 22 RISK FACTORS Prospective investors should carefully consider the following factors in addition to the other information contained in this Prospectus in evaluating whether to purchase the Common Stock offered hereby. FINANCING OF THE MERGER; LEVERAGE Following consummation of the Merger and the Financing Plan described in "The Merger and the Financing Plan -- The Financing Plan," including the Offering, 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 $781.0 million of stockholders' equity, resulting in a debt to total capital ratio of 0.43 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 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 0.57 to 1.00. See "The Merger and the Financing Plan -- The Financing Plan." 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 combination of the two companies would produce the beneficial effects described below 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 20 23 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 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 21 24 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. The nine Doubletree brand hotels are subject to Doubletree brand franchise agreements, and the non- Doubletree brand hotel has left the Doubletree system. 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 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. 22 25 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. 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 23 26 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 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. 24 27 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 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 25 28 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. 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 26 29 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 together beneficially own an aggregate of approximately 23.7% and the Partnership will own approximately 12.0% 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 "Management." 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 "Description of Capital Stock." 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 "Common Stock Price Range." 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, assuming no options to purchase Doubletree Common Stock have been exercised since August 15, 1996, Doubletree will have 37,459,076 outstanding shares of Doubletree Common Stock (38,209,076 if the underwriters' over-allotment option under the terms of the Offering is exercised in full), of which 17,731,768 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 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 17,643,747 shares for offer or sale to the public. The Partnership, the GEI Entities, 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 180 days (or, in the case of such executive officers and directors, 90 days) after the Effective Time. See "The Merger and the Financing Plan -- The Merger -- Interests of Certain Persons in the Merger", "Description of Capital Stock of Doubletree -- Registration Rights" and "Underwriters." 27 30 THE MERGER AND THE FINANCING PLAN GENERAL On September 12, 1996, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Red Lion and RLH Acquisition Corp., a wholly-owned subsidiary of the Company ("Merger Sub"), pursuant to which, upon the terms and subject to the conditions thereof, Merger Sub will be merged with and into Red Lion (the "Merger") and Red Lion will become a wholly-owned subsidiary of the Company. The closing of the Offering hereby will occur concurrently with, and will be contingent upon the consummation of, the Merger and will provide a portion of the financing for the Merger. MERGER CONSIDERATION Upon consummation of the Merger, each share of Red Lion Common Stock which is outstanding immediately prior to the Merger (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 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 Effective Time occurs (the "Cash Consideration"), and (ii) 0.2398 shares (the "Exchange Ratio") of the Company's 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 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 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. As noted in the first paragraph of "Prospectus Summary," all assumptions relating to the Merger and the Financing Plan, and to share numbers after giving effect thereto, assume that (among other things) 6,925,502 shares of Common Stock are issued in the Merger, based upon an assumed Final Doubletree Stock Price of $45.00 and a resulting adjustment of the Exchange Ratio from .2398 to .2153 in accordance with the Merger Agreement. In addition, upon consummation of the Merger, 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 of the Merger, 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). 28 31 CONDITIONS TO THE MERGER The obligations of the Company 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 approval of the stockholders of Red Lion and Doubletree, to the extent required, (ii) 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, (iii) 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, (iv) 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. The approval of the Merger by stockholders of Red Lion requires the affirmative vote of the holders of a majority of the shares of Red Lion Common Stock entitled to vote thereon. The Partnership has agreed to vote its shares of Red Lion Common Stock (constituting approximately 66.7% of the total number of shares so entitled 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. 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. The Merger Agreement may be terminated under certain circumstances, including, among others, if the Board of Directors of Red Lion changes or withdraws its recommendation for approval of the Merger by the stockholders of Red Lion, or if the Company is unable to consummate the Financing Plan described below (and, therefore, the Merger) due to the nonfulfillment of certain conditions precedent to the initial loans under the New Credit Facility. INTERESTS OF CERTAIN PERSONS IN THE MERGER Upon consummation of the Merger and the Financing Plan, the GEI Entities will beneficially own an aggregate of approximately 23.7%, and the Partnership will own approximately 12.0%, of the total outstanding shares of the Company's Common Stock. See "Security Ownership of Certain Beneficial Owners and Management of Doubletree." Effective upon consummation of the Merger, the Board of Directors of the Company will be expanded to include two additional members to be designated by the Partnership. The Partnership has designated Michael W. Michelson and Edward I. Gilhuly, each of whom is currently a director of Red Lion. Mr. Michelson is a stockholder, director and executive vice president of RLA, the general partner of the Partnership, and Mr. Gilhuly is a director and executive vice president of RLA. As general partner of the Partnership, RLA has sole voting and investment power with respect to the shares of Red Lion Common Stock owned of record by the Partnership and, accordingly, the shares of Common Stock to be issued to the Partnership in the Merger. Mr. Michelson and George R. Roberts, who is a stockholder, director and president of RLA, are each general partners of KKR Associates (Delaware), a limited partner of the Partnership. In connection with the Merger, certain registration rights will be granted to the Partnership with respect to the shares of Common Stock to be issued to the Partnership in the Merger, and the current Common Stock registration rights held by GEHOP will be extended to cover the shares of Common Stock to be issued pursuant to the GEPT Equity Investment. See "Description of Capital Stock of Doubletree -- Registration Rights." The Partnership has agreed not to sell or otherwise dispose of any such shares of Common Stock for 180 days following the Merger, except for a distribution to a limited partner of the Partnership (which shares will represent approximately 2.1% of the Common Stock to be outstanding after giving effect to the Merger and the Financing Plan). Pursuant to the Merger Agreement, at the time of the Merger, the Company, Red Lion and certain affiliates of Red Lion, will enter into a Partnership Services Agreement (the "Partnership Services 29 32 Agreement") pursuant to which the Company 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, the Company 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. THE FINANCING PLAN The total amount of funds required by Doubletree to consummate the Merger and to pay related fees and expenses is expected to be approximately $919.7 million, including approximately $685.2 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 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 $215.0 million in proceeds from the Offering, net of underwriting discounts and commissions and estimated offering expenses, (iii) $100.0 million in proceeds from the GEPT Equity Investment, and (iv) cash on hand.
AMOUNT -------------- (IN MILLIONS) Sources of Funds: Borrowings under the New Credit Facility....................... $600.0 Net proceeds from the Offering................................. 215.0 Proceeds from the GEPT Equity Investment....................... 100.0 Cash on hand................................................... 4.7 ------ Total sources of funds.................................... $919.7 ====== Uses of Funds: Cash Consideration in the Merger............................... $685.2 Repayment of existing indebtedness of Red Lion................. 213.3 Estimated fees and expenses, excluding underwriting discounts and commissions and estimated offering expenses in connection with the Offering............................................ 21.2 ------ Total uses of funds....................................... $919.7 ======
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 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 Offering is not consummated at or prior to the Effective Time, Doubletree currently intends to finance the Merger, to the extent necessary, through the Bridge Loan and 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 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 30 33 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. Reference is made to a copy of the written commitment relating to the New Credit Facility filed as an exhibit to the Registration Statement of which this Prospectus forms a part. 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 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 Offering (or, if the 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 any such affiliate at the Effective Time, at an exercise price per share equal to the price at which GEPT elects to purchase (or elects for any such affiliate to purchase) such shares at the Effective Time. GEPT has elected the aforesaid implied price, and is entitled to change its election at any time until the twentieth trading day prior to the Effective Time. Although the price of the shares to be sold pursuant to the GEPT Equity Investment is subject to change based on the actual Final Doubletree Stock Price, such implied price would be $40.90 per share, assuming, as noted in the first paragraph of "Prospectus Summary," that the Final Doubletree Stock Price is $45.00 and the resulting adjusted Exchange Ratio is .2153. As a result, GEPT or such affiliate would purchase 2,444,988 shares, and Warrants to purchase 244,499 additional shares, of Doubletree Common Stock pursuant to the GEPT Equity Investment. 31 34 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock in the Offering (based on an assumed public offering price of $45.00 per share, representing the last reported sale price of the Common Stock on October 4, 1996, as quoted on Nasdaq), after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company in connection with the Offering, are approximately $215.0 million ($247.4 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds from its sale of Common Stock in the Offering, together with the initial borrowings under the New Credit Facility and the proceeds from the GEPT Equity Investment and a portion of the Company's cash on hand, to effect the Merger and pay related fees and expenses. See "The Merger and the Financing Plan." COMMON STOCK PRICE RANGE The Company's initial public offering of Common Stock occurred on July 1, 1994. The Company's Common Stock is quoted on Nasdaq under the symbol "TREE." The following table sets forth, for the periods indicated, the high and low closing bid prices for the Common Stock, as quoted on Nasdaq. The high and low closing bid prices quoted on Nasdaq reflect prices between dealers. They do not include retail markups, markdowns or commissions and do not necessarily represent actual transactions.
COMMON STOCK ----------------- HIGH LOW ------ ------ 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 Fourth Quarter................................................... 25.88 20.50 YEAR ENDING DECEMBER 31, 1996: First Quarter.................................................... 27.88 23.25 Second Quarter................................................... 35.38 26.50 Third Quarter.................................................... 39.50 31.25 Fourth Quarter (through October 14, 1996)........................ 45.25 40.50
A recent reported last sales price for the Company's Common Stock as quoted on Nasdaq is set forth on the cover of this Prospectus. On September 30, 1996, there were approximately 327 holders of record of the Company's Common Stock. DIVIDEND POLICY No dividends have been declared or paid on the Common Stock since the incorporation of Doubletree. 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 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. 32 35 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996 and as adjusted to reflect the consummation of the Merger and the Financing Plan, including the sale of shares of Common Stock in the Offering (all based upon the assumptions set forth in the first paragraph of "Prospectus Summary.") See "Use of Proceeds." This table should be read in conjunction with "The Merger and the Financing Plan," the Unaudited Pro Forma Condensed Consolidated Financial Information and the consolidated financial statements of the Company and Red Lion and the notes thereto included elsewhere or incorporated by reference in this Prospectus.
AS OF JUNE 30, 1996 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Total indebtedness (including current portion of $5,000)............... $ -- $ 600,000 Stockholders' equity(1): Common Stock, $.01 par value, 100,000,000 shares authorized; 23,070,961 shares issued and outstanding, actual; and 37,441,451 shares as adjusted(2)............................................. 231 374 Additional paid-in capital........................................... 128,061 754,504 Unearned employee compensation....................................... (176) (176) Unrealized gain on marketable equity securities...................... 26 26 Retained earnings.................................................... 26,319 26,319 -------- -------- Total stockholders' equity........................................ 154,461 781,047 -------- -------- Total capitalization......................................... $154,461 $ 1,381,047 ======== ========
- --------------- (1) The Company is authorized to issue 5,000,000 shares of preferred stock, $0.01 par value, none of which is currently outstanding. See "Description of Capital Stock -- Preferred Stock." (2) Does not include an aggregate of 1,509,625 shares of Common Stock reserved for issuance under the Incentive Plan. At September 30, 1996, options to purchase 1,727,600 shares of Common Stock were outstanding, of which 452,100 were exercisable. 33 36 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 12.0% of Doubletree's Common Stock upon consummation of the Merger and the Financing Plan. The GEI Entities will own in the aggregate approximately 23.7% of the Doubletree Common Stock upon consummation of the Merger and the Financing Plan. See "The Merger and the Financing Plan -- The Financing Plan" 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 After the consummation of the Merger, 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 $60.0 million and $45.8 million and net income of $20.2 million and $14.6 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. 34 37 In addition to the Merger, 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 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. 35 38 - 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. 36 39 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." 37 40 DOUBLETREE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
RED LION DOUBLETREE ------------------------------------------------ ----------------------------------- RECLASSIFICATION PRO FORMA PRO FORMA(1) ADJUSTMENTS(2) AS ADJUSTED ACTUAL ADJUSTMENTS TOTAL ------------ ------------------- ----------- -------- ----------- -------- 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 26,355(a) 50,368 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 46,893 539,358 -------- --------- -------- -------- -------- -------- Operating income......................... 56,599 1,166 57,765 22,304 (20,118) 59,951 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 (44,159) 22,901 Minority interest share of income (loss)............................... (758) -- (758) 35 -- (723) -------- --------- -------- -------- -------- -------- Income before income taxes............... 40,078 -- 40,078 26,259 (44,159) 22,178 Income tax expense..................... (7,327) -- (7,327) (8,468) 13,842(c) (1,953) -------- --------- -------- -------- -------- -------- Net income............................... $ 32,751 $ -- $ 32,751 $ 17,791 $ (30,317) $ 20,225(3) ======== ========= ======== ======== ======== ======== EARNINGS PER SHARE....................... $ 0.80 $ 0.55(3) ======== ======== Weighted average common and common equivalent shares outstanding.......... 22,219 36,590 ======== ========
- --------------- (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 Red Lion 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 $21.3 million and $0.58, respectively. See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information 38 41 DOUBLETREE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
RED LION DOUBLETREE ------------------------------------------------ --------------------------------------- RECLASSIFICATION PRO FORMA PRO FORMA(1) ADJUSTMENTS(2) AS ADJUSTED ACTUAL ADJUSTMENTS TOTAL ------------ ------------------- ----------- ------------ ----------- -------- 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 12,957(a) 24,897 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 23,228 250,944 -------- --------- -------- -------- -------- -------- Operating income.................... 32,402 1,144 33,546 11,897 (9,717) 35,726 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 (20,766) 16,907 Minority interest share of (income) loss................... (159) -- (159) (7) -- (166) -------- --------- -------- -------- -------- -------- Income before income taxes.......... 23,891 -- 23,891 13,616 (20,766) 16,741 Income tax expense................ (9,556) -- (9,556) (4,229) 6,396(c) (7,389) -------- --------- -------- -------- -------- -------- Net income.......................... $ 14,335 $ -- $ 14,335 $ 9,387 $ (14,370) $ 9,352(3) ======== ========= ======== ======== ======== ======== EARNINGS PER SHARE.................. $ 0.43 $ 0.26(3) ======== Weighted average common and common equivalent shares outstanding..... 21,984 36,355 ========
- --------------- (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 $8.8 million and $0.24, respectively. See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information 39 42 DOUBLETREE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
RED LION DOUBLETREE -------------------------------------------- ------------------------------------ RECLASSIFICATION PRO FORMA ACTUAL ADJUSTMENTS(1) AS ADJUSTED ACTUAL ADJUSTMENTS TOTAL -------- ------------------- ----------- ---------- ----------- -------- 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 13,674(a) 25,781 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 expenses......................... 219,240 (60,134) 159,106 100,181 22,840 282,127 -------- --------- -------- -------- -------- -------- Operating income........................... 38,727 583 39,310 17,195 (10,744) 45,761 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 (24,590) 26,923 Minority interest share of (income)...... (978) -- (978) (22) -- (1,000) -------- --------- -------- -------- -------- -------- Income before income taxes................. 31,393 -- 31,393 19,120 (24,590) 25,923 Income tax expense....................... (12,557) -- (12,557) (6,693) 7,924(c) (11,326) -------- --------- -------- -------- -------- -------- Net income................................. $ 18,836 $ -- $ 18,836 $ 12,427 $ (16,666) $ 14,597 ======== ========= ======== ======== ======== ======== EARNINGS PER SHARE....................... $ 0.54 $ 0.39 ======== ======== Weighted average common and common equivalent shares outstanding.......... 22,849 37,220 ======== ========
- --------------- (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 40 43 DOUBLETREE CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
AS OF JUNE 30, 1996 ------------------------------------------------ HISTORICAL PRO FORMA DOUBLETREE ADJUSTMENTS(4) PRO FORMA ---------- -------------- ---------- ASSETS Cash and cash equivalents......................... $ 46,566 $ 15,688(a) $ 62,254 Accounts receivable, net.......................... 20,596 18,400(b) 38,996 Other............................................. 3,421 7,200(b) 10,621 -------- ---------- ---------- Total current assets......................... 70,583 41,288 111,871 -------- ---------- ---------- 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..................................... 15,228 382,169(b) 397,397 -------- ---------- ---------- $ 211,973 $1,577,477 $1,789,450 ======== ========== ========== 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...................................... 231 143(e) 374 Additional paid-in capital........................ 128,061 626,443(e) 754,504 Unearned employee compensation.................... (176) -- (176) Unrealized gain on marketable securities.......... 26 -- 26 Retained earnings................................. 26,319 -- 26,319 -------- ---------- ---------- Total Stockholders' Equity................... 154,461 626,586 781,047 -------- ---------- ---------- $ 211,973 $1,577,477 $1,789,450 ======== ========== ==========
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information 41 44 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 $311.6 million of Doubletree Common Stock as Stock Consideration, (2) the Red Lion 1996 Hotel Acquisitions (which are further described below), (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 $215.0 million from the Offering, (6) the payment of approximately $685.2 million in Cash Consideration to the stockholders 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 and the Financing Plan -- The Financing Plan." 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. 42 45 (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 increase in cash and cash equivalents consisting of: 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 Offering........................... 215,000 Proceeds from borrowings under the New Credit Facility... 600,000 Repayment of existing notes payable...................... (213,319) Cash Consideration paid pursuant to the Merger........... (685,152) --------- $ 15,688 =========
(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 Offering and the GEPT Equity Investment all in accordance with the assumptions set forth in the first paragraph of "Prospectus Summary." 43 46 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 Prospectus.
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 -------- ------- ------- -------- -------- -------- -------- -------- 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 ======= ======== ======== ======== ========
44 47
AS OF DECEMBER 31, AS OF --------------------------------------------------------- JUNE 30, 1991(1) 1992(1) 1993 1994 1995 1996 ------- ------- ------- -------- -------- -------- 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
- --------------- (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 $12.7 million and $0.63, respectively. (5) During the fourth quarter of 1995, Doubletree and RFS Management incurred $2.6 million 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. 45 48 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 46 49 amortization increased $0.9 million over the comparable 1995 period primarily due to increased amortization 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. 47 50 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 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. 48 51 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. 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 49 52 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. 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 $315.0 million of net proceeds pursuant to the GEPT Equity Investment and the Offering. In the event that the Offering is not consummated at or prior to the Effective Time, Doubletree intends to obtain substitute financing through the Bridge Loan 50 53 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." 51 54 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 was to have been invested over the next six months thereafter, 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 $150.0 million. Doubletree believes that the Candlewood joint venture provides it with an 52 55 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 a Club Hotel by Doubletree, containing a fully operational Business Club, 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. Effective October 1, 1996, Starwood converted the short-term management agreements for the hotels to short-term Doubletree franchise agreements. 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. 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 53 56 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 were operated by Doubletree under management contracts and 16 were operated by franchisees licensed to use the Doubletree brand name at June 30, 1996. Four of the managed hotels were also leased by Doubletree as of such date. At June 30, 1996, Doubletree full-service hotels ranged in size from 120 to 720 rooms, and room rates generally ranged 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. The following table sets forth certain information regarding the Doubletree full-service hotels managed or franchised by Doubletree at June 30, 1996:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels........................................... 44 14,654 Franchised Hotels........................................ 16 4,680 --- ------ Total............................................... 60 19,334 === ======
54 57 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. At June 30, 1996, Doubletree Guest Suites ranged in size from 55 to 460 guest suites, and suite rates generally ranged 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:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels........................................... 26 5,985 Franchised Hotels........................................ 11 2,048 --- ----- Total............................................... 37 8,033 === =====
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. At June 30, 1996, Doubletree Club Hotels ranged in size from 158 to 215 rooms, and room rates generally ranged 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. The following table sets forth certain information regarding the Doubletree Club Hotels managed or franchised by Doubletree at June 30, 1996:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels........................................... 3 512 Franchised Hotels........................................ 10 1,852 --- ----- Total............................................... 13 2,364 === =====
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 each of Jacksonville, Florida, and San Antonio, Texas, has been converted to Club Hotels by Doubletree. See "-- Recent Developments -- Introduction of Club Hotels by Doubletree." 55 58 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 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. 56 59 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 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 57 60 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 Percentage Leases then in effect 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 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. 58 61 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 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. 59 62 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." 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:
TOTAL NON- DOUBLETREE DOUBLETREE DOUBLETREE DOUBLETREE DOUBLETREE BRAND BRAND FULL-SERVICE GUEST SUITES CLUB HOTELS HOTELS HOTELS TOTAL ------------ ------------ ----------- ---------- ---------- ------- 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
- --------------- (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. 60 63 The following table sets forth, at June 30, 1996, certain information with respect to Doubletree hotels:
MANAGED(M), LEASED(L) OR NUMBER OF HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS - ----------------------------------------------- ------------------ ---------------- --------- 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
61 64
MANAGED(M), LEASED(L) OR NUMBER OF HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS - ----------------------------------------------- ------------------ ---------------- --------- 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
62 65
MANAGED(M), LEASED(L) OR NUMBER OF HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS - ----------------------------------------------- ------------------ ---------------- --------- 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
63 66
MANAGED(M), LEASED(L) OR NUMBER OF HOTEL LOCATION STATE FRANCHISED(F)(1) ROOMS - ----------------------------------------------- ------------------ ---------------- --------- 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
- --------------- (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. 64 67 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." 65 68 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. 66 69 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 Prospectus. For a discussion of the historical corporate organization of Red Lion, see "Corporate Organization."
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 -------- -------- -------- -------- -------- -------- --------- --------- --------- -------- 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
67 70
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 -------- -------- -------- -------- -------- -------- --------- --------- --------- -------- 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
- --------------- (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 $14.7 million and the initial recording of estimated deferred income tax benefits of $9.7 million 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 $13.3 million 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 $1.3 million 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 $71.3 million. Excluding the impact of the nonrecurring Red Lion Formation costs of $1.3 million, obligations under an incentive unit plan and a supplemental retirement agreement aggregating $13.3 million, and deferred income tax benefits of $9.7 million, pro forma net income would have been $32.8 million 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 $2.6 million. 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 $29.9 million, 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 $9.7 million 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 $14.7 million of expenses resulting from the Red Lion Formation and the Red Lion Refinancing. Excluding these expenses, EBITDA would have been $96.6 million. 68 71 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:
1996 1995 ------ ------ Occupancy percentage............................... 71.0% 72.2% Average room rate.................................. $79.75 $74.88
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 69 72 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 70 73 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. 71 74 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 $67.88 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 72 75 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 and the Financing Plan -- The Financing Plan." 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. 73 76 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. 74 77 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.
OWNED (O), MANAGED (M) OR NUMBER OF HOTEL LOCATION STATE LEASED (L) ROOMS - ---------------------------------------------------- ----------- -------------- --------- 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
75 78
OWNED (O), MANAGED (M) OR NUMBER OF HOTEL LOCATION STATE LEASED (L) ROOMS - ---------------------------------------------------- ----------- ------ 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 ======
- --------------- (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). 76 79 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. 77 80 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, 78 81 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 and the Financing Plan -- The Merger -- Interests of Certain Persons in the Merger." 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 79 82 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 and the Financing Plan -- The Merger -- Interests of Certain Persons in the Merger." 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. 80 83 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. 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." 81 84 MANAGEMENT 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.
NAME AGE POSITION - ------------------------- --- -------------------------------------------------- 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
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. 82 85 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 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, 83 86 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. 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. 84 87 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, including the sale of shares of Common Stock in the Offering, 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.
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 - --------------------------------------------------- ---------- ------- ---------- ------- GE Investment Management Incorporated(3)........... 6,060,981 26.2% 6,060,981 16.2% Trustees of General Electric Pension Trust(4)...... 137,134 * 2,826,620 7.5% ---------- ------- ---------- ------- Total GEI Entities............................... 6,198,115 26.8% 8,887,601 23.7% 3003 Summer Street P.O. Box 7900 Stamford, Connecticut 06905 Red Lion, a California Limited Partnership(5)...... -- -- 4,499,970 12.0% 4001 Main Street Vancouver, Washington 98663 Putnam Investments, Inc.(6)........................ 2,446,674 10.6% 2,446,674 6.5% One Post Office Square Boston, MA 02109 Ridge Partners, L.P.(7)............................ 1,532,432 6.6% 1,532,432 4.1% 1436 Ridge Road Northbrook, Illinois 60062 RCM Capital Management(8).......................... 1,315,500 5.7% 1,315,500 3.5% Four Embarcadero Center San Francisco, CA 94111 Richard J. Ferris(7)(10)(11)....................... 1,537,432 6.7% 1,537,432 4.1% Peter V. Ueberroth(9)(10)(11)...................... 1,085,432 4.7% 1,085,432 2.9% 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 7.7%
- --------------- * Less than 1%. 85 88 (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 after such date. (2) The number of shares of Doubletree Common Stock and percentages reflected in this column are based on (i) the assumption that the Financing Plan is effectuated and (ii) the assumptions set forth in the first paragraph of "Prospectus Summary." (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), 2,826,620 shares to be owned of record and beneficially by GEPT and/or an affiliate thereof. 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 beneficial ownership of these shares only to the extent that RCM Limited may be deemed to have 86 89 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 2,826,620 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). 87 90 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 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, 37,459,076 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 "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 the benefit of Doubletree or at the request of another holder of Doubletree Common Stock. In addition, 88 91 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 or securities convertible into or exchangeable for 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. 89 92 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. 90 93 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK The following discussion sets forth certain United States Federal income and estate tax consequences of the ownership and disposition of shares of Common Stock by Non-U.S. Holders. In general, a "Non-U.S. Holder" is any holder other than (i) a citizen or resident, as specifically defined for United States Federal income and estate tax purposes, of the United States, (ii) a corporation or partnership (or any entity treated as a corporation or partnership for United States Federal income tax purposes) created or organized in the United States or under the laws of the United States or of any political subdivision thereof, or (iii) an estate or trust whose income is includible in gross income for United States Federal income tax purposes regardless of its source. The discussion is based on current law, which is subject to change retroactively or prospectively, and is for general information only. The discussion does not address all aspects of United States Federal income and estate taxation and does not address any aspects of state, local or foreign tax laws. The discussion does not consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder (including the fact that in the case of a Non-U.S. Holder that is a partnership, the United States tax consequences of holding and disposing of shares of Common Stock may be affected by certain determinations made at the partner level). Accordingly, prospective investors are urged to consult their tax advisors regarding the application of United States Federal income and estate tax laws to their particular situations as well as any tax consequences to them arising under the laws of any state, local or foreign taxing jurisdiction. DIVIDENDS It is not currently contemplated that Doubletree will pay dividends on Common Stock in the foreseeable future. In general, dividends paid to a Non-U.S. Holder will be subject to United States withholding tax at a 30% rate (or such lower rate as may be prescribed by an applicable tax treaty) unless the dividends are either (i) effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States, or (ii) if a tax treaty applies, attributable to a United States permanent establishment maintained by the Non-U.S. Holder. Dividends effectively connected with such a trade or business or attributable to such a permanent establishment (if a tax treaty applies) and so treated as effectively connected income will generally not be subject to withholding (if the Non-U.S. Holder files certain forms annually with the "payor," as defined for United States Federal income tax purposes, of the dividend) and will generally be subject to United States Federal income tax on a net income basis at regular graduated rates. In the case of a Non-U.S. Holder which is a corporation, such effectively connected income also may be subject to the 30% branch profits tax (which is generally imposed on a foreign corporation on the repatriation from the United States of effectively connected earnings and profits). The branch profits tax may not apply, or may apply at a reduced rate, if the recipient is a qualified resident of certain countries with which the United States has an income tax treaty. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country are presumed under current Treasury Regulations to be paid to a resident of that country, unless the payor has definite knowledge that such presumption is not warranted or an applicable tax treaty (or specific United States Treasury Regulations thereunder) requires some other method for determining a Non-U.S. Holder's residence. Under current regulations, Doubletree must report annually to the Internal Revenue Service ("IRS") and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Under the provisions of a specific treaty or agreement, copies of these reports may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides. SALE OF COMMON STOCK Generally, a Non-U.S. Holder will not be subject to United States Federal income tax on any gain realized upon the disposition of such holder's shares of Doubletree Common Stock unless (i) subject to the exception discussed below, Doubletree is or has been a "United States real property holding corporation" (a "USRPHC") within the meaning of section 897(c)(2) of the Code at any time within the shorter of the five-year period preceding such disposition or such holder's holding period (the "Required Holding Period"); 91 94 (ii) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States or, if a tax treaty applies, attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States; (iii) the Non-U.S. Holder is an individual who holds the shares of Doubletree Common Stock as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition, and either (a) such Non-U.S. Holder has a "tax home" (as specifically defined for United States Federal income tax purposes) in the United States (unless the gain from the disposition is attributable to an office or other fixed place of business maintained by such Non-U.S. Holder in a foreign country and such gain has been subject to a foreign tax equal to at least 10%), or (b) the gain from the disposition is attributable to an office or fixed place of business maintained by such Non-U.S. Holder in the United States; or (iv) the Non-U.S. Holder is subject to tax pursuant to the provisions of United States tax law applicable to certain United States expatriates. A corporation is generally a USRPHC if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. It is unclear whether Doubletree currently is a USRPHC and there can be no assurance that Doubletree is not (or will not become, by reason of the Merger or otherwise) a USRPHC. However, even if Doubletree is or becomes a USRPHC, a Non-U.S. Holder would generally not be subject to tax, or withholding in respect of such tax, on gain from a sale or other disposition of Doubletree Common Stock by reason of Doubletree's USRPHC status so long as the Doubletree Common Stock is regularly traded on an established securities market as defined for purposes of Code section 897(c) ("regularly traded") during the calendar year in which such sale or disposition occurs provided that such holder does not own and has not owned, actually or constructively, Common Stock with a fair market value in excess of 5% of the fair market value of all Doubletree Common Stock outstanding at any time during the Required Holding Period. Doubletree believes that the Doubletree Common Stock will be treated as regularly traded. If Doubletree is or has been a USRPHC within the Required Holding Period, and if a non-U.S. holder owns or owned in excess of 5% of the fair market value of Common Stock (as described in the preceding paragraph), such Non-U.S. Holder of Doubletree Common Stock will be subject to U.S. Federal income tax at regular graduated rates under certain rules ("FIRPTA tax") on gain recognized on a sale or other disposition of such Doubletree Common Stock. In addition, if Doubletree is or has been a USRPHC during the Required Holding Period and the Doubletree Common Stock were not treated as regularly traded, a Non-U.S. Holder (without regard to its ownership percentage) would be subject to withholding at a rate of 10% of the amount realized on a sale or other disposition of Doubletree Common Stock and would be subject to further FIRPTA tax if such tax exceeded the amount withheld. Any amount withheld would be creditable against such Non-U.S. Holder's U.S. Federal income tax liability. Non-U.S. holders are urged to consult their tax advisors concerning the potential applicability of these provisions. ESTATE TAX Shares of Doubletree Common Stock owned or treated as owned by an individual who is not a citizen or resident (as defined for United States federal estate tax purposes) of the United States at the time of death will be includible in such individual's gross estate for United States Federal estate tax purposes (unless an applicable tax treaty provides otherwise) and therefore may be subject to United States federal estate tax. BACKUP WITHHOLDING AND INFORMATION REPORTING Under current United States Federal income tax law, backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) and information reporting requirements apply to payments of dividends. Backup withholding tax and information reporting requirements will generally not apply to dividends paid on Doubletree Common Stock to Non-U.S. Holders to which the Company is required to withhold at a 30% rate or, if applicable, a lower treaty rate, as described under "-- Dividends." 92 95 The payment of the proceeds from the disposition of shares of Doubletree Common Stock to or through the United States office of a broker will be subject to information reporting and backup withholding unless the holder or beneficial owner certifies, under penalties of perjury, among other things, as to its status as a Non-U.S. Holder, or otherwise establishes an exemption. Generally, the payment of the proceeds from the disposition of shares of Doubletree Common Stock to or through a non-U.S. office of a broker will not be subject to backup withholding and will not be subject to information reporting. In the case of the payment of proceeds from the disposition of shares of Doubletree Common Stock to or through a non-U.S. office of a broker that is a U.S. person or a "U.S.-related person," existing regulations require information reporting on the payment unless the broker receives a statement from the owner, signed under penalties of perjury, certifying, among other things, its status as a Non-U.S. Holder, or the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no actual knowledge to the contrary. For this purpose, a "U.S.-related person" is (i) a "controlled foreign corporation" for United States Federal income tax purposes or (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a United States trade or business. Non-U.S. Holders should consult their tax advisors regarding the application of these rules to their particular situations, the availability of an exemption therefrom, and the procedure for obtaining such an exemption, if available. A Non-U.S. Holder generally may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS. PROPOSED REGULATIONS On April 22, 1996, the IRS issued proposed regulations relating to withholding, backup withholding and information reporting that, if adopted in their current form, would, among other things, unify current certification procedures and forms and clarify reliance standards. The proposed regulations would, among other things, eliminate the general current law presumption that dividends paid to an address in a foreign country are paid to a resident of that country and would impose certain certification and documentation requirements (which, in some cases, could be satisfied by the provision of a certificate of residence issued by a competent authority of the relevant treaty country) on Non-U.S. Holders claiming the benefit of a reduced withholding rate with respect to dividends under a tax treaty. These regulations generally are proposed to be effective with respect to payments made after December 31, 1997, although in certain cases they are proposed to be effective only with respect to payments made after December 31, 1999. Proposed regulations are subject to change, however, prior to their adoption in final form. Prospective investors are urged to consult their tax advisors regarding the potential effect on them of the proposed regulations. 93 96 UNDERWRITERS Under the terms and subject to the conditions in the Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), a syndicate of United States Underwriters (the "U.S. Underwriters") named below has severally agreed to purchase, and the Company has agreed to sell to them, severally, shares of the Company's Common Stock and the syndicate of International Underwriters (the "International Underwriters") named below has severally agreed to purchase, and the Company has agreed to sell to them, severally, the respective number of shares of Common Stock set forth opposite the names of such Underwriters below.
NUMBER NAME OF SHARES -------------------------------------------------------------------------- --------- U.S. Underwriters: Morgan Stanley & Co. Incorporated....................................... Montgomery Securities................................................... Schroder Wertheim & Co. Incorporated.................................... ------- Subtotal........................................................ 4,000,000 ------- International Underwriters: Morgan Stanley & Co. International Limited.............................. Montgomery Securities................................................... J. Henry Schroder & Co. Limited......................................... ------- Subtotal........................................................ 1,000,000 ------- Total...................................................... 5,000,000 =======
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any U.S. Shares (as defined below) for the account of anyone other than a United States or Canadian Person (as defined below) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any International Shares (as defined below) being sold by it for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any International Shares or distribute any prospectus relating to the International Shares within the United States or Canada or to any United States or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and an International Underwriter, the foregoing representations and agreements (a) made by it in its capacity as a U.S. Underwriter shall apply only to shares purchased by it in its capacity as a U.S. Underwriter and (b) made by it in its capacity as an International Underwriter shall apply only to shares purchased by it in its capacity as an International Underwriter, and (c) do not restrict its ability to distribute any prospectus relating to the shares of Common Stock to any person. The foregoing limitations do not apply to stabilization actions or to certain other transactions specified in the Agreement Between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or 94 97 Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person) and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Common Stock to be purchased by the U.S. Underwriters and the International Underwriters under the Underwriting Agreement are referred to herein as the U.S. Shares and the International Shares, respectively. Pursuant to the Agreement Between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and International Underwriters of any number of shares of Common Stock to be purchased pursuant to the Underwriting Agreement as may be mutually agreed. The per share price of any shares so sold shall be the price to public set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement Between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares of Common Stock, directly or indirectly, in Canada in contravention of the securities laws of Canada or any province or territory thereof and has represented that any offer or sale of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any shares of Common Stock a notice stating in substance that, by purchasing such Common Stock, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such Common Stock in Canada or to, or for the benefit of, any resident of Canada in contravention of the securities laws of Canada or any province or territory thereof and that any offer or sale of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and that such dealer will deliver to any other dealer to whom it sells any of such Common Stock a notice to the foregoing effect. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that: (i) it has not offered or sold and will not, during the period of six months from the date of the Offering, offer or sell any shares of Common Stock in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations (1995) (the "Regulations"); (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Regulations with respect to anything done by it in relation to the shares of Common Stock in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue or sale of the shares of Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a person to whom such document may otherwise lawfully be issued or passed on. Pursuant to the Agreement Between U.S. and International Underwriters, each International Underwriter has represented and agreed that it has not offered or sold, and agrees not to offer or sell, directly or indirectly, in Japan or to or for the account of any resident thereof, any of the shares of Common Stock acquired in connection with the distribution contemplated hereby, except for offers or sales to Japanese International Underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan. Each International Underwriter further agrees to send to any dealer who purchases from it any of the Common Stock a notice stating in substance that, by purchasing such shares, such dealer represents and agrees that it has not offered or sold and will not offer or sell any of such shares, directly or indirectly in Japan or to or for the account of any resident thereof except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan, and that such dealer will send to any other dealer whom it sells any of such Common Stock a notice containing substantially the same statement as contained in the foregoing. 95 98 The Underwriters propose to offer part of the Common Stock directly to the public at the price to public set forth on the cover page hereof and part of the Common Stock to certain dealers at a price which represents a concession not in excess of $ per share below the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to other Underwriters or to certain dealers. After the initial public offering of the Common Stock, the offering price and other selling terms may from time to time be varied by the Underwriters. Pursuant to the Underwriting Agreement, the Company has granted to the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 750,000 additional shares of Common Stock at the price to public set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option to purchase solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Common Stock hereby. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of shares of Common Stock offered by the U.S. Underwriters hereby. The Company, all of the Company's executive officers and Directors and certain other stockholders of the Company, who will own after the Offering in the aggregate approximately 11,805,734 shares of Common Stock (including 471,999 shares which can be acquired through currently exercisable options), have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), they will not (a) offer, pledge, sell contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (b) enter into any swap or other agreement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (a) or (b) of this paragraph is to be settled by delivery of such Common Stock or such other securities, in cash or otherwise, for a period of 180 days (or, in the case of executive officers and Directors of the Company, 90 days) after the date of this Prospectus, other than (i) the sale to the Underwriters of the shares of Common Stock under the Underwriting Agreement, (ii) the issuance of any shares of Common Stock in connection with the Merger or the GEPT Equity Investment, and (iii) the issuance by the Company of shares of Common Stock upon the exercise of an option sold or granted, or the grant of options, pursuant to an existing employee benefit plan of the Company and outstanding on the date of this Prospectus or upon exercise of any of the Warrants issued in connection with the Financing Plan. In addition, the Partnership (which will own 4,499,970 shares of Common Stock after giving effect to the Merger and the Financing Plan) has agreed with the Company not to offer or sell its shares of Common Stock for a period of 180 days after the Effective Time (except for certain distributions to a limited partner of the Partnership as described in "The Merger and the Financing Plan -- Interests of Certain Persons in the Merger"). The Company has agreed that, without the prior written consent of Morgan Stanley, it will not waive or release the Partnership from the foregoing 180-day restriction. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. Pursuant to regulations promulgated by the Commission, market makers in the Common Stock who are Underwriters or prospective underwriters ("passive market makers") may, subject to certain limitations, make bids for or purchases of shares of Common Stock until the earlier of the time of commencement (the "Commencement Date") of offers or sales of the Common Stock contemplated by this Prospectus or the time at which a stabilizing bid for such shares is made. In general, and after the date two business days prior to the Commencement Date (1) such market maker's net daily purchases of the Common Stock may not exceed 30% of its average daily trading volume in such stock for the two full consecutive calendar months immediately preceding the filing date of the Registration Statement of which this Prospectus forms a part, (2) such market maker may not effect transactions in, or display bids for, the Common Stock at a price that exceeds the highest bid for the Common Stock by persons who are not passive market makers and (3) bids made by passive market makers must be identified as such. 96 99 Certain of the Underwriters and their affiliates have from time to time performed, and continue to perform, various investment banking and other financial services for the Company. Morgan Stanley has acted as financial advisor to Doubletree in connection with the Merger, and has rendered an opinion to the Board of Directors of Doubletree that the Merger is fair to Doubletree from a financial point of view. In connection therewith, Doubletree has agreed to pay Morgan Stanley fees of (i) $1.5 million for rendering its fairness opinion (in the event the Merger is consummated) and (ii) $500,000 for other advice in connection with its role as financial advisor. 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 role as financial advisor. Morgan Stanley Senior Funding, Inc. and Morgan Stanley Group Inc., affiliates of Morgan Stanley, are being paid customary fees and reimbursed expenses by the Company in connection with acting as syndication agent under the New Credit Facility and providing a commitment under the Bridge Loan, respectively. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Dewey Ballantine. Certain legal matters relating to the Offering will be passed upon for the Underwriters by Davis Polk & Wardwell. EXPERTS The consolidated financial statements and schedule of the Company 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 or incorporated by reference in this Prospectus have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as set forth in their reports, which are included herein, and have been given 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 in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, appearing elsewhere herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements included in this 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 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. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed by the Company 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 97 100 Company's Common Stock is quoted on The Nasdaq Stock Market's National Market, and certain of the reports, proxy statements and other information concerning the Company 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. The Company has filed a Registration Statement on Form S-3 (together with any amendments thereto, the "Registration Statement"), of which this Prospectus is a part, with the Commission under the Securities Act, with respect to the shares of Common Stock offered hereby. This 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 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. 98 101 INDEX TO FINANCIAL STATEMENTS
PAGE ---- 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
F-1 102 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 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-2 103 DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31, DECEMBER 31, JUNE 30, 1994 1995 1996 ----------- ----------- ---------- (UNAUDITED) 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 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 104 DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY) SAMANTHA HOTEL CORPORATION (PREDECESSOR) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------- ------------------ PREDECESSOR COMPANY COMPANY COMPANY COMPANY 1993 1994 1995 1995 1996 ----------- -------- -------- ------- -------- (UNAUDITED) 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 ======== ======== ======= ========
See accompanying notes to consolidated financial statements. F-4 105 DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY) SAMANTHA HOTEL CORPORATION (PREDECESSOR) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------- ------------------- PREDECESSOR COMPANY COMPANY COMPANY COMPANY 1993 1994 1995 1995 1996 ----------- -------- -------- -------- -------- (UNAUDITED) 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 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 106 DOUBLETREE CORPORATION AND SUBSIDIARIES (COMPANY) SAMANTHA HOTEL CORPORATION (PREDECESSOR) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
RETAINED ADDITIONAL UNEARNED EARNINGS COMMON PAID-IN ESOP TREASURY EMPLOYEE UNREALIZED (ACCUMULATED STOCK CAPITAL OBLIGATION STOCK COMPENSATION GAIN DEFICIT) TOTAL ------ ---------- ---------- -------- ------------ ---------- ------------ -------- 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 ==== ======== ===== ===== ===== === ======== ========
See accompanying notes to consolidated financial statements. F-6 107 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-7 108 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-8 109 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-9 110 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.
YEARS ENDED DECEMBER 31, SIX MONTHS --------------------------------- ENDED 1993 1994 1995 JUNE 30, 1995 ------- -------- -------- ------------- (UNAUDITED) 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 ======== =======
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-10 111 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):
YEAR ENDED DECEMBER 31, 1993 ----------------- (UNAUDITED) Total revenues............................................... $56,796 ======= Net income................................................... $ 8,615 =======
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-11 112 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:
YEAR ENDING DECEMBER 31 ------------ 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 ========
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-12 113 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):
DECEMBER 31, REPAYMENT TERMS ----------------- JUNE 30, INTEREST RATE INTEREST/PRINCIPAL MATURITY 1994 1995 1996 - ------------- ------------------------------------------- --------- ------- ------- -------- 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 ======= ======= =======
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-13 114 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):
DECEMBER 31, ----------------- JUNE 30, 1994 1995 1996 ------ ------ -------- 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 ====== ====== =======
(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-14 115 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:
YEAR ENDING DECEMBER 31, - ------------ 1996................................................................. $1,392 1997................................................................. 1,447 1998................................................................. 874 1999................................................................. 591 2000................................................................. 596 Thereafter........................................................... 1,856 ------ Total future minimum lease payments................................ $6,756 ======
(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:
1994 1995 ------ ---- 8% note payable shareholder, repaid March 1996...................... $ 902 $672 10% note payable shareholders, repaid June 1995..................... 609 -- ------ ---- $1,511 $672 ====== ====
(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-15 116 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:
YEARS ENDED DECEMBER 31, SIX MONTHS ------------------------ ENDED PRICE RANGE 1994 1995 JUNE 30, 1996 ---------------- --------- ---------- ------------- 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
(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-16 117 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):
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 ------- -------- -------- -------- -------- 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
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:
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------- ------------------ 1993 1994 1995 1995 1996 ------- -------- -------- ------- ------- 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 ====== ======= ======= ====== ======
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-17 118 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):
YEARS ENDED DECEMBER 31, -------------------------- 1993 1994 1995 ---- ------ ------ 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 ==== ====== ======
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:
YEARS ENDED DECEMBER 31, -------------------------- 1993 1994 1995 ------ ----- ----- 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% ====== ===== =====
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-18 119 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):
DECEMBER 31, --------------------- 1994 1995 -------- -------- 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) ======== ========
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):
AMOUNT OF YEAR OF EXPIRATION FEDERAL NOLS - ------------------ ------------ 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 =======
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-19 120 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-20 121 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):
DECEMBER 31, JUNE ------------------- 30, 1994 1995 1996 ------- ------- ------- 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 ======= ======= =======
(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): 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 =======
F-21 122 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.
QUARTER ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ 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
- --------------- (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.
QUARTER ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ 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
- --------------- (b) Includes $2,565,000 of business combination expenses. F-22 123 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.
QUARTER ENDED ---------------------- MARCH 31, JUNE 30, --------- -------- 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
(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-23 124 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-24 125 RED LION HOTELS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 1996 1995 (UNAUDITED) ------------ -------- 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 ======== ========
See notes to consolidated financial statements. F-25 126 RED LION HOTELS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOUR SIX MONTHS ENDED MONTHS ENDED TEN JUNE 30, JUNE 30, MONTHS ENDED 1995 1996 DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED) ----------------- ------------ ------------ 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 =========== =========== =======
See notes to consolidated financial statements. F-26 127 RED LION HOTELS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ADDITIONAL PAID-IN COMMON STOCK CAPITAL AND ----------------- NET ASSETS RETAINED SHARES AMOUNT CONTRIBUTED EARNINGS TOTAL ------ ------ ----------- -------- -------- 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 ====== ==== ======== ======= ========
See notes to consolidated financial statements. F-27 128 RED LION HOTELS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOUR MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, TEN MONTHS ENDED 1995 1996 DECEMBER 31, 1995 (UNAUDITED) (UNAUDITED) ----------------- ------------ ------------ 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 $ --
See notes to consolidated financial statements. F-28 129 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-29 130 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-30 131 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):
DECEMBER JUNE 30, 31, 1996 1995 (UNAUDITED) ----------- ----------- 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 ========= =========
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: Building and improvements..................................... 10 to 40 years Furnishings and equipment..................................... 5 to 15 years
F-31 132 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):
DECEMBER 31, JUNE 30, 1995 1996 ----------- ----------- 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 ======== =========
TEN MONTHS SIX MONTHS ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ----------- ----------- 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) ============ ===========
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-32 133 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):
DECEMBER JUNE 30, 31, 1996 1995 (UNAUDITED) ----------- ----------- Accrued payroll and related costs................. $22,253 $20,085 Accrued interest.................................. 2,311 2,153 Other............................................. 12,633 16,050 ------- ------- $37,197 $38,288 ======= =======
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-33 134 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-34 135 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):
DECEMBER JUNE 30, 31, 1996 1995 (UNAUDITED) ----------- ----------- 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 ======== =========
The annual principal requirements for the five years subsequent to June 30, 1996 are as follows (in thousands and unaudited): 1997...................................................... $ 9,219 1998...................................................... 101,045 1999...................................................... 19,375 2000...................................................... 20,000 2001...................................................... 27,125 Thereafter................................................ 36,564 -------- $213,328 ========
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-35 136 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): 1997...................................................... $ 16,403 1998...................................................... 16,367 1999...................................................... 16,050 2000...................................................... 16,029 2001...................................................... 16,004 Thereafter................................................ 155,490 -------- $236,343 ========
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-36 137 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:
SHARES UNDER OPTION PRICE OPTION PER SHARE ------------ ------------------ 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 =========
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-37 138 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):
TEN MONTHS SIX MONTHS ENDED ENDED DECEMBER JUNE 30, 31, 1996 1995 (UNAUDITED) ----------- ----------- 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
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-38 139 RED LION HOTELS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized income statement information for the MLP is as follows (in thousands and unaudited):
AUGUST 1 THROUGH SIX MONTHS DECEMBER ENDED 31, JUNE 30, 1995 1996 ----------- ----------- Revenues.......................................... $16,884 $19,677 Net income........................................ 2,364 1,722
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):
DECEMBER 31, JUNE 30, 1995 1996 ----------- ----------- 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
8. INCOME TAXES Income tax benefit (expense) consists of the following (in thousands):
TEN MONTHS SIX MONTHS ENDED ENDED DECEMBER JUNE 30, 31, 1996 1995 (UNAUDITED) ----------- ----------- 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) ======= =========
F-39 140 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):
TEN MONTHS ENDED SIX MONTHS DECEMBER JUNE 30, 31, 1996 1995 (UNAUDITED) ----------- ----------- 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) ======== =========
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):
DECEMBER JUNE 30, 31, 1996 1995 (UNAUDITED) ----------- ----------- 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 ======= =========
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-40 141 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):
CARRYING ESTIMATED AMOUNT FAIR VALUE --------- ---------- 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
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-41 142 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):
QUARTER ENDED --------------------------------------------------- JUNE DECEMBER 30, SEPTEMBER 30, 31, JUNE 30, 1995 1995 1995 1996 ------- ------------- ----------- ----------- 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
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-42 143 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-43 144 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-44 145 HISTORICAL RED LION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands)
DECEMBER 31, 1994 ------------ 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 ========
The accompanying notes are an integral part of these consolidated financial statements. F-45 146 HISTORICAL RED LION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
YEARS ENDED DECEMBER SEVEN MONTHS 31, ENDED JULY 31, --------------------- 1995 1994 1993 -------------- -------- -------- 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) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-46 147 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)
PARTNERS' ACCUMULATED CAPITAL DEFICIT TOTAL --------- ----------- -------- 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 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-47 148 HISTORICAL RED LION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
SEVEN MONTHS YEARS ENDED ENDED DECEMBER 31, JULY 31, -------------------- 1995 1994 1993 ------------ -------- -------- 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 ======== ======== ========
F-48 149 HISTORICAL RED LION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (In thousands)
SEVEN MONTHS ENDED YEARS ENDED JULY 31, DECEMBER 31, 1995 1994 1993 -------- -------- -------- 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
The accompanying notes are an integral part of these consolidated financial statements. F-49 150 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-50 151 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): 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 ========
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: Buildings....................................................... 40 years Improvements.................................................... 10-15 years Furnishings and equipment....................................... 3-15 years
F-51 152 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):
DECEMBER 31, 1994 ------------ 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 ========
F-52 153 HISTORICAL RED LION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEVEN MONTHS YEARS ENDED ENDED DECEMBER 31, JULY 31, ----------------- 1995 1994 1993 ------------ ------ ------ 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 ====== ====== ======
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): Accrued payroll and related costs.................................. $20,682 Accrued interest................................................... 2,676 Other.............................................................. 9,649 ------- $33,007 =======
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-53 154 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-54 155 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): 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 ========
The annual principal requirements for the five years subsequent to December 31, 1994 are as follows (in thousands): 1995............................................................ $108,358 1996............................................................ 110,328 1997............................................................ 215,120 1998............................................................ 46,992 1999............................................................ 15,298 Thereafter...................................................... 1,206 -------- $497,302 ========
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-55 156 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-56 157 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). 1995............................................................... $ 975 1996............................................................... 945 1997............................................................... 898 1998............................................................... 721 1999............................................................... 668 Thereafter......................................................... 12,786 ------- $16,993 =======
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-57 158 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):
SEVEN MONTHS YEARS ENDED ENDED DECEMBER 31, JULY 31, ----------------- 1995 1994 1993 ------------ ------ ------ 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
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-58 159 HISTORICAL RED LION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized income statement information for MLP is as follows (in thousands):
SEVEN MONTHS YEARS ENDED ENDED DECEMBER 31, JULY 31, ------------------- 1995 1994 1993 ------------ ------- ------- 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 ======= ======= =======
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):
DECEMBER 31, 1994 ------------ 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
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-59 160 [Inside back cover page] [Artwork to come] 161 [DOUBLETREE LOGO] 162 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Issued October 15, 1996 5,000,000 Shares DOUBLETREE CORPORATION LOGO COMMON STOCK ------------------------ ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. OF THE 5,000,000 SHARES OF COMMON STOCK BEING OFFERED, 1,000,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 4,000,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ STOCK MARKET'S NATIONAL MARKET UNDER THE SYMBOL "TREE." ON OCTOBER 14, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON STOCK WAS $45 5/8 PER SHARE. ------------------------ The Company will use the net proceeds from the sale of the Shares of Common Stock made hereby to provide a portion of the financing for the acquisition of Red Lion Hotels, Inc. pursuant to the Merger (as defined herein). The offering of Common Stock made hereby is contingent upon the consummation of the Merger, which in turn is subject to certain conditions. See "The Merger and the Financing Plan." ------------------------ SEE "RISK FACTORS" COMMENCING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES 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 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 THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO THE PUBLIC COMMISSIONS(1) COMPANY(2) ---------------- ------------------ ---------------- Per Share..................... $ $ $ Total(3)...................... $ $ $
- ------------ (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company estimated at $1,000,000. (3) The Company has granted the U.S. Underwriters an option, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 750,000 additional shares of Common Stock at the price to public, less underwriting discounts and commissions, for the purpose of covering over-allotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to the Company will be $ , $ and $ , respectively. See "Underwriters." ------------------------ The Shares of Common Stock are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein, and subject to approval of certain legal matters by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that delivery of the Shares of Common Stock will be made on or about , 1996 at the offices of Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor in same day funds. ------------------------ MORGAN STANLEY & CO. International MONTGOMERY SECURITIES J. HENRY SCHRODER & CO. LIMITED November , 1996 163 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Common Stock being registered. All amounts are estimates except the Securities and Exchange Commission registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- Securities and Exchange Commission Registration Fee...................... $ 79,304 NASD Filing Fee.......................................................... 23,500 Nasdaq National Market Application Fee................................... 17,500 Printing costs........................................................... 250,000 Legal fees and expenses (other than blue sky)............................ 250,000 Accounting fees and expenses............................................. 175,000 Blue Sky fees and expenses............................................... 40,000 Transfer Agent and Registrar fees and expenses........................... 5,000 Miscellaneous............................................................ $ 159,696 --------- Total.......................................................... $1,000,000 =========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that to the fullest extent permitted by the Delaware General Corporation Law ("the DGCL"), a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Under the current DGCL, liability of a director may not be limited (i) for any breach of the director's duty of loyalty to the Company 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 the provision of the Company's Certificate of Incorporation is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) 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 the Company or any stockholder to seek nonmonetary relief such as a injunction or rescission in the event of a breach of a director's duty of care. In addition, the Company's Certificate of Incorporation provides that the Company 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. In addition, the Company has entered into agreements (the "Indemnification Agreements") with each of the directors and officers of the Company pursuant to which the Company has agreed to indemnify such director or officer from damages, judgments, fines, penalties, settlements and costs, attorneys' fees and disbursements, and costs of attachment or similar bonds, investigation, or any expenses of establishing a right to indemnification under the Indemnification Agreements incurred by such director or officer and arising out of his or her capacity as a director, trustee, officer, employee and/or agent of the corporation of which he or she is a director or officer to the maximum extent provided by applicable law. In addition, such director or officer will be entitled to an advance of expenses to the maximum extent authorized or permitted by law to meet the obligations indemnified against; provided, however, that the director or officer will repay to the Company any expenses previously advanced to the extent that it is determined that such expenses were not reasonable in that the director or officer was not entitled to indemnification therefor. II-1 164 To the extent that the Board of Directors or the stockholders of the Company may in the future wish to limit or repeal the ability of the Company to indemnify directors, 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 are contractually assured by the Indemnification Agreements. It is anticipated that similar contracts may be entered into, from time to time, with future directors of the Company. ITEM 16. EXHIBITS. (a) EXHIBITS. The following exhibits are filed as part of this Registration Statement:
EXHIBIT NUMBER DESCRIPTION - -------- --------------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement. 2.1** -- Agreement and Plan of Merger dated as of September 12, 1996, by and among Doubletree Corporation, RLH Acquisition Corp. and Red Lion Hotels, Inc. 2.2* -- Form of Third Amendment to the Incorporation and Registration Rights Agreement to be entered into by and among Doubletree Corporation, GE Investment Hotel Partners I, Limited Partnership, Metpark Funding Inc., The Ueberroth Family Trust, Ueberroth Investment Trust, Richard J. Ferris, Ridge Partners, L.P., Robert M. Solmson (for himself and as attorney-in-fact for the RFS Shareholders, as defined therein), Canadian Pacific Hotels Holdings (U.S.) Inc. and Red Lion, a California Limited Partnership. 2.3* -- Form of Partnership Services Agreement to be entered into by and among Doubletree Corporation, Red Lion Hotels, Inc., Red Lion, a California Limited Partnership and the affiliates thereof identified therein. 4.1*** -- Certificate of Incorporation of Doubletree Corporation. 4.2*** -- By-Laws of Doubletree Corporation. 5.1 -- Opinion of Dewey Ballantine as to the legality of the securities. 10.1* -- Acquisition Financing Letter dated September 12, 1996 among Morgan Stanley Senior Funding, Inc., The Bank of Nova Scotia and Doubletree Corporation, relating to the New Credit Facility described in the Prospectus included in this Registration Statement. 10.2* -- Summary of Terms and Conditions dated September 10, 1996, as agreed to among Morgan Stanley Group, Inc., The Bank of Nova Scotia, First Union Corporation, Societe Generale Investment Corporation and Doubletree Corporation, relating to the Bridge Loan described in the Prospectus included in this Registration Statement. 10.3* -- Commitment letter dated September 6, 1996, as supplemented on September 12, 1996, from General Electric Investment Corporation to Doubletree Corporation. 10.4 -- Form of Securities Purchase Agreement by and between Doubletree Corporation and the Trustees of General Electric Pension Trust. 10.5 -- Form of Warrant to Purchase Common Stock of Doubletree Corporation to be issued to General Electric Pension Trust or an affiliate thereof. 10.6 -- Form of Credit Agreement by and among Doubletree Corporation, Morgan Stanley & Co. Incorporated, as syndication agent, The Bank of Nova Scotia, as administrative agent, and the lenders identified therein. 23.1 -- Consent of KPMG Peat Marwick LLP. 23.2 -- Consent of Deloitte & Touche LLP. 23.3 -- Consent of Arthur Andersen LLP. 23.4 -- Consent of Dewey Ballantine (included in Exhibit 5.1). 23.5* -- Consent of Michael W. Michelson.
II-2 165
EXHIBIT NUMBER DESCRIPTION - -------- --------------------------------------------------------------------------------- 23.6* -- Consent of Edward I. Gilhuly. 24.1* -- Powers of Attorney. 27.1* -- Financial Data Schedule.
- --------------- * Previously filed. ** Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 12, 1996. *** Previously filed by the Registrant in Registration No. 33-79188 and incorporated by reference herein pursuant to Rule 12b-32 of the Exchange Act. (b) FINANCIAL STATEMENT SCHEDULES: Schedule VII Valuation and Qualifying Account All other schedules are omitted because they are not required, are not applicable, or the information is included in the consolidated financial statements or notes thereto. ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or controlling persons of the Registrant pursuant to the provisions described under Item 14 or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 166 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Phoenix, State of Arizona, on this 31st day of October, 1996. DOUBLETREE CORPORATION, a Delaware corporation By: * ------------------------------------ Richard J. Ferris Co-Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by each of the following persons in the capacities indicated on October 31, 1996.
SIGNATURE TITLE - ---------------------------------------- ----------------------------------------------- * Co-Chairman of the Board and Director - ---------------------------------------- (Principal Executive Officer) Richard J. Ferris * Co-Chairman of the Board and Director - ---------------------------------------- Peter V. Ueberroth /s/ WILLIAM L. PEROCCHI Executive Vice President, Chief Financial - ---------------------------------------- Officer and Treasurer (Principal Financial and William L. Perocchi Accounting Officer) * Director - ---------------------------------------- William R. Fatt * Director - ---------------------------------------- Dale F. Frey * Director - ---------------------------------------- Ronald K. Gamey * Director - ---------------------------------------- Norman B. Leventhal * Director - ---------------------------------------- John H. Myers * Director - ---------------------------------------- Richard M. Kelleher *By /s/ DAVID L. STIVERS - ---------------------------------------- David L. Stivers Attorney-in-fact
II-4 167 SCHEDULE VII DOUBLETREE CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS)
ADDITIONS BALANCE ------------------------------------- BALANCE AT CHARGED TO CHARGED TO ACQUIRED IN AT YEAR ENDED BEGINNING COSTS AND OTHER DHC END OF DECEMBER 31, DESCRIPTION OF YEAR EXPENSES ACCOUNTS ACQUISITION DEDUCTIONS YEAR - ------------ ------------------------ --------- ---------- ---------- ----------- ---------- ------- 1995 Allowance for doubtful accounts................ $ 393 211 0 0 (309)(1) $ 295 1994 Allowance for doubtful accounts................ $ 291 189 0 0 (87)(1) $ 393 1993 Allowance for doubtful accounts................ $ 15 56 0 260 (40) $ 291
- --------------- (1) Represents write-offs of amounts previously reserved. 168 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - -------- --------------------------------------------------------------------------- ---- 1.1 -- Form of Underwriting Agreement............................................. 2.1** -- Agreement and Plan of Merger dated as of September 12, 1996, by and among Doubletree Corporation, RLH Acquisition Corp. and Red Lion Hotels, Inc..... 2.2* -- Form of Third Amendment to the Incorporation and Registration Rights Agreement to be entered into by and among Doubletree Corporation, GE Investment Hotel Partners I, Limited Partnership, Metpark Funding Inc., The Ueberroth Family Trust, Ueberroth Investment Trust, Richard J. Ferris, Ridge Partners, L.P., Robert M. Solmson (for himself and as attorney-in-fact for the RFS Shareholders, as defined therein), Canadian Pacific Hotels Holdings (U.S.) Inc. and Red Lion, a California Limited Partnership................................................................ 2.3* -- Form of Partnership Services Agreement to be entered into by and among Doubletree Corporation, Red Lion Hotels, Inc., Red Lion, a California Limited Partnership and the affiliates thereof identified therein.......... 4.1*** -- Certificate of Incorporation of Doubletree Corporation..................... 4.2*** -- By-Laws of Doubletree Corporation.......................................... 5.1 -- Opinion of Dewey Ballantine as to the legality of the securities........... 10.1* -- Acquisition Financing Letter dated September 12, 1996 among Morgan Stanley Senior Funding, Inc., The Bank of Nova Scotia and Doubletree Corporation, relating to the New Credit Facility described in the Prospectus included in this Registration Statement. 10.2* -- Summary of Terms and Conditions dated September 10, 1996, as agreed to among Morgan Stanley Group, Inc., The Bank of Nova Scotia, First Union Corporation, Societe Generale Investment Corporation and Doubletree Corporation, relating to the Bridge Loan described in the Prospectus included in this Registration Statement. 10.3* -- Commitment letter dated September 6, 1996, as supplemented on September 12, 1996, from General Electric Investment Corporation to Doubletree Corporation. 10.4 -- Form of Securities Purchase Agreement by and between Doubletree Corporation and the Trustees of General Electric Pension Trust......................... 10.5 -- Form of Warrant to Purchase Common Stock of Doubletree Corporation to be issued to General Electric Pension Trust or an affiliate thereof........... 10.6 -- Form of Credit Agreement by and among Doubletree Corporation, Morgan Stanley & Co. Incorporated, as syndication agent, The Bank of Nova Scotia, as administrative agent, and the lenders identified therein................ 23.1 -- Consent of KPMG Peat Marwick LLP........................................... 23.2 -- Consent of Deloitte & Touche LLP........................................... 23.3 -- Consent of Arthur Andersen LLP............................................. 23.4 -- Consent of Dewey Ballantine (included in Exhibit 5.1)...................... 23.5* -- Consent of Michael W. Michelson............................................ 23.6* -- Consent of Edward I. Gilhuly............................................... 24.1* -- Powers of Attorney......................................................... 27.1* -- Financial Data Schedule....................................................
- --------------- * Previously filed. ** Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 12, 1996. *** Previously filed by the Registrant in Registration No. 33-79188 and incorporated by reference herein pursuant to Rule 12b-32 of the Exchange Act. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 Exhibit 1.1 __________ Shares Doubletree Corporation Common Stock UNDERWRITING AGREEMENT November __, 1996 MORGAN STANLEY & CO. INCORPORATED MONTGOMERY SECURITIES SCHRODER WERTHEIM & CO. INCORPORATED c/o MORGAN STANLEY & CO. INCORPORATED 1585 Broadway New York, N.Y. 10036 MORGAN STANLEY & CO. INTERNATIONAL LIMITED MONTGOMERY SECURITIES J. HENRY SCHRODER & CO. LIMITED c/o MORGAN STANLEY & CO. INTERNATIONAL LIMITED 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs: SECTION 1. Introductory. Doubletree Corporation, a Delaware corporation ("Doubletree"), proposes to sell to the several underwriters (as defined below) an aggregate of ______ shares (the "Firm Common Shares") of Doubletree's common stock, $.01 per share ("Common Stock"). It is understood that, subject to the conditions hereinafter stated, ________ Firm Common Shares (the "U.S. Firm Common Shares") will be sold to the several U.S. underwriters named in Schedule A I hereto (the "U.S. Underwriters") in connection with the offering and sale of such U.S. Firm Common Shares in the United States and Canada to United States and Canadian Persons (as such 2 terms are defined in the Agreement between U.S. and International Underwriters of even date herewith), and _______ Firm Common Shares (the "International Firm Common Shares") will be sold to the several International Underwriters named in Schedule A II hereto (the "International Underwriters") in connection with the offering and sale of such International Firm Common Shares outside the United States and Canada to persons other than United States and Canadian persons. The U.S. Underwriters and the International Underwriters are hereinafter collectively referred to as the "Underwriters". In addition, Doubletree proposes to grant the U.S. Underwriters an option to purchase up to _________ additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 3 hereof, for the purposes of covering over-allotments in connection with the sale of the Common Shares. The Firm Common Shares and, to the extent such option is exercised, the Optional Common Shares are hereinafter collectively referred to as the "Common Shares." The Common Shares are being issued and sold in connection with the acquisition (the "Acquisition") of Red Lion Hotels, Inc., a Delaware corporation ("Red Lion"), by Doubletree. The Acquisition is being effected pursuant to an Agreement and Plan of Merger, dated as of September 12, 1996 (the "Merger Agreement"), by and among Doubletree, RLH Acquisition Corp., a Delaware corporation and a wholly owned Subsidiary of Doubletree ("Merger Sub"), and Red Lion. Pursuant to the Merger Agreement, Merger Sub will merge with and into Red Lion with Red Lion continuing as the surviving corporation, and Doubletree will acquire all of the issued and outstanding capital stock of Red Lion (the "Merger"). At the time the Merger is consummated (the "Effective Time"), each share of common stock, par value $.01 per share, of Red Lion (the "Red Lion Common Stock") will be converted into the right to receive certain cash consideration and Common Stock pursuant to the terms of the Merger Agreement. At or prior to the closing of the Merger (the "Merger Closing"), Doubletree will, in connection with the financing in part of the Merger, (i) enter into a Credit Agreement (the "Senior Credit Facility") among Doubletree, Morgan Stanley Senior Funding, Inc. as Syndication Agent and Arranger, The Bank of Nova Scotia as Administrative Agent, and the lenders party thereto, and (ii) issue to General Electric Pension Trust ("GEPT") or an affiliate thereof (collectively, the "GE Entity") shares of Common Stock and warrants to purchase shares of Common Stock (the "GE Warrants") for an aggregate purchase price of $100,000,000 (the "GE Investment") pursuant to an agreement (the "GE Agreement"), dated September 6, 1996, between Doubletree and General Electric Investment Corporation. The shares of Common Stock issued to the holders of Red Lion Common Stock pursuant to the Merger and issued to the GE Entity pursuant to the GE Investment are referred to herein collectively as the "Merger Shares." The Merger Agreement, the Senior Credit Facility, the GE Agreement and this Agreement are collectively referred to herein as the "Transaction Documents." The term "Company" as used herein means Doubletree after giving effect to the Merger, on a stand-alone basis excluding any subsidiaries. The term "Subsidiary" means (i) in the case of Doubletree: each of the 2 3 direct and indirect subsidiaries of Doubletree listed on Schedule D-1 hereto; (ii) in the case of Red Lion: each of the direct and indirect subsidiaries of Red Lion listed on Schedule D-2 hereto; and (iii) in the case of the Company: Red Lion and each of the entities listed on Schedule D-1 and Schedule D-2 hereto, 50% of more of the voting or equity interests of which are owned directly or indirectly by the Company after giving effect to the Merger. Doubletree understands that the Underwriters propose to make a public offering of their respective portions of the Common Shares on the effective date of the Registration Statement hereinafter referred to or as soon thereafter as in your judgment is advisable. Doubletree hereby confirms that the U.S. Underwriters and any United States dealers have been authorized to distribute or cause to be distributed each U.S. Preliminary Prospectus (as defined below) and are authorized to distribute the U.S. Prospectus (as defined below), as from time to time amended or supplemented, and that the International Underwriters and any International dealers have been authorized to distribute or cause to be distributed each International Prospectus (as defined below), as from time to time amended or supplemented on the effective date of the Registration Statement hereinafter referred to or as soon thereafter as in your judgment is advisable. Doubletree hereby confirms its agreement with respect to the purchase of the Common Shares by the Underwriters as follows: SECTION 2. Representations and Warranties of Doubletree. Doubletree hereby represents and warrants to the Underwriters that: (a) A registration statement on Form S-3 (File No. 333-13161) with respect to the Common Shares has been prepared by Doubletree in conformity in all material respects with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. Doubletree has prepared and has filed or proposes to file prior to the effective date of such registration statement an amendment or amendments to such registration statement, which amendment or amendments have been or will be similarly prepared. There have been delivered to you two signed copies of such registration statement and amendments, together with two copies of each exhibit filed therewith. Conformed copies of such registration statement and amendments (but without exhibits) and of the related Preliminary Prospectus (as defined below) have been delivered to you in such reasonable quantities as you have requested. Doubletree will next file with the Commission one of the following: (i) prior to effectiveness of such registration statement, a further amendment thereto, including the form of final Prospectus (as defined below), (ii) a final Prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations or (iii) a term sheet (the "Term Sheet") as described in and in accordance 3 4 with Rules 434 and 424(b) of the Rules and Regulations. As filed, the final Prospectus, if one is used, or the Term Sheet and the latest Preliminary Prospectus sent or given to purchasers of the Common Shares by the Underwriters prior to or at the same time as the confirmation of such sale, if a final Prospectus is not used, shall include all Rule 430A Information (as defined below) and, except to the extent that you shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the date and time that this Agreement was executed and delivered by the parties hereto, or, to the extent not completed at such date and time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as Doubletree shall have previously advised you in writing would be included or made therein. The term "Registration Statement" shall mean such registration statement (including exhibits, amendments and supplements thereto) at the time such registration statement becomes effective and, in the event any post-effective amendment thereto becomes effective prior to the First Closing Date (as defined), shall also mean such registration statement as so amended; provided, however, that such term shall also include all Rule 430A Information deemed to be included in such registration statement at the time such registration statement becomes effective as provided by Rule 430A of the Rules and Regulations. The term "Preliminary Prospectus" shall mean any preliminary prospectus relating to the Common Shares and delivered to you as well as any preliminary prospectus included in the Registration Statement at the time it becomes effective that omits Rule 430A Information. The term "Preliminary Prospectus" shall refer to both the U.S. preliminary prospectus (the "U.S. Preliminary Prospectus") to be used in connection with the offering and sale of U.S. Firm Common Shares in the United States and Canada to United States and Canadian Persons and the international preliminary prospectus (the "International Preliminary Prospectus") to be used in connection with the offering and sale of International Firm Common Shares outside the United States and Canada to persons other than United States and Canadian Persons. The International Preliminary Prospectus is identical to the U.S. Preliminary Prospectus except for the outside front cover page. The term "Prospectus" shall mean: (i) the prospectus relating to the Common Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations; (ii) if a Term Sheet is not used and no filing pursuant to Rule 424(b) of the Rules and Regulations is required, the form of final prospectus included in the Registration Statement at the time it becomes effective; or (iii) if a Term Sheet is used, the Term Sheet in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, together with the latest Preliminary Prospectus sent or given to purchasers of the Common Shares by the Underwriters prior to or at the same time as the confirmation of such sale. The term "Rule 430A Information" shall mean information with respect to the Common Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the Rules and Regulations. The term 4 5 "Prospectus" shall refer to both the U.S. prospectus (the "U.S. Prospectus") to be used in connection with the offering and sale of U.S. Firm Common Shares in the United States and Canada to United States and Canadian Persons and the international prospectus (the "International Prospectus") to be used in connection with the offering and sale of International Firm Common Shares outside the United States and Canada to persons other than United States and Canadian Persons. The International Prospectus is identical to the U.S. Prospectus except for the outside front cover page. Any reference in this Agreement to the Registration Statement, the Prospectus, or any Preliminary Prospectus previously filed with the Commission pursuant to Rule 424 shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Securities Act which were filed under the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Exchange Act") on or before the date of this Agreement or the date of the Prospectus or any Preliminary Prospectus, as the case may be; and any reference to "amend", "amendment" or "supplement" with respect to the Registration Statement, the Prospectus or any Preliminary Prospectus shall be deemed to refer to and include any documents filed under the Exchange Act after the date of this Agreement, or the date of the Prospectus or any Preliminary Prospectus, as the case may be, which are deemed to be incorporated by reference therein. (b) Each document, if any, filed or to be filed pursuant to the Exchange Act, and incorporated by reference in the Prospectus complied or will comply, in each case when so filed, in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder; the Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; at the time the Registration Statement became effective, and at all times subsequent thereto up to and including each Closing Date hereinafter mentioned, the Registration Statement and the Prospectus, and any amendments or supplements thereto, will contain all material statements and information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and the Registration Statement, when it became effective, did not and, as amended or supplemented, if applicable, will not include 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 not misleading, and neither the Prospectus, nor any amendment or supplement thereto, will include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary, in light of the circumstances under which they were made, to make the 5 6 statements therein not misleading; provided, however, no representation or warranty contained in this subsection 2(b) shall be applicable to information contained in or omitted from any Preliminary Prospectus, the Registration Statement, the Prospectus or any such amendment or supplement that is described in the "blood letter" to be delivered by the Representatives to Doubletree on the First Closing Date. (c) The Company and each of its corporate Subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, and each partnership Subsidiary is a duly formed general or limited partnership and is validly existing as a general or limited partnership under the laws of the state of its organization, each with full power and authority (corporate or partnership and other) to own and lease its material assets and properties and conduct its business in all material respects as now being conducted and as described in the Registration Statement; as of the First Closing Date referred to below, except as disclosed in the Registration Statement or in the "Parent Disclosure Schedule" or "Company Disclosure Schedule" referred to in the Merger Agreement (copies of which have been furnished to Morgan Stanley & Co. Incorporated on behalf of the Underwriters), the Company will own all of the outstanding capital stock, or the general or limited partnership interests, of the Subsidiaries that are corporations or partnerships, free and clear of all claims, liens, charges and encumbrances, other than as imposed by applicable law or as disclosed in the Registration Statement; the Company and each of the Subsidiaries are in possession of and operating in material compliance with all authorizations, licenses, permits, consents, certificates and orders material to the conduct of their respective businesses, all of which are valid and in full force and effect; the Company and the Subsidiaries that are corporations or partnerships are duly qualified to do business and in good standing as foreign corporations, or foreign partnerships, as the case may be, in each jurisdiction in which the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except for jurisdictions in which the failure to so qualify would not have a material adverse effect upon the Company and its Subsidiaries; taken as a whole; and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. Each of the subsidiaries and each of the affiliates of Doubletree and of Red Lion which meets the criteria in the definition of "significant subsidiary" pursuant to Rule 1-02(w) of Regulation S-X under the Securities Act, after giving effect to the Merger, is listed on either Schedule D1 or D2 hereof. (d) Immediately prior to the First Closing Date and the Merger Closing, the issued and outstanding shares of Common Stock will have been duly authorized and validly issued, will be fully paid and nonassessable, will have been issued in compliance with all applicable federal and state securities laws, will not have been issued in violation of or subject to any preemptive rights or other rights to subscribe for 6 7 or purchase securities, and will conform in all material respects to the description thereof contained in the Prospectus. All issued and outstanding shares of capital stock of each corporate Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company, Doubletree or Red Lion and the related notes thereto, included in the Prospectus, or in the "Parent Disclosure Schedule" or "Company Disclosure Schedule" referred to above, the Company, as of the First Closing Date, will not have, and no Subsidiary has, outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements (if any), and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (e) Immediately prior to the First Closing Date, the Common Shares, and immediately prior to the Merger Closing, the Merger Shares, will have been duly authorized and, when issued, delivered and paid for in the manner set forth in the applicable Transaction Document, will be validly issued, fully paid and nonassessable, and will conform to the description thereof contained in the Prospectus. Immediately prior to the First Closing Date and the Merger Closing, except as disclosed in the Registration Statement, no preemptive rights or other rights to subscribe for or purchase will exist with respect to the issuance and sale of the Common Shares and the Merger Shares, respectively. Immediately prior to the First Closing Date and the Merger Closing, except for the former shareholders of RFS, Inc., no stockholder of Doubletree will have any right which will not have been waived to require Doubletree to register the sale of any shares owned by such stockholder under the Act in the public offering contemplated by this Agreement. No further approval or authorization of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Common Shares or the Merger Shares as contemplated by the applicable Transaction Document. (f) Each of Doubletree and Merger Sub has the full right, power and authority to enter into each of the Transaction Documents to which it is a party and to perform the transactions contemplated thereby. The Transaction Documents have been duly authorized, executed and delivered by Doubletree and constitute valid and binding agreements of Doubletree, and the Merger Agreement has been duly executed and delivered by Merger Sub and constitutes the valid and binding obligation of Merger Sub, enforceable against Doubletree and Merger Sub, as the case may be, in accordance with the terms thereof, except (A) as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, (B) that the remedy of 7 8 specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought and (C) to the extent that rights to indemnity or contribution under a Transaction Document may be limited by federal, state or provincial securities laws or the public policy underlying such laws. The execution and delivery by Doubletree and Merger Sub of the Transaction Documents to which it is a party and the consummation by Doubletree and Merger Sub of the transactions under the Transaction Documents to which it is a party will not (i) violate any provisions of the certificate or articles of incorporation or bylaws of any of the Company or any of its Subsidiaries, and (ii) will not conflict with, result in the breach or violation of, or constitute, either by itself or upon notice or the passage of time or both, a default under any hotel management agreement or franchise agreement to which the Company or any of its Subsidiaries is a party or any other agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument that is material to the Company and its Subsidiaries, taken as a whole, and to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties may be bound or affected, any statute or any authorization, judgment, decree, order, rule or regulation of any court or any regulatory body, administrative agency or other governmental body applicable to any of the Company or any of the Subsidiaries or any of their respective properties, except in each case for any such violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the execution and delivery by Doubletree or Merger Sub of the Transaction Documents to which it is a party or the consummation by Doubletree or Merger Sub of the transactions contemplated by the Transaction Documents to which it is a party, except for (i) compliance with the Act, the Exchange Act and the Blue Sky laws applicable to the public offering of the Common Shares by you, (ii) the clearance of such offering with the National Association of Securities Dealers, Inc. (the "NASD"), (iii) compliance with statutes, rules or regulations regulating the consumption, sale or serving of alcoholic beverages, and (iv) in the case of the Merger Agreement, (A) such as relate to the matters set forth in Section 5.17 or 5.18 of the Merger Agreement, and (B) where the failure to obtain any such consent, approval, authorization or order would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (g) KPMG Peat Marwick, Deloitte & Touche LLP and Arthur Andersen LLP who have expressed their opinion with respect to the financial statements and schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent accountants as required by the Act and the Rules and Regulations. 8 9 (h) As of the First Closing Date, the consolidated financial statements and schedules of Doubletree and its subsidiaries, and the related notes thereto, and the consolidated financial statements and schedules of Red Lion and its subsidiaries, included in the Registration Statement and the Prospectus will present fairly in all material respects the consolidated financial position of Doubletree and its Subsidiaries and of Red Lion and its Subsidiaries, as the case may be, as of the respective dates of the consolidated balance sheets included in such financial statements and schedule, and the consolidated results of operations for the periods indicated in the consolidated statements of income or operations, cash flows and stockholders' equity or partners' equity, as the case may be, included in such consolidated financial statements and the other information purported to be shown therein of Doubletree and its subsidiaries, or of Red Lion and its subsidiaries, as the case may be. Such consolidated financial statements, schedule and related notes have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as noted therein) as certified in each case by one of the independent accountants named in subsection 2(g). The Registration Statement includes all of the financial statements and schedules required under the Act to be included in the Registration Statement. Immediately prior to the First Closing Date, the selected financial data set forth in the Prospectus under the captions "Summary Consolidated Financial Information of Doubletree," "Capitalization," "Selected Consolidated Financial Information of Doubletree" and "Selected Pro Forma Financial, Historical Financial and Other Data of Red Lion," will present fairly in all material respects the information set forth therein on the basis stated in the Registration Statement. The pro forma financial statements and the related notes thereto included or incorporated by reference in the Registration Statement and the Prospectus present fairly in all material respects the information shown therein and have been prepared in accordance with Article XI of Regulation S-X, and the assumptions used in the preparation thereof (taken as a whole) are reasonable and, based upon such assumptions, the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (i) Except as disclosed in the Prospectus, and except as to breaches, events of default and defaults which individually or in the aggregate would not have a material adverse effect on the Company and its Subsidiaries taken as a whole, none of the Company or any of its Subsidiaries is in violation or default of any provision of its certificate or articles of incorporation or bylaws, or is in breach of or default with respect to any provision of any agreement, judgment, decree or order, or any mortgage, deed of trust, lease, franchise, license, indenture, permit or other instrument to which it is a party or by which it or any of its properties is bound; and there does not exist any state of facts which constitutes an event of default (as defined in such documents) on the part of any of the Company or any such Subsidiary or which, with notice or lapse of time or both, would constitute such an event of default. 9 10 (j) There are no contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. The contracts so described in the Prospectus are in full force and effect on the date hereof; and none of the Company or any of its Subsidiaries, nor to the best of Doubletree's knowledge, any other party is in breach of, or default under, any of such contracts, which breach or default would have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (k) There are no legal or governmental actions, suits or proceedings pending or, to the best of Doubletree's knowledge, threatened to which the Company or any of its Subsidiaries is a party or of which property owned or leased by the Company or any of its Subsidiaries is the subject, including actions related to environmental or discrimination matters, which actions, suits or proceedings might reasonably be expected to, individually or in the aggregate, prevent or materially and adversely affect the transactions contemplated by this Agreement or by any other Transaction Document or result in a material adverse change in the condition (financial or otherwise), properties, business or results of operations of the Company and its Subsidiaries, taken as a whole; and no labor disturbance by the employees of the Company or any of its Subsidiaries exists or is imminent which might reasonably be expected to affect materially and adversely such condition, properties, business or results of operations. None of the Company or any of its Subsidiaries is a party or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body which would have such a material adverse effect. (l) The Company and each of its Subsidiaries has good and valid title to all the properties and assets reflected as owned in the financial statements hereinabove described or as described elsewhere in the Prospectus, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if any, reflected in such financial statements or as described elsewhere in the Prospectus and (ii) those which are not material in amount and do not materially and adversely affect the use made and proposed to be made of such property and assets by the Company, the Subsidiaries and Candlewood. The Company and each of its Subsidiaries holds its leased properties under valid and binding leases, with such exceptions as are not materially significant in relation to the business of the Company and its Subsidiaries, taken as a whole. Immediately prior to the First Closing Date, except as disclosed in the Prospectus, the Company and each of its Subsidiaries will own or lease all such properties as are necessary to their respective operations as now conducted or as proposed in the Prospectus to be conducted. (m) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as described in or specifically contemplated by the Prospectus: (i) neither the Company nor any of its Subsidiaries has 10 11 incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction which, in the case of Red Lion and its Subsidiaries, is known to Doubletree and which, in any event, is not in the ordinary course of business and could reasonably be expected to result in a material reduction in the future earnings of the Company and its Subsidiaries, taken as a whole; (ii) neither the Company nor any of its Subsidiaries has sustained any loss or interference with their respective businesses or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance, which, in the case of Red Lion and its Subsidiaries, is known to Doubletree and which, in any event, would have a material adverse effect on the Company and its Subsidiaries, taken as a whole; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock and the Company and the Subsidiaries are not in default in the payment of principal or interest on any outstanding debt obligations; (iv) except as described in the Prospectus, there has not been any change in the capital stock (other than upon the sale of the Common Shares hereunder or the Merger Shares and the GE Warrants under the Transaction Documents) or indebtedness of the Company or any of the Subsidiaries that is material to the Company and the Subsidiaries, taken as a whole (other than in the ordinary course of business); and (v) there has not been any material adverse change, in the condition (financial or otherwise), business, properties or results of operations prospects of the Company and the Subsidiaries, taken as a whole. (n) The Company and the Subsidiaries, together, have sufficient trademarks, trade names, service marks, patent rights, copyrights, licenses, know-how and other similar intellectual rights (collectively, "Intangibles") to conduct their respective businesses as now conducted; and the Company has no knowledge of any material infringement by it or the Subsidiaries of any Intangible of others, and there is no claim being made against the Company or the Subsidiaries regarding any Intangible which could have a material adverse effect on the condition (financial or otherwise), business or results of operations of the Company and the Subsidiaries, taken as a whole. (o) Doubletree has not been advised, and has no reason to believe, that any of it, or any Subsidiary is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, all applicable local, state and federal environmental laws and regulations (which are addressed below), except where failure to be so in compliance would not materially and adversely affect the condition (financial or otherwise), business, results of operations or prospects of the Company, and the Subsidiaries, taken as a whole. (p) The Company and the Subsidiaries have filed all necessary federal, material state and income foreign tax returns and have paid all taxes shown as due thereon; and Doubletree has no knowledge of any tax deficiency which has been or might be asserted or threatened against the Company, the Subsidiaries or Candlewood which 11 12 could materially and adversely affect the business, operations or properties of the Company, and the Subsidiaries, taken as a whole. (q) Doubletree is not and, after giving effect to the offering and sale of the Common Shares and the application of the proceeds thereof as described in the Prospectus and to the issuance of the Merger Shares, the Company will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (r) The Company has not distributed and will not distribute prior to the First Closing Date any offering material in connection with the offering and sale of the Common Shares other than any Preliminary Prospectus, the Prospectus, the Registration Statement and the other materials permitted by the Act. (s) Except as would not have a material adverse effect on the Company and its Subsidiaries taken as a whole, the Company and each of the Subsidiaries maintains insurance of the types and in the amounts generally deemed adequate for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company, the Subsidiaries and Candlewood against theft, damage, destruction, acts or vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (t) None of Doubletree or its Subsidiaries or, to the knowledge of Doubletree, Red Lion or its Subsidiaries has at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (u) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (v) To the best knowledge of Doubletree, each of the Company and its Subsidiaries has obtained all permits, licenses and other authorizations that are required under all environmental laws, including but not limited to the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), Resource Conservation & Recovery Act (42 U.S.C. Section 6901 et seq.), Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. SectionSection 201, 300f). Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), Clean Air Act (42 U.S.C. Section 7401 et seq.), Comprehensive Environmental Response, Compensation and Liability 12 13 Act (42 U.S.C. Section 9601 et seq.), other applicable state and other laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes into the environment (including without limitation, ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or wastes, or any other applicable regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder (collectively, the "Environmental Laws"), except to the extent failure to have any such permit, license or authorization, individually or in the aggregate, would not have a material adverse effect on the condition (financial or otherwise), business or results of operations of the Company and the Subsidiaries, taken as a whole. Except as described in the Prospectus, the Company and the Subsidiaries are in compliance with all terms and conditions of any required permits, licenses, authorizations, limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws, except to the extent failure to comply would not have a material adverse effect on the condition (financial or otherwise), business or results of operations of the Company and the Subsidiaries, taken as a whole. [(w) To the best knowledge of Doubletree, there are no past or present events, conditions, circumstances, activities, practices, incidents, actions or plans relating to the business as presently being conducted by the Company or any Subsidiary that interfere with or prevent compliance or continued compliance with the Environmental Laws, or which would be reasonably likely to give rise to any legal liability (whether statutory or common law) or otherwise would be reasonably likely to form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation, study, investigation, remediation or cleanup based on or related to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release into the workplace, the community or the environment of any pollutant, contaminant, chemical or industrial, toxic, or hazardous substance or waste, except for any liabilities or any claims, demands or other actions specified above that will not individually or in the aggregate have a material adverse effect on the Company and the Subsidiaries, taken as a whole.] (x) The Common Shares have been duly authorized for quotation on the NASDAQ Stock Market's National Market. SECTION 3. Purchase, Sale and Delivery of Common Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, Doubletree agrees to issue and sell to the Underwriters the Common Shares as provided in Section 1. The Underwriters agree, severally and not jointly, to purchase from Doubletree the number of Firm Common 13 14 Shares described above. The purchase price per share to be paid by the several Underwriters to Doubletree shall be $____ per share. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, N.Y. (or such other place as may be agreed upon by Doubletree and the Underwriters) at 10 A.M., New York City time, on November __, 1996(1), not later than the eighth full business day following the first date that any of the Common Shares are released by you for sale to the public (or at such other time and date, not later than one week after such fourth full business day, as may be agreed upon by Doubletree and the Underwriters) (the "First Closing Date"); provided, however, that if the Prospectus is at any time prior to the First Closing Date recirculated to the public, the First Closing Date shall occur upon the later of the third full business day following the first date that any of the Common Shares are released by you for the sale to the public or the date that is 48 hours after the date that the Prospectus has been so recirculated. Delivery of certificates for the Firm Common Shares shall be made by or on behalf of Doubletree to you, for the respective accounts of the Underwriters, against payment by you, for the accounts of the Underwriters, of the purchase price therefor by wire transfer payable in same day funds to the order of Doubletree. The certificates for the Firm Common Shares shall be registered in such names and denominations as you shall have requested at least two full business days prior to the First Closing Date, and shall be made available for checking and packaging on the business day preceding the First Closing Date at such location in New York, New York, as may be designated by you. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. In addition, on the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, Doubletree hereby grants an option to the U.S. Underwriters to purchase, severally and not jointly, up to an aggregate of _______ Optional Common Shares at the purchase price per share to be paid by the U.S. Underwriters for the U.S. Firm Common Shares, for use solely in covering any over-allotments made by the Underwriters in the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the first date that any of the Common Shares are released by you for sale to the public, upon notice by you to the Company setting forth the aggregate number of Optional Common Shares as to which the U.S. Underwriters are exercising the option, the names and denominations in which the certificates for such Optional Common Shares are to be registered and the time and place at which such - -------- 1 Three or four business days after pricing. 14 15 certificates are to be delivered. Such time of delivery (which may not be earlier than the First Closing Date and being herein referred to as the "Second Closing Date") shall be determined by you, but if at any time other than the First Closing Date shall not be earlier than three nor later than ten full business days after delivery of such notice of exercise. The number of Optional Common Shares to be purchased by each U.S. Underwriter shall be determined by multiplying the number of Optional Common Shares to be sold by the Company pursuant to such notice of exercise by a fraction, the numerator of which is the number of U.S. Firm Common Shares to be purchased by such U.S. Underwriter as set forth opposite its name in Schedule A I and the denominator of which is ____ (subject to such adjustments to eliminate any fractional share purchases as you in your discretion may make). Certificates for the Optional Common Shares being purchased will be made available for checking and packaging on the business day preceding the Second Closing Date at such location in New York, New York, as may be designated by you. The manner of payment for and delivery of such Optional Common Shares shall be the same as for the Firm Common Shares purchased as specified in the two preceding paragraphs. At any time before lapse of the option, you may cancel such option by giving written notice of such cancellation to the Company. If the option is canceled or expires unexercised in whole or in part, the Company will deregister under the Act the number of Optional Common Shares as to which the option has not been exercised. Subject to the terms and conditions hereof, the Underwriters propose to make a public offering of their respective portions of the Common Shares as soon after the effective date of the Registration Statement as in your judgement is advisable and at the public offering price set forth on the cover page of and on the terms set forth in the final Prospectus, if one is used, or on the first page of the Term Sheet, if one is used. SECTION 4. Covenants of Doubletree. Doubletree covenants and agrees that: (a) Doubletree will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective. If the Registration Statement has become or becomes effective pursuant to Rule 430A of the Rules and Regulations, or the filing of the Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations, Doubletree will file the Prospectus, properly completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules and Regulations within the time period prescribed and will provide evidence satisfactory to you of such timely filing. Doubletree will promptly advise you in writing (i) of the receipt of any comments of the Commission, (ii) of any request of the Commission for amendment of or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus or for additional information, (iii) when the Registration Statement shall have become effective and (iv) of 15 16 the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose. If the Commission shall enter any such stop order at any time, Doubletree will use its best efforts to obtain the lifting of such order at the earliest possible moment. Doubletree will not file any amendment or supplement to the Registration Statement (either before or after it becomes effective), any Preliminary Prospectus or the Prospectus if you have not been furnished with a copy a reasonable time prior to such filing, if you reasonably object to Doubletree filing such document or if the document to be filed is not in compliance with the Act and the Rules and Regulations. (b) Doubletree will prepare and file with the Commission, promptly upon your request, any amendments or supplements or the Registration Statement or the Prospectus which in your judgment may be necessary or advisable to enable the Underwriters to continue the distribution of the Common Shares and will use its best efforts to cause the same to become effective as promptly as possible. Doubletree will fully and completely comply with the provisions of Rule 430A of the Rules and Regulations with respect to information omitted from the Registration Statement in reliance upon such Rule. (c) As soon as practicable, but not later than 45 days after the end of the first quarter ending after the first anniversary of the effective date of the Registration Statement (as defined in Rule 158(c) of the Rules and Regulations), Doubletree will make generally available to its security holders an earnings statement (which need not be audited) covering a period of 12 consecutive months beginning after the effective date of the Registration Statement which will satisfy the provisions of the last paragraph of Section 11(a) of the Act. (d) Doubletree shall cooperate with you and your counsel in order to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the Blue Sky laws of such jurisdictions as you designate, will comply with such laws and will continue such qualifications, registrations and exemptions in effect so long as reasonably required for the distribution of the Common Shares. Doubletree shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. Doubletree will advise you promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, Doubletree, with your cooperation, will use its best efforts to obtain the withdrawal thereof. 16 17 (e) During the period of five years hereafter, the Company will furnish to each of the Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants: (ii) as soon as practicable after the filing thereof, copies of each proxy statement and annual and other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. (f) During the period of 90 days after the date of the Prospectus, without your prior written consent (which consent may be withheld at your sole discretion), the Company will not other than (i) in accordance with the employee benefit plans described in the Prospectus or in any document incorporated by reference in the Prospectus, (ii) the sale of the Common Shares hereunder, (iii) the issuance of the Merger Shares pursuant to the Transaction Documents or (iv) the issuance of Common Stock upon exercise of any GE Warrants, (A) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (B) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (A) or (B) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. (g) Doubletree will apply the net proceeds of the sale of the Common Shares hereby and the sale of Merger Shares pursuant to the GE Agreement substantially in accordance with its statements under the caption "Use of Proceeds" and "the Merger and the Financial Plan" in the Prospectus. You may, in your sole discretion, waive in writing the performance by the Company of any one or more of the foregoing covenants or extend the time for their performance. SECTION 5. Payment of Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement becomes effective or is terminated, Doubletree agrees to pay all costs, fees and expenses incurred in connection with the performance of the obligations of Doubletree hereunder and in connection with the transactions contemplated hereby (except as set forth herein), including without limiting the generality of the foregoing: (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees 17 18 and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel and the Company's independent accountants, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement, each Preliminary Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, this Agreement, the preliminary and the Final Blue Sky Memoranda, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all of any part of the Common Shares for offer and sale under the Canadian provincial securities laws and U.S. state Blue Sky laws, (vii) the filing fee of the NASD and any fees and expenses relating to inclusion of the Common Shares on the Nasdaq Stock Market, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants (other than the Underwriters) engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives (other than the Underwriters) and officers of the Company and any such consultants, and the cost of any aircraft chartered by the Company or by the Underwriters on behalf of the Company in connection with the road show, and (ix) all other fees, costs and expenses referred to in Item 16 of the Registration Statement. Except as provided in this Section 5, Section 7 and Section 9 hereof, the Underwriters shall pay all of their own expenses, including the fees and disbursements of their counsel (excluding those relating to qualification, registration or exemption under the securities and Blue Sky laws and the Blue Sky Memoranda referred to above) and the costs and expenses of the Underwriters relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares (such as fees and expenses of their consultants, and travel and lodging expenses of the Underwriters and their representatives). SECTION 6. Conditions of the Obligations of the Underwriters and the Company. (i) The obligations of the several Underwriters to purchase and pay for the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the accuracy of the representations and warranties on the part of Doubletree herein set forth as of the date hereof and as of the First Closing Date or the Second Closing Date, as the case may be, to the accuracy of the statements of Doubletree officers made pursuant to the provisions hereof, to the performance by Doubletree of its obligations hereunder, and to the following additional conditions: 18 19 (a) The Registration Statement shall have become effective not later than 10:00 A.M., New York City Time, on the date of this Agreement, or at such later time as shall have been consented to by you; if the filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of the Rule and Regulations, the Prospectus shall have been filed in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and prior to such Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or, to the knowledge of Doubletree or you, shall be contemplated by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement, or otherwise, shall have been complied with to your satisfaction. (b) You shall be satisfied that since the respective dates as of which information is given in the Registration Statement and Prospectus, (i) except as set forth in or contemplated by the Registration Statement or the Prospectus, there shall not have been any change in the capital stock other than as provided for herein or in accordance with the employee benefit plans described in the Prospectus or in any document incorporated by reference in the Prospectus of the Company or any of the Subsidiaries or any material change in the indebtedness (other than in the ordinary course of business) of the Company or any of the Subsidiaries, (ii) except as set forth in or contemplated by the Registration Statement or the Prospectus, no material verbal or written agreement or other transaction shall have been entered into by the Company or any of the Subsidiaries, taken as a whole, (iii) no loss or damage (whether or not insured) to the property of the Company or any of the Subsidiaries shall have been sustained which materially and adversely affects the condition (financial or otherwise), business, properties or results of operations of the Company or the Subsidiaries, taken as a whole, (iv) no legal or governmental action, suit or proceeding affecting the Company or any of the Subsidiaries which would have a material adverse effect on the Company or the Subsidiaries, taken as a whole, or which affects or may affect the material transactions contemplated by this Agreement shall have been instituted or threatened and (v) there shall not have been any material adverse change in the condition (financial or otherwise), business, properties or results of operations of the Company or the Subsidiaries, taken as a whole, which makes it impractical or inadvisable in your judgment to proceed with the public offering or purchase the Common Shares as provided hereby. (c) There shall have been delivered to you the Firm Common Shares and, if any Optional Common Shares are then being purchased, such Optional Common Shares. (d) The NASD, upon review of the terms of the public offering of the Common Shares, shall not have objected to the fairness and reasonableness of the underwriting terms and arrangements as proposed in this Agreement. 19 20 (e) The representations and warranties of the Company contained in this Agreement and in the certificates delivered pursuant to Section 6(f)(iii) shall be true and correct when made and on and as of the First Closing Date or the Second Closing Date, as the case may be, as if made on such respective date and the Company shall have performed all covenants and agreements and satisfied all the conditions contained in this Agreement required to be performed or satisfied by it at or before such respective Closing Date. (f) There shall have been furnished to you on the First Closing Date and/or the Second Closing Date, as appropriate, in form and substance reasonably satisfactory to you, except as otherwise expressly provided below: (i) An opinion of Dewey Ballantine, special counsel for Doubletree (or as to paragraphs 1, 2, 3, 4, 6 and 12 of David Stivers, General Counsel for Doubletree), addressed to the Underwriters and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) Doubletree and each of its corporate Subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. (2) Doubletree, and each of its Subsidiaries has full corporate, partnership or limited liability company power and authority to own and lease its assets and properties and conduct its business as now being conducted and as described in the Registration Statement. (3) The authorized, issued and outstanding capital stock of the Company are as set forth under the caption "Capitalization" in the Prospectus; all of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, have been issued in transactions that were registered or exempt from registration under the Act, and were not issued in violation of or subject to any preemptive rights contained in any applicable statute or the Certificate of Incorporation of Doubletree; and the description thereof contained under the caption "Description of Capital Stock" in the Prospectus is an accurate summary in all material respects of the information required therein by Form S-3 under the Act. (4) Except as set forth in the Registration Statement or in the disclosure schedules delivered in connection with the Merger Agreement, all of the issued and outstanding shares of the corporate Subsidiaries of Doubletree have been duly and validly authorized and issued, are fully paid and nonassessable and are owned directly or indirectly by Doubletree, free and clear of all liens, 20 21 encumbrances, equities or claims; and, to the knowledge of such counsel, all of the partnership interests of the partnership Subsidiaries of Doubletree are owned directly or indirectly by Doubletree, except as set forth in the Registration Statement or in the disclosure schedules delivered in connection with the Merger Agreement. (5) The certificates evidencing the Common Shares to be delivered hereunder and the Merger Shares to be delivered under the Merger Agreement and the GE Agreement are in proper form under the Delaware General Corporation Law (the "DGCL"), have been duly authorized and, when duly countersigned by Doubletree's transfer agent and registrar and delivered to you or upon your order or GEPT or its order against payment of the agreed consideration therefor in accordance with the provisions of the applicable Transaction Document, the Common Shares and the Merger Shares represented thereby will be validly issued, fully paid and nonassessable and will not have been issued in violation of or subject to any preemptive rights contained in any applicable U.S. federal or New York state statute or the Certificate of Incorporation of Doubletree. (6) Except as disclosed in or contemplated by the Prospectus, there are no outstanding options, warrants or other rights issued by Doubletree calling for the issuance of, and no commitments, plans or arrangements of Doubletree to issue, any shares of capital stock of Doubletree or any security convertible into or exchangeable for capital stock of Doubletree. (7) (A) The Registration Statement has become effective under the Act, and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or preventing the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; and any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b). (B) Each document filed pursuant to the Exchange Act and incorporated by reference in the Registration Statement and the Prospectus (except for financial statements and schedules as to which such counsel need not express any opinion) complied when so filed as to form in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder. (C) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material 21 22 respects with the requirements of the Act and the Rules and Regulations; it being understood, however, that such counsel expresses no opinion with respect to the financial statements, schedule and other financial, numerical and statistical data included in the Registration Statement, the Prospectus and each amendment or supplement thereto. (D) To such counsel's knowledge, there are no U.S. federal or New York state statutes or regulations or franchises, leases, contracts or agreements of a character required by the Act to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed, as so required. (E) To such counsel's knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened against Doubletree or any of its Subsidiaries which are so required to be described in the Prospectus which are not described as required. (8) Doubletree has the corporate power and authority to enter into this Agreement and to sell and deliver the Common Shares to be sold by it to the several Underwriters; this Agreement has been duly authorized, executed and delivered by Doubletree. (9) Doubletree and the Merger Sub have the corporate power and authority to enter into the Merger Agreement and Doubletree has the corporate power and authority to issue and deliver the Merger Shares to be issued pursuant to the Merger; Doubletree has the corporate power and authority to enter into each other Transaction Document; each Transaction Document has been duly authorized, executed and delivered by Doubletree and the Merger Agreement has been duly authorized, executed and delivered by Merger Sub. (10) No approval, authorization, order, consent, registration, filing, qualification, license or permit of or with any U.S. federal or New York state court, regulatory, administrative or other governmental body that, in such counsel's experience, are normally applicable to transactions of the type contemplated by this Agreement or any other Transaction Document, is required to be obtained by the Company for the execution and delivery of any of the Transaction Documents by Doubletree, or the execution and delivery of Merger Agreement by Merger Sub, or the sale by Doubletree of the Common Shares to the Underwriters or the issuance by Doubletree of the Merger Shares, except (i) such as have been obtained and are in full force and effect under the Act, (ii) such as may be required under applicable Blue Sky laws in connection with the purchase and distribution of the Common Shares by the Underwriters, as to which 22 23 no opinion is rendered, (iii) such as arise under statutes, rules or regulations regulating the consumption, sale or serving of alcoholic beverages, as to which no opinion is rendered and (iv) in the case of the Merger Agreement, (A) such as relate to the matters set forth in Sections 5.17 or 5.18 of the Merger Agreement, and (B) such as would not individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (11) The execution and delivery by Doubletree of, and the performance by Doubletree of its obligations under, the Transaction Documents and the sale by Doubletree of the Common Shares to the several Underwriters and the issuance by Doubletree of the Merger Shares by Doubletree will not violate any of the provisions of the Certificate of Incorporation or bylaws of Doubletree, [or any agreement or other instrument binding upon Doubletree or any of its Subsidiaries that is material to the Company and its Subsidiaries, taken as a whole,] or, to the knowledge of such counsel, cause Doubletree to violate any U.S. federal or New York State statute, judgment, decree, order, rule or regulation of any court or governmental body applicable to the Company except that no opinion shall be rendered as to federal securities laws or applicable Blue Sky laws or statutes, rules or regulations regulating the consumption, sale or serving of alcoholic beverages. (12) To such counsel's knowledge, no holders of Capital Stock of Doubletree have rights, which have not been waived, to the registration of shares of Common Stock because of the filing of the Registration Statement by Doubletree or the offering of Common Shares pursuant hereto. (13) Doubletree is not and, after giving effect to the offering and sale of the Common Shares and the application of the proceeds thereof as described in the Prospectus and to the issuance of the Merger Shares, the Company will not be an "investment company" within the meaning of the Investment Company Act of 1940. (14) The statements (A) in the Prospectus under the captions "Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock," "Description of Capital Stock" and "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein. In rendering such opinion, such counsel may rely on certificates of officers of Doubletree and its subsidiaries and of governmental officials, and may limit their opinions to U.S. federal law, the Delaware General Corporation Law and, in the case of 23 24 Dewey Ballantine, New York state law or, in the case of the General Counsel of Doubletree, California state law. Dewey Ballantine shall also include a statement to the effect that such counsel has participated in conferences with officers and other representatives of Doubletree, representatives of the independent public accountants of Doubletree, and the Underwriters and its representatives, at which the contents of the Registration Statement were discussed and, although such counsel is not passing upon, and does not assume any responsibility whatsoever for, the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, and have not made any independent check or verification thereof, during the course of such participation (relying as to materiality to a large extent on the statements of officers and other representatives of Doubletree), no facts came to their attention that caused them to believe that the Registration Statement or the Prospectus, at the time the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contains an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; it being understood that such counsel expresses no opinion with respect to the financial statements, schedules and other financial, numerical and statistical data included in the Registration Statement or the Prospectus. (ii) An opinion of Latham & Watkins, special counsel for Red Lion, addressed to the Underwriters and dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) Red Lion has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. (2) Red Lion and each of its subsidiaries has full corporate, partnership or limited liability company power and authority to own and lease its assets and properties and conduct its business as now being conducted and as described in the Registration Statement. (3) Red Lion has the corporate power and authority to enter into the Merger Agreement have been duly authorized, executed and delivered by Red Lion. (iii) Such opinion or opinions of Davis Polk & Wardwell, counsel for the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, with respect to the incorporation of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the 24 25 Common Shares, the Registration Statement and the Prospectus and other related matters as you may reasonably require, and Doubletree shall have furnished to such counsel such documents and shall have exhibited to them such papers and records as they may reasonably request for the purpose of enabling them to pass upon such matters. In connection with such opinions, such counsel may rely on representations or certificates of officers of Doubletree and governmental officials. With respect to subparagraph (9) of paragraph (ii) above, Davis Polk & Wardwell may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto (other than the documents incorporated by reference) and review and discussion of the contents thereof (including documents incorporated by reference), but are without independent check or verification except as specified. (iv) A certificate of Doubletree executed by a Co-Chairman of the Board or the President and the chief financial or accounting officer of Doubletree, dated the First Closing Date or the Second Closing Date, as the case may be, to the effect that: (1) The representations and warranties of Doubletree set forth in Section 2 of this Agreement were true and correct as of the date of this Agreement and are true and correct in all material respects as of the First Closing Date or the Second Closing Date, as the case may be, and Doubletree has complied in all material respects with all the agreements and satisfied in all material respects all the conditions on its part to be performed or satisfied on or prior to such Closing Date. (2) The Commission has not issued any order preventing or suspending the use of the Prospectus or any Preliminary Prospectus filed as a part of the Registration Statement or any amendment or supplement thereto; no stop order suspending the effectiveness of the Registration Statement has been issued; and to the best of the knowledge of the respective signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Act. (v) On the date before this Agreement is executed and also on each Closing Date, a comfort letter addressed to you, as Representatives of the Underwriters, from each of KPMG Peat Marwick, Deloitte & Touche LLP and Arthur Andersen LLP, independent accountants, the first one to be dated the day before the date of this Agreement, and the second one to be dated the First Closing Date and the third one (in the event of a Second Closing hereunder) to be dated the Second Closing Date, in form and substance reasonably satisfactory to you. 25 26 (vi) On or before the First Closing Date, the "lock-up" letters, each substantially in the form of Exhibit A hereto, from each of the stockholders listed on Schedule C hereto and each director and executive officer of Doubletree delivered to you shall be in full force and effect. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are reasonably satisfactory to you and to Davis Polk & Wardwell, counsel for the Underwriters. Doubletree shall furnish you with such manually signed or conformed copies of such opinions, certificates, letters and documents as you request. Any certificate signed by any officer of Doubletree and delivered to the Underwriters or to counsel for the Underwriters shall be deemed to be a representation and warranty by Doubletree to the Underwriters as to the statements made therein. (g) Each of the Transaction Documents shall be in full force and effect on the First Closing Date, and Doubletree shall have no reason to believe that each of the actions contemplated or required to occur and each of the conditions contemplated or required to be satisfied at or prior to the Merger Closing, shall not occur or shall not be satisfied in all material respects, in each case, as of the time such action or condition is required to occur or be satisfied, and no waiver, amendment or modification of any provision of any of the Transaction Documents shall have occurred, other than any such action or condition or any such waiver, amendment or modification which in the Underwriters' reasonable judgment does not make it impracticable to market the Common Shares on the terms and in the manner contemplated in the Prospectus; and, simultaneous with or prior to, the First Closing Date, the Company shall have received (A) such proceeds under the Senior Credit Facility as described in the Prospectus and (B) the proceeds from the GE Investment pursuant to the GE Agreement. (h) Simultaneous with or prior to the First Closing Date, the Merger shall have been consummated pursuant to the Merger Agreement, the Merger Shares shall have been issued pursuant to the applicable Transaction Document and such other consideration to be paid to the holders of Red Lion Common Stock pursuant to the terms of the Merger Agreement shall have been delivered (or transmitted for delivery) to such holders or the Exchange Agent under the Merger Agreement. If any condition to the Underwriters' obligations hereunder to be satisfied prior to or at the First Closing Date is not so satisfied, this Agreement at your election will terminate upon notification by you to Doubletree without liability on the part of any Underwriter or Doubletree except for the expenses to be paid or reimbursed by Doubletree pursuant to Sections 5 and 7 hereof and except to the extent provided in Section 10 hereof. 26 27 (ii) The obligations of Doubletree to issue and sell to the several Underwriters the Firm Common Shares on the First Closing Date and the Optional Common Shares on the Second Closing Date shall be subject to the following condition: (a) Simultaneous with or prior to the First Closing Date, the Merger shall have been consummated pursuant to the Merger Agreement, the Merger Shares shall have been issued pursuant to the applicable Transaction Document and such other consideration to be paid to the holders of Red Lion Common Stock pursuant to the terms of the Merger Agreement shall have been delivered (or transmitted for delivery) to such holders or the Exchange Agent under the Merger Agreement. SECTION 7. Reimbursement of Underwriters' Expenses. Notwithstanding any other provisions hereof, if this Agreement shall be terminated by you pursuant to Section 7 or Section 13 hereof, or if the sale to the Underwriters of the Firm Common Shares at the First Closing Date is not consummated because of any refusal, inability or failure on the part of Doubletree to perform any agreement herein or to comply with any provision hereof, Doubletree agrees to reimburse the Underwriters upon demand for all out-of-pocket expenses that shall have been reasonably incurred by them in connection with the proposed purchase and the sale of the Firm Common Shares, including but not limited to reasonable fees and disbursements of counsel, printing expenses, travel expenses, postage and telephone charges relating directly to the offering contemplated by the Prospectus. Any such termination shall be without liability of any party to any other party except that the provisions of this Section and Section 5 and Section 9 hereof shall at all times be effective and shall apply. SECTION 8. Effectiveness of Registration Statement. Doubletree will use its best efforts to cause the Registration Statement to become effective, to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement and, if such stop order be issued, to obtain as soon as possible the lifting thereof. SECTION 9. Indemnification and Contribution. (a) Doubletree agrees to (i) indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages, liabilities or expenses, joint or several, to which such Underwriter or such controlling person may become subject, under the Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of Doubletree) insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in 27 28 the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state in any of them a material fact required to be stated therein or necessary (with respect to the Prospectus or any Preliminary Prospectus, in light of the circumstances under which they were made) to make the statements in any of them not misleading; and (ii) reimburse each Underwriter and each such controlling person for any legal and other expenses as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished in writing by the Representatives to Doubletree; and provided further that the indemnification provisions contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of any Common Shares by such Underwriter to any person if a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter agrees to severally indemnify and hold harmless Doubletree, the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls Doubletree or the Company within the meaning of the Act against any losses, claims, damages, liabilities or expenses to which Doubletree or the Company or any such director, officer or controlling person may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof as contemplated below) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary (with respect to the Prospectus or any Preliminary Prospectus, in light of the circumstances under which they were made) to make the statements in any of them not misleading, in each case to the extent, but only to 28 29 the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with the information furnished in writing by the Representatives to Doubletree or the Company; and will reimburse Doubletree and each such director, officer or controlling person for any legal and other expenses, as such expenses are reasonably incurred by Doubletree or the Company or any such director, officer or controlling person in connection with investigating, defending, settling compromising or paying any such loss, claim, damage, liability, expense or action. This indemnity agreement will be in addition to any liability which the Underwriters may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under the indemnity agreement contained in this Section or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with all other indemnifying parties similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. The indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnifying party, indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the sole expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed in writing to the retention by the indemnified party of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and the indemnified party shall have reasonably concluded that there may be a conflict between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Morgan Stanley & Co. 29 30 Incorporated, in the case of parties indemnified pursuant to paragraph (a) of this Section, and by the Company, in the case of parties indemnified pursuant to paragraph (b) of this Section. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes either (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding or (ii) a conditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding which release is applicable, to the same manner and extent, to the indemnifying party; provided, however, that the foregoing shall not apply to settlements in respect of any officer or director of an indemnifying party which may be effected without the consent of the indemnified party; provided, further, that nothing herein, including, without limitation, the failure of an indemnifying party to satisfy any condition to the settlement, shall limit any rights of an indemnified party as provided hereunder. (d) If the indemnification provided for in this Section 9 is required by its terms but is for any reason held to be unavailable to hold harmless an indemnified party under paragraphs (a) or (b) of this Section 9 in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any losses, claims, damages, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by Doubletree on the one hand and the Underwriters on the other hand from the offering of the Common Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of Doubletree on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by Doubletree and the Underwriters shall be deemed to be in the same proportion, in the case of Doubletree, as the total price paid to Doubletree for the Common Shares sold by them to the Underwriters (net of underwriting commissions but before deducting expenses), and, in the case of the Underwriters, as the underwriting commissions received by them, in each case bears to the total of such amounts paid to Doubletree and the amounts received by the Underwriters as underwriting commissions. The relative fault of Doubletree and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission 30 31 to state a material fact relates to information supplied by Doubletree or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in paragraph (c) of this Section 9, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in paragraph (c) of this Section 9 with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this paragraph (d); provided, however, that no additional notice shall be required with respect to any action for which notice has been given under such paragraph (c) for purposes of indemnification. Doubletree and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined solely by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount of the total underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it. No person guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. SECTION 10. Default of Underwriter. It shall be a condition to this Agreement and the obligation of Doubletree to sell and deliver the Common Shares hereunder, and of each Underwriter to purchase the Common Shares in the manner as described herein, that, except as hereinafter in this paragraph provided, each of the Underwriters shall purchase and pay for all the Common Shares agreed to be purchased by such Underwriter hereunder upon tender to the Underwriters of such shares in accordance with the terms hereof. If any Underwriter defaults in its obligation to purchase Common Shares hereunder on either the First or Second Closing Date, the non-defaulting Underwriter or Underwriters shall have the right to purchase, or to seek another person or persons to purchase, all, but shall not be under any obligation to purchase any, of the Common Shares; and if such non-defaulting Underwriter or Underwriters and such other person or persons do not purchase all of the Common 31 32 Shares, this Agreement will terminate without liability of the non-defaulting Underwriter or Underwriters or Doubletree except for the expenses to be paid by Doubletree pursuant to Section 5 hereof and except to the extent provided in Section 9 hereof. If Common Shares to which a default relates are to be purchased by the non-defaulting Underwriter or Underwriters or by another person or persons, the non-defaulting Underwriter or Doubletree shall have the right to postpone the First or Second Closing Date, as the case may be, for not more than five business days in order that the necessary changes in the Registration Statement, Prospectus, this Agreement and any other documents, as well as any other arrangements, may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. SECTION 11. Effective Date. This Agreement shall become effective immediately as to Sections 5, 7, 9, and 13 hereof and, as to all other provisions, (i) if at the time of execution of this Agreement the Registration Statement has not become effective, at 2:00 P.M., New York time, on the first full business day following the effectiveness of the Registration Statement, or (ii) if at the time of execution of this Agreement the Registration Statement has been declared effective, at 2:00 P.M., New York time, on the first full business day following the date of execution of this Agreement; but this Agreement shall nevertheless become effective at such earlier time after the Registration Statement becomes effective as you may determine on and by notice to the Company or by release of any of the Common Shares for sale to the public. For the purposes of this Section 11, the Common Shares shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Common Shares or upon the release by you of notices (i) advising your sales personnel that the Common Shares are released for public offering, or (ii) offering the Common Shares for sale to securities dealers, whichever may occur first. SECTION 12. Termination. Without limiting the right to terminate this Agreement pursuant to any other provision hereof: (a) This Agreement may be terminated by Doubletree or, by you by notice to the other parties hereto at any time prior to the time this Agreement shall become effective as to all its provisions, and any such termination shall be without liability on the part of Doubletree to any Underwriter (except for the expenses to be paid or reimbursed by Doubletree pursuant to Sections 5 and 7 hereof and except to the extent provided in Section 9 hereof) or of any Underwriter to Doubletree (except to the extent provided in Section 9 hereof). 32 33 (b) This Agreement may also be terminated by you prior to the First Closing Date by notice to Doubletree (i) if material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the Nasdaq stock market's national market by the NASD, or trading in securities generally shall have been suspended on either such Exchange or in the over the counter market by the NASD, or a general banking moratorium shall have been established by federal or, New York authorities, (ii) if an outbreak of major hostilities or other national or international calamity or any substantial change in political, financial or economic conditions shall have occurred or shall have accelerated or escalated to such an extent, as, in the judgment of the Underwriters, to affect materially and adversely the marketability of the Common Shares, (iii) if any adverse event shall have occurred or shall exist which makes untrue or incorrect in any material respect any statement or information contained in the Registration Statement or the Prospectus or which is not reflected in the Registration Statement or the Prospectus but should be reflected therein in order to make the statements or information contained therein not misleading in any material respect or (iv) if there shall be any action, suit or proceeding pending or threatened, or there shall have been any development or prospective development involving particularly the business or properties or securities of the Company, any of the Subsidiaries or Candlewood or the transactions contemplated by this Agreement, which, in the judgment of the Underwriters, may materially and adversely affect the Company's business or earnings and makes it impracticable or inadvisable to offer or sell the Common Shares. Any termination pursuant to this Section 12(b) shall be without liability on the part of any Underwriter to the Company or on the part of the Company to any Underwriter (except for expenses to be paid or reimbursed by the Company pursuant to Sections 5 and 7 hereof and except to the extent provided in Section 9 hereof). SECTION 13. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of Doubletree of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, Doubletree or any of its partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. SECTION 14. Notices. All communications hereunder shall be in writing and, if sent to the Underwriters, shall be mailed, delivered or telecopied and confirmed to Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, N.Y. 10036 Attention: __________, FAX: (212) 761-0260, with a copy to Davis Polk & Wardwell, 450 Lexington Avenue, New York, NY 10017, Attention: Richard D. Truesdell, Jr., Esq., FAX: (212) 480-4800; and if sent to Doubletree or the Company shall be mailed, 33 34 delivered or telecopied and confirmed to the Company at 410 North 44th Street, Suite 700, Phoenix, Arizona 85008, Attention: David L. Stivers, Esq., FAX: (602) 220-6602, with a copy to Dewey Ballantine, 1301 Avenue of the Americas, New York, NY 10019, Attention: William J. Phillips, Esq. and Curtis L. Mo, Esq., FAX: (213) 259-6333. The Company or you may change the address for receipt of communications hereunder by giving notice to the others. SECTION 15. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the officers and directors and controlling persons referred to in Section 9 hereof, and in each case their respective successors, personal representatives and assigns, and no other person will have any right or obligation hereunder. No such assignment shall relieve any party of its obligations hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 16. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 17. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of New York. SECTION 18. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in several counterparts, each one of which shall be an original, and all of which shall constitute one and the same document. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The Section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by Doubletree and you. 34 35 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed copies hereof, whereupon it will become a binding agreement among Doubletree and you, all in accordance with its terms. Very truly yours, DOUBLETREE CORPORATION By: ---------------------------------------- Title: The foregoing Underwriting Agreement is hereby confirmed and accepted by us in New York, New York as of the date first above written. MORGAN STANLEY & CO. INCORPORATED MONTGOMERY SECURITIES SCHRODER WERTHEIM & CO. INCORPORATED By: MORGAN STANLEY & CO. INCORPORATED By: -------------------------------------------- Title: MORGAN STANLEY & CO. INTERNATIONAL LIMITED MONTGOMERY SECURITIES J. HENRY SCHRODER & CO. LIMITED By: MORGAN STANLEY & CO. INTERNATIONAL LIMITED By: -------------------------------------------- Title: 35 36 A I Number of Firm Common Name of Underwriter Shares to be Purchased ------------------- ---------------------- MORGAN STANLEY & CO. INCORPORATED MONTGOMERY SECURITIES SCHRODER WERTHEIM & CO. INCORPORATED TOTAL A-1 37
A II Number of Firm Common Name of Underwriter Shares to be Purchased ------------------- ---------------------- MORGAN STANLEY & CO. LIMITED MONTGOMERY SECURITIES J. HENRY SCHRODER & CO. LIMITED TOTAL
A-2 38
SCHEDULE B FIRM COMMON SHARES SHARES TO BE SOLD - ------------------ ----------------- Doubletree Corporation __________ SUBTOTAL __________ OPTIONAL COMMON SHARES Doubletree Corporation __________ TOTAL ==========
B-1 39 SCHEDULE C Name of Stockholder to execute "lock-up" agreement C-1 40 EXHIBIT A [Form of Lock-Up Letter] _____________, 1996 Morgan Stanley & Co. Incorporated [NAMES OF OTHER CO-MANAGERS] c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Dear Sirs and Mesdames: The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan Stanley") proposes to enter into an Underwriting Agreement (the "Underwriting Agreement") with Doubletree Corporation, a Delaware corporation (the "Company"), providing for the public offering (the "Public Offering") by the several Underwriters, including Morgan Stanley (the "Underwriters"), of ___ shares (the "Shares") of the Common Stock, $.01 par value, of the Company (the "Common Stock"). To induce the Underwriters that may participate in the Public Offering to continue their efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending [90] days after the date of the final prospectus relating to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the sale of any Shares to the Underwriters pursuant to the Underwriting Agreement. In addition, the undersigned agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period commencing on the date hereof and ending [90] days after the date 41 of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Underwriters. Very truly yours, ------------------------- (Name) ------------------------- (Address) A-2 EX-5.1 3 OPINION OF DEWEY BALLANTINE 1 Exhibit 5.1 [DEWEY BALLANTINE LETTERHEAD] October 31, 1996 Doubletree Corporation 410 North 44th Street Suite 700 Phoenix, Arizona 85008 Ladies and Gentlemen: We have acted as special counsel for Doubletree Corporation, a Delaware corporation (the "Company"), in connection with the filing of a Registration Statement on Form S-3 (File No. 333-13161), as amended (the "Registration Statement"), under the Securities Act of 1933, as amended (the "Act"), for the purpose of registering under the Act the sale of up to 5,750,000 shares (the "Shares") of the Company's common stock, par value $.01 per share, by the Company. We have examined a copy of the Certificate of Incorporation of the Company as certified by the Department of State of the State of Delaware and copies of resolutions adopted by the Board of Directors of the Company and the Pricing Committee thereof and such other documents as we have deemed relevant to expressing the opinions contained herein. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents presented to us as originals, the conformity to the originals of all documents presented to us as copies, and the authenticity of the originals of such latter documents. Based upon the foregoing, we are of the opinion that, when the Registration Statement becomes effective under the Act and the Shares are sold by the Company as provided in the Registration Statement, the Shares will be validly issued, fully paid and non-assessable. This opinion may be relied upon exclusively by you, and may not be relied upon by any other person without our prior written consent. 2 We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the use of the name of our firm under the caption "Legal Matters" in the prospectuses which are included as a part of the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required by Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ DEWEY BALLANTINE -------------------------------- 2 EX-10.4 4 FORM OF SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 10.4 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT dated as of October 31, 1996 (this "Agreement"), by and between Doubletree Corporation, a Delaware corporation (the "Seller"), and the Trustees of General Electric Pension Trust, a New York common law trust (the "Buyer"). Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to them in the Merger Agreement referred to below. RECITALS WHEREAS, the Seller, RLH Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Seller ("Merger Sub"), and Red Lion Hotels, Inc., a Delaware corporation ("Red Lion"), are parties to an Agreement and Plan of Merger dated as of September 12, 1996 (the "Merger Agreement"), pursuant to which Merger Sub will merge with and into Red Lion (the "Merger") and Red Lion will become a wholly owned subsidiary of the Seller; and WHEREAS, in order to finance a portion of the Cash Consideration payable under the Merger Agreement and other fees and expenses related to the Merger, the Seller wishes to issue and sell to the Buyer or an affiliate thereof, and the Buyer wishes to purchase (or to cause an affiliate of the Buyer to purchase) from the Seller, (i) the number of shares of Common Stock, par value $.01 per share, of the Seller ("Common Stock") determined in accordance with Section 1.2 below (the "Shares") and (ii) warrants, substantially in the form attached hereto as Exhibit A, entitling the holders thereof to purchase an aggregate of 10% of such number of Shares (the "Warrants"), all upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto hereby agree as follows: ARTICLE I PURCHASE AND SALE OF SECURITIES Section 1.1 Purchase and Sale of Securities. Upon the terms and subject to the conditions set forth in 2 this Agreement, the Buyer agrees to purchase (or to cause an affiliate of the Buyer to purchase) from the Seller, and the Seller agrees to issue and sell to the Buyer or such affiliate, the Shares and the Warrants (collectively, the "Securities"), for an aggregate purchase price of $100,000,000 in immediately available funds (the "Purchase Price"). Section 1.2 Elected Price. The actual number of Shares purchased hereunder shall be equal to the quotient (rounded to the nearest whole number) of the Purchase Price divided by the "Elected Price" determined as follows: (a) The Seller has heretofore notified the Buyer that the expected date of the Closing under the Merger Agreement is November 8, 1996. The Seller shall use its best efforts to notify the Buyer of any changes hereafter in the expected date of the Closing (the original notice, and each notice of change, of the expected date of the Closing, a "Closing Date Notice"). (b) The parties have agreed that, at or prior to the close of business on the twentieth day immediately prior to the date on which the Closing occurs (the "Closing Date"), the Buyer shall be entitled to elect a per Share purchase price (the "Elected Price") consisting of either (i) the Acquisition Price (as defined below), or (ii) the Market Price (as defined below), by giving written notice to the Seller of its election thereof (an "Election Notice"). For purposes hereof: "Acquisition Price" means an implied price per share of Common Stock equal to the product obtained by multiplying (i) a fraction, the numerator of which is the initial Exchange Ratio or 0.2398 and the denominator of which is the final adjusted Exchange Ratio, by (ii) $36.7253. For purposes of illustration, assuming that the Final Parent Stock Price were $45 (resulting in a final adjusted Exchange Ratio of 0.2153), then the Acquisition Price would be equal to $40.90. All calculations of the Acquisition Price shall be made in a manner consistent with the foregoing illustration. "Market Price" means (A) if the Seller shall consummate an underwritten public offering of at least $100,000,000 of its Common Stock at or immediately prior to the Closing, the per share price at which shares of Common Stock are sold to the underwriters (e.g. net of any underwriting discounts) in connection with such underwritten public offering, or (B) otherwise, the Final Parent Stock Price under the Merger Agreement. 2 3 (c) The Buyer has delivered an Election Notice dated October 10, 1996 in which it elected the Acquisition Price to be the Elected Price. The Buyer shall be entitled hereafter to change its election with respect to the Elected Price by delivering one or more subsequent Election Notices, specifying a different Elected Price. If the actual Closing Date is three (3) or more days later than November 8, 1996, the last Election Notice received by the Seller not less than 20 business days (as defined in the Merger Agreement) prior to the actual Closing Date shall supercede all other Election Notices given hereunder, and the Elected Price determined in accordance with such last Election Notice shall be final and binding upon the parties hereto. Section 1.3 Closing. Subject to the satisfaction or waiver of the conditions to closing set forth in Article IV hereof, the closing of the purchase and sale of the Securities hereunder shall take place at the time, date and place of the Closing under the Merger Agreement. At the Closing, (a) the Seller shall issue and deliver to the Buyer (or an affiliate thereof designated by the Buyer) one or more certificates representing each of the Securities, all registered in the name of the Buyer or such affiliate, against (b) payment by the Buyer or such affiliate, as the case may be, to the Seller of the Purchase Price by wire transfer of immediately available funds to an account or accounts designated by the Seller in a written notice delivered to the Buyer not later than two (2) business days prior to the Closing Date. ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1 Representations and Warranties of the Seller. The Seller hereby represents and warrants to the Buyer as follows: (a) Organization and Power. The Seller 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 execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. (b) Authorization and Enforceability. The execution, delivery and performance of this Agreement by the Seller and the consummation of the transactions pursuant hereto have been duly and validly authorized by all necessary corporate action on the part of the Seller. This Agreement has been duly executed and 3 4 delivered by the Seller and constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller 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 or by the application of general principles of equity (regardless of whether such equitable principles are applied in a proceeding at law or in equity). (c) No Conflict. Subject to making the filings and obtaining the approvals identified in the next paragraph, the execution and delivery of this Agreement by the Seller do not, and the performance by the Seller of its obligations hereunder and the consummation by the Seller of the transactions pursuant hereto will not, (i) conflict with or violate the certificate of incorporation or by-laws of the Seller, (ii) conflict with or violate any law, statute, rule, regulation, order, judgment, writ, injunction or decree applicable to the Seller, or (iii) result in any violation or breach of, or constitute a default under, any agreement, contract or other instrument to which the Seller is a party. (d) Consents and Approvals. The execution and delivery of this Agreement by the Seller do not, and the performance by the Seller of its obligations hereunder and the consummation by the Seller of the transactions pursuant hereto will not, require the Seller to obtain any consent, approval, authorization or permit of, or to make any filing with or notification to, any Governmental Entity or other Person except as required by the HSR Act, the Securities Act, the Exchange Act and Blue Sky Laws. (e) Litigation. There is no action, suit, claim or proceeding pending or, to the knowledge of the Seller, threatened against the Seller or any of its subsidiaries by or before any court or other Governmental Entity which seeks to enjoin or prohibit the performance by the Seller of its obligations hereunder or the consummation by the Seller of any of the transactions pursuant hereto. (f) Title to Securities. (i) The Shares have been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable and subject to no preemptive rights. Upon issuance of the Shares to the Buyer or its affiliate as aforesaid, the Buyer or such affiliate (as the case may be) will acquire good and marketable title to the Shares, free and clear of any liens and encumbrances. 4 5 (ii) The Warrants have been duly authorized and, when issued in accordance with this Agreement, will be validly issued. Upon issuance of the Warrants to the Buyer or its affiliate as aforesaid, the Buyer or such affiliate (as the case may be) will acquire good and marketable title to the Warrants, free and clear of any liens and encumbrances. At all times following the Closing during which any Warrants are outstanding and exercisable, the Seller will reserve and keep available out of its authorized Common Stock, solely for issuance and delivery upon exercise of Warrants, at least the number of shares of Common Stock issuable upon exercise of all then outstanding Warrants. The shares of Common Stock that are issued upon exercise of Warrants will, when issued in accordance with the terms thereof, be duly authorized, validly issued, fully paid, nonassessable, subject to no preemptive rights, and free and clear of any liens or encumbrances. (g) Use of Proceeds. The Purchase Price will be used solely to pay a portion of the Cash Consideration and other fees and expenses related to the Merger. (h) Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the issuance and sale of Securities pursuant hereto based upon arrangements made by or on behalf of the Seller. (i) Full Disclosure. No representation or warranty by the Seller contained in this Agreement or in the Registration Statement on Form S-3 (File No. 333-13161), as amended, of the Seller contains any untrue statement of a material fact by the Seller or omits to state a material fact required to be stated therein or necessary to make the statements contained therein by the Seller, in light of the circumstances under which it was made, not false or misleading. Section 2.2 Representations and Warranties of the Buyer. The Buyer hereby represents and warrants to the Seller as follows: (a) Organization and Power. The Buyer is a common law trust duly organized, validly existing and in good standing under the laws of the State of New York, and has all requisite power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. 5 6 (b) Authorization and Enforceability. The execution, delivery and performance of this Agreement by the Buyer and the consummation of the transactions pursuant hereto have been duly and validly authorized by all necessary action on the part of the Buyer. This Agreement has been duly executed and delivered by the Buyer and constitutes the legal, valid and binding obligation of the Buyer, enforceable against the Buyer 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 or by the application of general principles of equity (regardless of whether such equitable principles are applied in a proceeding at law or in equity). (c) No Conflict. Subject to making the filings and obtaining the approvals identified in the next paragraph, the execution and delivery of this Agreement by the Buyer do not, and the performance by the Buyer of its obligations hereunder and the consummation by the Buyer or its affiliate of the transactions pursuant hereto will not, (i) conflict with or violate the trust instrument or other organization documents of the Buyer or any such affiliate, (ii) conflict with or violate any law, statute, rule, regulation, order, judgment, writ, injunction or decree applicable to the Buyer or any such affiliate, or (iii) result in any violation or breach of, or constitute a default under, any agreement, contract or other instrument to which the Buyer or any such affiliate is a party. (d) Consents and Approvals. The execution and delivery of this Agreement by the Buyer do not, and the performance by the Buyer of its obligations hereunder and the consummation by the Buyer or its affiliate of the transactions pursuant hereto will not, require the Buyer or any such affiliate to obtain any consent, approval, authorization or permit of, or to make any filing with or notification to, any Governmental Entity or other Person except as required by the HSR Act, the Securities Act, the Exchange Act and Blue Sky Laws. (e) Litigation. There is no action, suit, claim or proceeding pending or, to the knowledge of the Buyer, threatened against the Buyer or any of its subsidiaries by or before any court or other Governmental Entity which seeks to enjoin or prohibit the performance by the Buyer of its obligations hereunder or the consummation by the Buyer or its affiliate of any of the transactions pursuant hereto. 6 7 (f) Investment Intent. The Securities are being acquired by the Buyer or an affiliate thereof for the account of the Buyer or such affiliate, as the case may be, without a present view to the distribution or resale thereof or of any interest therein (it being understood that the Buyer or any such affiliate shall have the right to sell or otherwise dispose of any such Securities or any Common Stock deliverable upon exercise of the Warrants, pursuant to registration or an exemption therefrom under the Securities Act and Blue Sky Laws). (g) Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the purchase of Securities pursuant hereto based upon arrangements made by or on behalf of the Buyer or any affiliate thereof. ARTICLE III COVENANTS Section 3.1 Further Assurances. Each of the parties hereto shall use all commercially reasonable good faith efforts to take, or cause to be taken, all actions, and do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations (including, without limitation, under the HSR Act, the Securities Act, the Exchange Act and Blue Sky Laws), and consult with 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 transactions contemplated hereby as promptly as practicable hereafter. Section 3.2 Expenses. The Seller shall bear all expenses incurred by the parties hereto in connection with this Agreement or any of the transactions contemplated hereby. ARTICLE IV CONDITIONS Section 4.1 Conditions. The obligation of the Seller to issue and sell the Securities to the Buyer or an affiliate thereof designated by the Buyer, and the obligation of the Buyer to purchase (or to cause an affiliate thereof to purchase) the Securities hereunder, shall be subject to the satisfaction at or prior to the Closing of the following conditions, either or both of which 7 8 may be waived, in whole or in part, to the extent permitted by applicable law: (a) any waiting period (and any extension thereof) under the HSR Act applicable to the issuance and sale of the Securities shall have expired or been terminated; and (b) the Closing under the Merger Agreement shall have occurred. Section 4.2 Additional Buyer Conditions. The obligation of the Buyer to purchase, or to cause an affiliate to purchase, the Securities hereunder shall also be subject to the following conditions, any or all of which may be waived, in whole or in part, to the extent permitted by applicable law: (a) each of the representations and warranties of the Seller contained in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except where the failure to be so true and correct would not, individually or in the aggregate, have a Parent Material Adverse Effect), and the Buyer and any such affiliate shall have received a certificate executed by an executive officer of the Seller to such effect; (b) the Buyer or any such affiliate shall have received an opinion or opinions, in form and substance reasonably satisfactory to the Buyer or such affiliate, dated the Closing Date, from the General Counsel of the Seller or Dewey Ballantine, special counsel to the Seller, to the effect that: (i) the Seller 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 execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. (ii) the execution, delivery and performance of this Agreement by the Seller and the consummation of the transactions pursuant hereto have been duly and validly authorized by all necessary corporate action on the part of the Seller; this Agreement has been duly executed and delivered by the Seller and constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the 8 9 enforcement of creditors' rights generally or by the application of general principles of equity (regardless of whether such equitable principles are applied in a proceeding at law or in equity); (iii) the Shares have been duly authorized and, when issued in accordance with this Agreement, will be validly issued, fully paid and nonassessable and, to the knowledge of such counsel, subject to no preemptive rights; (iv) the Warrants have been duly authorized and, when issued in accordance with this Agreement, will be validly issued; and the shares of Common Stock that are issued upon exercise of the Warrants will, when issued in accordance with the terms of the Warrants, be validly issued, fully paid and nonassessable and, to the knowledge of such counsel, subject to no preemptive rights; and (v) assuming the accuracy of the representations and warranties of the Buyer set forth in Section 2.2(f) hereof, the issuance, sale and delivery of the Securities by the Seller are exempt from registration under the Securities Act; and (c) the Seller shall have entered into the Registration Rights Agreement (or another agreement, in form and substance reasonably satisfactory to the Buyer, providing for the Shares and any shares of Common Stock issuable upon exercise of the Warrants to be covered by the existing registration rights of the Buyer under the "Existing Agreement" referred to in the form of Registration Rights Agreement attached as Exhibit B to the Merger Agreement). Section 4.3 Additional Seller Condition. The obligation of the Seller to issue and sell the Securities hereunder shall also be subject to the condition that each of the representations and warranties of the Buyer contained in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except where the failure to be so true and correct would not, individually or in the aggregate, have a material adverse effect on the ability of the Buyer to perform its obligations hereunder or the ability of the Buyer or any affiliate thereof to consummate the transactions pursuant hereto), and the Seller shall have received a certificate executed by a trustee of the Buyer to such effect. 9 10 ARTICLE V MISCELLANEOUS Section 5.1 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or when mailed by registered or certified mail, postage prepaid, or when given by facsimile transmission, as follows: (a) If to the Seller: Doubletree Corporation 410 North 44th Street Suite 700 Phoenix, Arizona 85008 Telecopy No.: (602) 220-6602 Attention: Chief Financial Officer (b) If to the Buyer: General Electric Investment Corporation 3003 Summer Street P.O. Box 7900 Stamford, Connecticut 06905 Telecopy No.: (203) 326-4179 Attention: David W. Wiederecht or to such other person as either party hereto shall designate by written notice to the other in the manner provided in this Section 5.1. Section 5.2 Limited Liability. Any monetary obligation or liability of the Buyer under this Agreement shall be enforced solely against the assets of the Buyer and not against the Trustees of the Buyer or General Electric Company or any affiliate thereof. Section 5.3 Entire Agreement. This Agreement (including the documents specifically referred to herein) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings between the parties with respect thereto. Section 5.4 Amendments. This Agreement may only be amended or modified in an instrument executed by both parties hereto. This Agreement may not be assigned, in whole or in part, by either party hereto without the prior written consent of the other party hereto. 10 11 Section 5.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflict of law principles thereof. Section 5.6 Counterparts. This Agreement may be executed by the parties in two counterparts, each of which when so executed shall be an original and all of which together shall constitute one and the same instrument. 11 12 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed as of the date and year first written above. DOUBLETREE CORPORATION By: ------------------------- Name: Title: TRUSTEES OF GENERAL ELECTRIC PENSION TRUST By: ------------------------- Name: Title: Trustee 12 EX-10.5 5 FORM OF WARRANT TO PURCHASE COMMON STOCK 1 EXHIBIT 10.5 FORM OF WARRANT THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION UNDER SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER. Void after 5:00 P.M. __________(1) Warrants to Purchase (unless previously terminated under Common Stock the circumstances described herein) Dated: _____________(2) WARRANT CERTIFICATE REPRESENTING WARRANTS TO PURCHASE COMMON STOCK OF DOUBLETREE CORPORATION FOR VALUE RECEIVED, Doubletree Corporation, a Delaware corporation (the "Company"), hereby certifies that, _________________ ("Holder"), the holder of these Warrants (the "Warrants", and each right to purchase a share of Common Stock, a "Warrant") is entitled, subject to the terms set forth below, at any time on or after ______________,(3) or from time to time thereafter, but not later than _______________,(4) to purchase from the Company __________(5) fully paid and nonassessable shares of Common Stock, par value $.01 per share ("Common Stock"), of the Company. These Warrants and all rights hereunder, to the extent such rights shall not have - -------------------- (1) Insert fifth anniversary of date of original issuance. (2) Insert date of original issuance. (3) Insert date of original issuance. (4) Insert fifth anniversary of original date of issuance. (5) Insert 10% of the number of Shares issued and sold at the Closing. 2 been exercised, shall terminate and become null and void at 5:00 p.m., New York time, on ___________.(6) These Warrants shall be subject to the terms set forth in the Securities Purchase Agreement dated as of October 31, 1996 by and between the Company and the Trustees of General Electric Pension Trust, pursuant to which these Warrants are being issued, and to the following terms and conditions: SECTION 1. EXERCISE OF WARRANTS; EXERCISE PRICE; ADJUSTMENTS RELATIVE TO EXERCISE OF WARRANTS 1A. Exercise of Warrants. (a) Subject to the conditions of this Section 1, the holder of any Warrant at the holder's option may exercise such holder's rights under all or any part of the Warrants to purchase Common Stock (the "Warrant Shares") at a price equal to $_______(7) (the "Exercise Price") at any time on or after the date hereof. The Warrant Shares and the Exercise Price are subject to certain adjustments as set forth in this Section 1 and the terms Warrant Shares and Exercise Price as used herein shall as of any time be deemed to include all such adjustments to be given effect as of such time in accordance with the terms hereof. 1B. Stock Dividends. In case at any time the Company shall declare a dividend or make any other distribution upon any class or series of stock of the Company payable in shares of Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such convertible or exchangeable stock or securities being herein called "Convertible Securities"), the Exercise Price in effect on the record date for such dividend or distribution shall be proportionately reduced. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in shares of Common Stock or in Convertible Securities, then such record date shall be deemed to be the date of the issue of the shares of Common Stock deemed to have been issued as a result of the declaration of such dividend or the making of such other distribution, as the case may be, unless such dividend or other distribution is to be measured by the market price of the Common Stock in effect on the date such dividend or other distribution is made, in which case such date shall be deemed to be the date of the issue of the shares of Common Stock deemed to have been so issued. For - ------------------ (6) Insert fifth anniversary of the date of original issuance. (7) Insert final Elected Price. A-2 3 purposes of such adjustment, the number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company. 1C. Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. 1D. Changes in Common Stock. If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or sale, transfer or other disposition of all or substantially all of its properties to another corporation, shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby each holder of Warrants shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the shares of the Common Stock of the Company immediately theretofore issuable upon exercise of the Warrants, such shares of stock, securities or properties, if any, as may be issuable or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore issuable upon exercise of the Warrants had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of each holder of Warrants to the end that the provisions hereof (including without limitation provisions for adjustment of the Exercise Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition, unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing or otherwise acquiring such properties shall assume, by written instrument executed and mailed or delivered to the holders of Warrants at the last address of such holders appearing on the books of the Company, the obligation to deliver to such holders such shares of stock, securities or properties as, in accordance with the foregoing provisions, such holders may be entitled to acquire. The above provisions of this subparagraph A-3 4 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers, or other dispositions. 1E. Other Adjustments. In case (i) the Company shall issue or sell any shares of its Common Stock for a consideration per share less than the fair market value thereof at the time of such issue or sale, or issue or grant any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or Convertible Securities at an exercise price per share of Common Stock less than the fair market value thereof on the date of such issue or grant, or issue or sell any Convertible Securities having a conversion or exchange price per share of Common Stock less than the fair market value thereof on the date of such issue or sale, or (ii) any other corporate event or transaction of the Company, outside the ordinary course of business consistent with past practice, not specified or contemplated by this Section 1 occurs which equitably requires an anti-dilutive adjustment to the Warrants represented hereby, then the Board of Directors of the Company shall make such appropriate adjustments to the Warrants as it may determine in its reasonable business judgment. 1F. Notice of Adjustment. Upon any adjustment of the Exercise Price, then and in each such case the Company shall promptly deliver to the Holder a certificate of the chief financial officer of the Company setting forth the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock issuable upon Exercise of the Warrant or Warrants held by each holder of Warrants, and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 1G. Prohibition of Certain Actions. The Company will not (i) authorize or issue, or agree to authorize or issue, any shares of its capital stock of any class preferred as to dividends or as to the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding-up of the Company unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par value in respect of participation in dividends and in the distribution of such assets or (ii) take any action which would result in any adjustment of the Exercise Price if the total number of shares of Common Stock issuable after such action upon exercise of all of the Warrants would exceed the total number of shares of Common Stock then authorized by the Company's Certificate of Incorporation. 1H. Stock to be Reserved. The Company will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon the exercise of A-4 5 Warrants as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants, and the Company will maintain at all times all other rights and privileges sufficient to enable it to fulfill all its obligations hereunder. The Company covenants that all shares of Common Stock which shall be so issuable shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, free from preemptive or similar rights on the part of the holders of any shares of capital stock or securities of the Company, and free from all Liens and charges with respect to the issue thereof; and without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such action as may be required to assure that the par value, if any, per share of the Common Stock is at all times equal to or less than the then effective Exercise Price. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation by the Company of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed. 1I. Registration and Listing of Common Stock. If any shares of Common Stock required to be reserved for purposes of exercise of Warrants hereunder require registration with or approval of any governmental authority under any Federal or state law (other than the Securities Act) before such shares may be issued upon exercise, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. Shares of Common Stock issuable upon exercise of the Warrants shall be registered by the Company under the Securities Act or similar statute then in effect if required by paragraph 11 and subject to the conditions stated in such paragraph. If and so long as the Common Stock is listed on any national securities exchange, the Company will, at its expense, obtain promptly and maintain the approval for listing on each such exchange upon official notice of issuance, of shares of Common Stock issuable upon exercise of the then outstanding Warrants and maintain the listing of such shares after their issuance; and the Company will also list on such national securities exchange, will register under the Securities Exchange Act of 1933, as amended (the "Exchange Act"), and will maintain such listing of, any other securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company or shall require registration under the Exchange Act. 1J. Closing of Books. The Company will at no time close its transfer books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the A-5 6 exercise of any Warrant in any manner which interferes with the timely exercise of such Warrant. 1K. No Rights or Liabilities as Shareholders. No Warrant shall entitle any holder thereof to any of the rights of a shareholder of the Company. No provision of this Warrant, in the absence of the actual exercise of such Warrant or any part thereof by the holder thereof into Common Stock issuable upon such exercise, shall give rise to any liability on the part of such holder as a shareholder of the Company, whether such liability shall be asserted by the Company or by creditors of the Company. SECTION 2. METHOD OF EXERCISE OF WARRANTS The Warrants may be exercised by the surrender of this Certificate, with the Form of Subscription attached hereto duly executed by the holder, to the Company at its principal office, accompanied by payment of the Exercise Price for the number of shares of Common Stock specified. The Warrants may be exercised for less than the full number of shares of Common Stock called for hereby by surrender of this Certificate in the manner and at the place provided above, accompanied by payment for the number of shares of Common Stock being purchased. If the Warrants should be exercised in part only, the Company shall, upon surrender of this Warrant Certificate for cancellation, execute and deliver a new Warrant Certificate evidencing the right of the holder to purchase the balance of the shares purchasable hereunder. Upon receipt by the Company of this Warrant Certificate at the office of the Company, in proper form for exercise, accompanied by the full Exercise Price in cash or certified or bank cashier's check, the holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Common Stock shall not then be actually delivered to the holder. As soon as practicable after the exercise of these Warrants in whole or in part and, in any event, within ten days thereafter, the Company at its expense will cause to be issued in the name of and delivered to the holder a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (and any new Warrants) to which the holder shall be entitled upon such exercise. Each certificate for shares of Common Stock so delivered shall be in such denominations as may be requested by the holder and shall be registered in the name of the holder or such other name as the holder may designate. A-6 7 SECTION 3. PAYMENT OF TAXES The issuance of certificates for shares of Common Stock upon exercise of the Warrants shall be made without charge to the holders of the Warrants exercised for any issuance tax in respect thereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Warrant or Warrants exercised. SECTION 4. MUTILATED OR MISSING WARRANT CERTIFICATES Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant Certificate, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification and upon surrender and cancellation of this Warrant Certificate, if mutilated, the Company will execute and deliver a new Warrant Certificate of like tenor and date. A-7 8 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, as of the day and year first above written. DOUBLETREE CORPORATION By: ------------------------------- Name: Title: A-8 9 FORM OF SUBSCRIPTION DATE: _____________ 19___ TO: DOUBLETREE CORPORATION The Undersigned, the holder of the within Warrants, hereby irrevocably elects to exercise all or part of the purchase right represented by such Warrants for, and to purchase thereunder, _______________ shares of Common Stock of DOUBLETREE CORPORATION (the "Company") and herewith makes payment of $___________ to the Company, evidenced by delivery of_________________, and requests that the certificate of such shares be issued in the name of, and be delivered to ______ _________, whose address is ______________________________. ---------------------------- (Name of Holder) ---------------------------- (Authorized Signatory) ---------------------------- (Address) EX-10.6 6 FORM OF CREDIT AGREEMENT 1 EXHIBIT 10.6 ================================================================================ CREDIT AGREEMENT among DOUBLETREE CORPORATION, VARIOUS BANKS, MORGAN STANLEY SENIOR FUNDING, INC., as SYNDICATION AGENT and as ARRANGER, and THE BANK OF NOVA SCOTIA, as ADMINISTRATIVE AGENT __________________________________ Dated as of November __, 1996 __________________________________ ================================================================================ 2 TABLE OF CONTENTS
Page ---- SECTION 1. Amount and Terms of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.01 The Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Minimum Amount of Each Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.03 Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.04 Disbursement of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.05 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.06 Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.07 Pro Rata Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.08 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.09 Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.10 Increased Costs, Illegality, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.11 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.12 Change of Lending Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.13 Replacement of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 2. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.01 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.02 Maximum Letter of Credit Outstandings; Final Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.03 Letter of Credit Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.04 Letter of Credit Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.05 Agreement to Repay Letter of Credit Drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.06 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 3. Commitment Commission; Fees; Reductions of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.01 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.02 Voluntary Termination of Unutilized Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.03 Mandatory Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 4. Prepayments; Payments; Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.01 Voluntary Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.02 Mandatory Repayments and Commitment Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 4.03 Method and Place of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4.04 Net Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 5. Conditions Precedent to Initial Credit Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.01 Execution of Agreement; Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
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Page ---- 5.02 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.03 Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.04 Corporate Documents; Proceedings; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 5.05 Employee Benefit Plans; Shareholders' Agreements; Management Agreements; Collective Bargaining Agreements; Existing Indebtedness Agreements; Tax Sharing Agreements; Joint Venture Agreements; Property Management Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 5.06 Equity Financing; Equity Rollover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 5.07 Consummation of Acquisition; Cash on Hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.08 Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.09 Adverse Change, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.11 Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.12 Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 5.13 Subsidiaries Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.14 Mortgages; Title Insurance; Survey; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 5.15 Projections; Pro Forma Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.16 Solvency Opinion; Insurance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.17 Fees, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6. Conditions Precedent to All Credit Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 6.01 No Default; Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 6.02 Notice of Borrowing; Letter of Credit Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 7. Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 7.01 Corporate and Other Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 7.02 Corporate and Other Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 7.03 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 7.04 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc. . . . . . . . . . . . 51 7.06 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 7.07 True and Complete Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 7.08 Use of Proceeds; Margin Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 7.09 Tax Returns and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 7.10 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 7.11 The Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 7.12 Representations and Warranties in Acquisition Documents . . . . . . . . . . . . . . . . . . . . . . . . . . 57 7.13 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 7.14 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 7.15 Subsidiaries and Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
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Page ---- 7.16 Compliance with Statutes, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 7.17 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 7.18 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 7.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 7.20 Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 7.21 Patents, Licenses, Franchises and Formulas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 7.22 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 7.23 Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 8. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.01 Information Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8.02 Books, Records and Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 8.03 Maintenance of Property; Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 8.04 Corporate Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 8.05 Compliance with Statutes, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 8.06 Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 8.07 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 8.08 End of Fiscal Years; Fiscal Quarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 8.09 Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 8.10 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 8.11 Interest Rate Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 8.12 Additional Security; Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 8.13 Foreign Subsidiaries Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 8.14 Joint Venture Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 8.15 Maintenance of Corporate Separateness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 9. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 9.01 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 9.02 Consolidation, Merger, Purchase or Sale of Assets, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 75 9.03 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 9.04 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 9.05 Advances, Investments and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 9.06 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 9.07 Capital Expenditures; Permitted Hotel Acquisitions; Permitted Hotel Investments . . . . . . . . . . . . . . 84 9.08 Consolidated Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 9.09 Consolidated Interest Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 9.10 Maximum Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 9.11 Minimum Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
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Page ---- 9.12 Limitation on Voluntary Payments and Modifications of Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements; etc. . . . . . . . . . . . . . . . . . . . . . . 89 9.13 Limitation on Certain Restrictions on Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 9.14 Limitation on Issuance of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 9.15 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 9.16 Limitation on Creation of Subsidiaries and Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . 91 SECTION 10. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 10.01 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 10.02 Representations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 10.03 Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 10.04 Default Under Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 10.05 Bankruptcy, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 10.06 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 10.07 Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 10.08 Subsidiaries Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 10.09 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 10.10 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 10.11 Certain Master Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 SECTION 11. Definitions and Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 11.01 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 SECTION 12. The Administrative Agent and the Syndication Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 12.01 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 12.02 Nature of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 12.03 Lack of Reliance on the Administrative Agent and the Syndication Agent . . . . . . . . . . . . . . . . . . 133 12.04 Certain Rights of the Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 12.05 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 12.06 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 12.07 The Administrative Agent and the Syndication Agent in their Individual Capacity . . . . . . . . . . . . . . 134 12.08 Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 12.09 Resignation by the Administrative Agent and the Syndication Agent . . . . . . . . . . . . . . . . . . . . . 135 SECTION 13. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 13.01 Payment of Expenses, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 13.02 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
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Page ---- 13.03 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 13.04 Benefit of Agreement; Assignments; Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 13.05 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 13.06 Payments Pro Rata . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 13.07 Calculations; Computations; Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 13.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . 141 13.09 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 13.10 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 13.11 Headings Descriptive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 13.12 Amendment or Waiver; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 13.13 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 13.14 Domicile of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 13.15 Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 13.16 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 13.17 Limitation on Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
SCHEDULE I Commitments SCHEDULE II Bank Addresses SCHEDULE III Real Property SCHEDULE IV Indebtedness to be Refinanced SCHEDULE V Capitalization SCHEDULE VI Subsidiaries and Joint Ventures SCHEDULE VII Existing Indebtedness SCHEDULE VIII Insurance SCHEDULE IX Existing Liens SCHEDULE X Existing Investments SCHEDULE XI Additional Capital Expenditures SCHEDULE XII Base Case EBITDA SCHEDULE XIII Designated Hotel Properties SCHEDULE XIV ERISA SCHEDULE XV Subsidiary Restrictions SCHEDULE XVI Existing Doubletree Investments SCHEDULE XVII Existing Red Lion Investments EXHIBIT A Notice of Borrowing EXHIBIT B-1 Tranche A Term Note EXHIBIT B-2 Tranche B Term Note (v) 7 EXHIBIT B-3 Revolving Note EXHIBIT B-4 Swingline Note EXHIBIT C Letter of Credit Request EXHIBIT D Section 4.04(b)(ii) Certificate EXHIBIT E-1 Opinion of Dewey Ballantine, counsel to the Credit Parties EXHIBIT E-2 Opinion of Wolf, Block, Schorr and Solis-Cohen, counsel to the Credit Parties EXHIBIT F Officers' Certificate EXHIBIT G Pledge Agreement EXHIBIT H Security Agreement EXHIBIT I Subsidiaries Guaranty EXHIBIT J Solvency Certificate EXHIBIT K Assignment and Assumption Agreement EXHIBIT L Intercompany Note (vi) 8 CREDIT AGREEMENT, dated as of November __, 1996, among DOUBLETREE CORPORATION, a Delaware corporation (the "Borrower"), the Banks party hereto from time to time, MORGAN STANLEY SENIOR FUNDING, INC., as Syndication Agent and as Arranger, and THE BANK OF NOVA SCOTIA, as Administrative Agent (all capitalized terms used herein and defined in Section 11 are used herein as therein defined). W I T N E S S E T H : WHEREAS, subject to and upon the terms and conditions set forth herein, the Banks are willing to make available to the Borrower the respective credit facilities provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. 1.01 The Commitments. (a) Subject to and upon the terms and conditions set forth herein, each Bank with a Tranche A Term Loan Commitment severally agrees to make a term loan or term loans (each a "Tranche A Term Loan" and, collectively, the "Tranche A Term Loans") to the Borrower, which Tranche A Term Loans (i) only may be incurred by the Borrower (x) on the Initial Borrowing Date and (y) on the Second Term Loan Borrowing Date, (ii) shall, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that (A) except as otherwise specifically provided in Section 1.10(b), all Tranche A Term Loans comprising the same Borrowing shall at all times be of the same Type and (B) no more than three Borrowings of Tranche A Term Loans maintained as Eurodollar Loans may be incurred prior to the earlier of (1) the 90th day after the Initial Borrowing Date or, if an Interest Period relating to any then outstanding Tranche A Term Loans beginning before such 90th day extends thereafter, the last day of such Interest Period, and (2) that date (the "Syndication Date") upon which the Agents shall have determined in their sole discretion (and shall have notified the Borrower) that the primary syndication (and resultant addition of institutions as Banks pursuant to Section 13.04(b)) has been completed (each of which Borrowings of Eurodollar Loans may only have an Interest Period of one month, and the first of which Borrowings may only be made on a single date on or after the Initial Borrowing Date and on or prior to the sixth Business Day following the Initial Borrowing Date, and the second and third of which Borrowings may only be made on the last day of -1- 9 the immediately preceding Interest Period) and (iii) shall be made by each such Bank on any Term Loan Borrowing Date in that aggregate principal amount which equals the Tranche A Term Loan Commitment of such Bank on such Term Loan Borrowing Date (before giving effect to any reductions thereto on such date pursuant to Section 3.03(b)(i) or (ii) but after giving effect to any reductions thereto on or prior to such date pursuant to Section 3.03(b)(iii)); provided, however, that until all Indebtedness to be Refinanced has been repaid in full, the Borrower will not be permitted to incur Tranche A Term Loans if, after giving effect to the incurrence thereof and the application of the proceeds therefrom, the remaining Total Tranche A Term Loan Commitment would be less than the aggregate outstanding principal amount of the remaining Indebtedness to be Refinanced. Once repaid, Tranche A Term Loans incurred hereunder may not be reborrowed. (b) Subject to and upon the terms and conditions set forth herein, each Bank with a Tranche B Term Loan Commitment severally agrees to make, on the Initial Borrowing Date, a term loan or term loans (each a "Tranche B Term Loan" and, collectively, the "Tranche B Term Loans") to the Borrower, which Tranche B Term Loans (i) shall, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that (A) except as otherwise specifically provided in Section 1.10(b), all Tranche B Term Loans comprising the same Borrowing shall at all times be of the same Type and (B) no more than three Borrowings of Tranche B Term Loans maintained as Eurodollar Loans may be incurred prior to the earlier of (1) the 90th day after the Initial Borrowing Date or, if an Interest Period relating to any then outstanding Tranche B Term Loans beginning before such 90th day extends thereafter, the last day of such Interest Period, and (2) the Syndication Date (each of which Borrowings of Eurodollar Loans may only have an Interest Period of one month, and the first of which Borrowings may only be made on the same day as the first day of the first Interest Period of the Tranche A Term Loans that are maintained as Eurodollar Loans, and the second and third of which Borrowings may only be made on the last day of the immediately preceding Interest Period) and (ii) shall be made by each such Bank in that aggregate principal amount which equals the Tranche B Term Loan Commitment of such Bank on the Initial Borrowing Date (before giving effect to the termination thereof on such date pursuant to Section 3.03(c)(i) but after giving effect to any reductions thereto on or prior to such date pursuant to Section 3.03(c)(ii)). Once repaid, Tranche B Term Loans incurred hereunder may not be reborrowed. (c) Subject to and upon the terms and conditions set forth herein, each Bank with a Revolving Loan Commitment severally agrees, at any time and from time to time on and after the Initial Borrowing Date and prior to the Revolving Loan Maturity Date, to make a revolving loan or revolving loans (each a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower, which Revolving Loans (i) shall, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that (A) except as otherwise specifically provided in Section 1.10(b), -2- 10 all Revolving Loans comprising the same Borrowing shall at all times be of the same Type and (B) no more than three Borrowings of Revolving Loans maintained as Eurodollar Loans may be incurred prior to the earlier of (1) the 90th day after the Initial Borrowing Date or, if an Interest Period relating to any then outstanding Revolving Loans beginning before such 90th day extends thereafter, the last day of such Interest Period, and (2) the Syndication Date (each of which Borrowings of Eurodollar Loans may only have an Interest Period of one month, and the first of which Borrowings may only be made on the same day as the first day of the first Interest Period of the Tranche A Term Loans that are maintained as Eurodollar Loans, and the second and third of which Borrowings may only be made on the last day of the immediately preceding Interest Period), (ii) may be repaid and reborrowed in accordance with the provisions hereof, (iii) shall not exceed for any such Bank at any time outstanding that aggregate principal amount which, when added to the product of (x) such Bank's Adjusted RL Percentage and (y) the sum of (I) the aggregate amount of all Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) at such time and (II) the aggregate principal amount of all Swingline Loans (exclusive of Swingline Loans which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) then outstanding, equals the Revolving Loan Commitment of such Bank at such time and (iv) shall not exceed for all Banks at any time outstanding that aggregate principal amount which, when added to (I) the amount of all Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) at such time and (II) the aggregate principal amount of all Swingline Loans (exclusive of Swingline Loans which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) then outstanding, equals the Total Revolving Loan Commitment at such time. (d) Subject to and upon the terms and conditions set forth herein, the Swingline Bank agrees to make, at any time and from time to time on and after the Initial Borrowing Date and prior to the Swingline Expiry Date, a revolving loan or revolving loans (each a "Swingline Loan" and, collectively, the "Swingline Loans") to the Borrower, which Swingline Loans (i) shall be made and maintained as Base Rate Loans, (ii) may be repaid and reborrowed in accordance with the provisions hereof, (iii) shall not exceed in aggregate principal amount at any time outstanding, when combined with the aggregate principal amount of all Revolving Loans made by Non-Defaulting Banks then outstanding and the Letter of Credit Outstandings at such time, an amount equal to the Adjusted Total Revolving Loan Commitment at such time (after giving effect to any reductions to the Adjusted Total Revolving Loan Commitment on such date), and (iv) shall not exceed in aggregate principal amount at any time outstanding the Maximum Swingline Amount. Notwithstanding anything to the contrary contained in this Section 1.01(d), the Swingline Bank shall not make any Swingline Loan after it has received written notice from the Borrower or the Required Banks stating that a Default or an Event of Default exists and is -3- 11 continuing until such time as the Swingline Bank shall have received written notice (i) of rescission of all such notices from the party or parties originally delivering such notice, (ii) of the waiver of such Default or Event of Default by the Required Banks or (iii) that the Agents in good faith believe that such Default or Event of Default has ceased to exist. (e) On any Business Day, the Swingline Bank may, in its sole discretion, give notice to the Banks that its outstanding Swingline Loans shall be funded with one or more Borrowings of Revolving Loans (provided that such notice shall be deemed to have been automatically given upon the occurrence of a Default or an Event of Default under Section 10.05 or upon the exercise of any of the remedies provided in the last paragraph of Section 10), in which case one or more Borrowings of Revolving Loans constituting Base Rate Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the immediately succeeding Business Day by all Banks with a Revolving Loan Commitment (without giving effect to any reductions thereto pursuant to the last paragraph of Section 10) pro rata based on each such Bank's Adjusted RL Percentage (determined before giving effect to any termination of the Revolving Loan Commitments pursuant to the last paragraph of Section 10) and the proceeds thereof shall be applied directly by the Swingline Bank to repay the Swingline Bank for such outstanding Swingline Loans. Each such Bank hereby irrevocably agrees to make Revolving Loans upon one Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by the Swingline Bank notwithstanding (i) the amount of the Mandatory Borrowing may not comply with the Minimum Borrowing Amount otherwise required hereunder, (ii) whether any conditions specified in Section 6 are then satisfied, (iii) whether a Default or an Event of Default then exists, (iv) the date of such Mandatory Borrowing and (v) the amount of the Total Revolving Loan Commitment or the Adjusted Total Revolving Loan Commitment at such time. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above (including, without limitation, as a result of the commencement of a proceeding under the Bankruptcy Code with respect to the Borrower), then each such Bank hereby agrees that it shall forthwith purchase (as of the date the Mandatory Borrowing would otherwise have occurred, but adjusted for any payments received from the Borrower on or after such date and prior to such purchase) from the Swingline Bank such participations in the outstanding Swingline Loans as shall be necessary to cause such Banks to share in such Swingline Loans ratably based upon their respective Adjusted RL Percentages (determined before giving effect to any termination of the Revolving Loan Commitments pursuant to the last paragraph of Section 10), provided that (x) all interest payable on the Swingline Loans shall be for the account of the Swingline Bank until the date as of which the respective participation is required to be purchased and, to the extent attributable to the purchased participation, shall be payable to the participant from and after such date and (y) at the time any purchase of participations pursuant to this sentence is actually made, the purchasing Bank shall be required to pay the Swingline Bank interest on the principal amount of participation purchased for each day from and including the day upon which the -4- 12 Mandatory Borrowing would otherwise have occurred to but excluding the date of payment for such participation, at the overnight Federal Funds Rate for the first three days and at the rate otherwise applicable to Revolving Loans maintained as Base Rate Loans hereunder for each day thereafter. 1.02 Minimum Amount of Each Borrowing. The aggregate principal amount of each Borrowing of Loans under a respective Tranche shall not be less than the Minimum Borrowing Amount for such Tranche. More than one Borrowing may occur on the same date, but at no time shall there be outstanding more than sixteen Borrowings of Eurodollar Loans. 1.03 Notice of Borrowing. (a) Whenever the Borrower desires to incur Loans hereunder (excluding Swingline Loans and Revolving Loans incurred pursuant to a Mandatory Borrowing), the Borrower shall give the Administrative Agent at its Notice Office at least one Business Day's prior notice of each Base Rate Loan and at least three Business Days' prior notice of each Eurodollar Loan to be incurred hereunder, provided that any such notice shall be deemed to have been given on a certain day only if given before 1:00 P.M. (New York time) on such day. Each such notice (each a "Notice of Borrowing"), except as otherwise expressly provided in Section 1.10, shall be irrevocable and shall be given by the Borrower in writing, or by telephone promptly confirmed in writing, in the form of Exhibit A, appropriately completed to specify the aggregate principal amount of the Loans to be incurred pursuant to such Borrowing, the date of such Borrowing (which shall be a Business Day), whether the Loans being incurred pursuant to such Borrowing shall constitute Tranche A Term Loans, Tranche B Term Loans or Revolving Loans and whether the Loans being incurred pursuant to such Borrowing are to be initially maintained as Base Rate Loans or Eurodollar Loans and, if Eurodollar Loans, the initial Interest Period to be applicable thereto. The Administrative Agent shall promptly give each Bank which is required to make Loans of the Tranche specified in the respective Notice of Borrowing, notice of such proposed Borrowing, of such Bank's proportionate share thereof and of the other matters required by the immediately preceding sentence to be specified in the Notice of Borrowing. (b)(i) Whenever the Borrower desires to incur Swingline Loans hereunder, the Borrower shall give the Swingline Bank no later than 2:00 P.M. (New York time) on the date that a Swingline Loan is to be incurred, written notice or telephonic notice promptly confirmed in writing of each Swingline Loan to be incurred hereunder. Each such notice shall be irrevocable and specify in each case (A) the date of Borrowing (which shall be a Business Day) and (B) the aggregate principal amount of the Swingline Loans to be incurred pursuant to such Borrowing. -5- 13 (ii) Mandatory Borrowings shall be made upon the notice specified in Section 1.01(e), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of the Mandatory Borrowings as set forth in Section 1.01(e). (c) Without in any way limiting the obligation of the Borrower to confirm in writing any telephonic notice of any Borrowing or prepayment of Loans, the Administrative Agent or the Swingline Bank, as the case may be, may act without liability upon the basis of telephonic notice of such Borrowing or prepayment, believed by the Administrative Agent or the Swingline Bank, as the case may be, in good faith to be from the Chief Executive Officer, the President, the Chief Financial Officer, the Treasurer, any Assistant Treasurer or the Controller of the Borrower, or from any other authorized person of the Borrower designated in writing by the Borrower to the Administrative Agent as being authorized to give such notices, prior to receipt of written confirmation. In each such case, the Borrower hereby waives the right to dispute the Administrative Agent's or the Swingline Bank's record of the terms of such telephonic notice of such Borrowing or prepayment of Loans (absent manifest error). 1.04 Disbursement of Funds. No later than 1:00 P.M. (New York time) on the date specified in each Notice of Borrowing (or (x) in the case of Swingline Loans, no later than 3:00 P.M. (New York time) on the date specified pursuant to Section 1.03(b)(i) or (y) in the case of Mandatory Borrowings, no later than 1:00 P.M. (New York time) on the date specified in Section 1.01(e)), each Bank with a Commitment of the respective Tranche will make available its pro rata portion (determined in accordance with Section 1.07) of each such Borrowing requested to be made on such date (or, in the case of Swingline Loans, the Swingline Bank will make available the full amount thereof). All such amounts will be made available in Dollars and in immediately available funds at the Payment Office of the Administrative Agent, and the Administrative Agent will make available to the Borrower at the Payment Office the aggregate of the amounts so made available by the Banks (other than in respect of Mandatory Borrowings). Unless the Administrative Agent shall have been notified by any Bank prior to the date of Borrowing that such Bank does not intend to make available to the Administrative Agent such Bank's portion of any Borrowing to be made on such date, the Administrative Agent may assume that such Bank has made such amount available to the Administrative Agent on such date of Borrowing and the Administrative Agent may (but shall not be obligated to), in reliance upon such assumption, make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Bank, the Administrative Agent shall be entitled to recover such corresponding amount on demand from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall promptly notify the Borrower and the Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover on demand from such Bank or the Borrower, as the case may be, interest on such corresponding -6- 14 amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower until the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (i) if recovered from such Bank, at the customary rate set by the Administrative Agent for the correction of errors among banks for each day during the period consisting of the first three Business Days following such date of availability and thereafter at the Base Rate as in effect from time to time and (ii) if recovered from the Borrower, the rate of interest applicable to the respective Borrowing, as determined pursuant to Section 1.08. Nothing in this Section 1.04 shall be deemed to relieve any Bank from its obligation to make Loans hereunder or to prejudice any rights which the Borrower may have against any Bank as a result of any failure by such Bank to make Loans hereunder. 1.05 Notes. (a) The Borrower's obligation to pay the principal of, and interest on, the Loans made by each Bank shall be evidenced (i) if Tranche A Term Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B- 1, with blanks appropriately completed in conformity herewith (each a "Tranche A Term Note" and, collectively, the "Tranche A Term Notes"), (ii) if Tranche B Term Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B-2, with blanks appropriately completed in conformity herewith (each a "Tranche B Term Note" and, collectively, the "Tranche B Term Notes"), (iii) if Revolving Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B-3, with blanks appropriately completed in conformity herewith (each a "Revolving Note" and, collectively, the "Revolving Notes") and (iv) if Swingline Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B-4, with blanks appropriately completed in conformity herewith (the "Swingline Note"). (b) The Tranche A Term Note issued to each Bank that has a Tranche A Term Loan Commitment or outstanding Tranche A Term Loans shall (i) be executed by the Borrower, (ii) be payable to such Bank or its registered assigns and be dated the Initial Borrowing Date (or, if issued after the Initial Borrowing Date, be dated the date of the issuance thereof), (iii) be in a stated principal amount equal to the Tranche A Term Loan Commitment of such Bank on the Initial Borrowing Date (before giving effect to the making of any Tranche A Term Loans on such date by such Bank) (or, if issued after the Initial Borrowing Date, be in a stated principal amount equal to any outstanding Tranche A Term Loan Commitment of such Bank at such time plus the outstanding principal amount of any Tranche A Term Loans of such Bank at such time) and be payable in the outstanding principal amount of Tranche A Term Loans evidenced thereby, (iv) mature on the Tranche A Term Loan Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and -7- 15 mandatory repayment as provided in Section 4.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (c) The Tranche B Term Note issued to each Bank that has a Tranche B Term Loan Commitment or outstanding Tranche B Term Loans shall (i) be executed by the Borrower, (ii) be payable to such Bank or its registered assigns and be dated the Initial Borrowing Date (or, if issued after the Initial Borrowing Date, be dated the date of the issuance thereof), (iii) be in a stated principal amount equal to the Tranche B Term Loans made by such Bank and be payable in the outstanding principal amount of Tranche B Term Loans evidenced thereby, (iv) mature on the Tranche B Term Loan Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (d) The Revolving Note issued to each Bank that has a Revolving Loan Commitment or outstanding Revolving Loans shall (i) be executed by the Borrower, (ii) be payable to such Bank or its registered assigns and be dated the Initial Borrowing Date (or, if issued after the Initial Borrowing Date, be dated the date of the issuance thereof), (iii) be in a stated principal amount equal to the Revolving Loan Commitment of such Bank (or, if issued after the termination thereof, be in a stated principal amount equal to the outstanding Revolving Loans of such Bank at such time) and be payable in the outstanding principal amount of the Revolving Loans evidenced thereby, (iv) mature on the Revolving Loan Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (e) The Swingline Note issued to the Swingline Bank shall (i) be executed by the Borrower, (ii) be payable to the Swingline Bank or its registered assigns and be dated the Initial Borrowing Date, (iii) be in a stated principal amount equal to the Maximum Swingline Amount and be payable in the outstanding principal amount of the Swingline Loans evidenced thereby from time to time, (iv) mature on the Swingline Expiry Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans evidenced thereby, (vi) be subject to voluntary prepayment as provided in Section 4.01, and mandatory repayment as provided in Section 4.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (f) Each Bank will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of any of its Notes endorse on the reverse side thereof the outstanding principal amount of Loans evi- -8- 16 denced thereby. Failure to make any such notation or any error in such notation shall not affect (i.e., will not increase or decrease) the Borrower's obligations in respect of such Loans. 1.06 Conversions. The Borrower shall have the option to convert, on any Business Day occurring after the Initial Borrowing Date, all or a portion equal to at least the Minimum Borrowing Amount of the outstanding principal amount of Loans (other than Swingline Loans, which may not be converted pursuant to this Section 1.06) made pursuant to one or more Borrowings (so long as of the same Tranche) of one or more Types of Loans into a Borrowing (of the same Tranche) of another Type of Loan, provided that, (i) except as otherwise provided in Section 1.10(b), Eurodollar Loans may be converted into Base Rate Loans only on the last day of an Interest Period applicable to the Loans being converted and no such partial conversion of Eurodollar Loans shall reduce the outstanding principal amount of such Eurodollar Loans made pursuant to a single Borrowing to less than the Minimum Borrowing Amount applicable thereto, (ii) Base Rate Loans may only be converted into Eurodollar Loans if no Default or Event of Default is in existence on the date of the conversion, (iii) unless the Agents otherwise shall have determined that the Syndication Date has occurred, prior to the 90th day after the Initial Borrowing Date, conversions of Base Rate Loans into Eurodollar Loans may only be made if the conversion is effective on the first day of the first, second or third Interest Period referred to in clause (B) of the proviso of each of Sections 1.01(a)(ii), 1.01(b)(i) and 1.01(c)(i) and so long as such conversion does not result in a greater number of Borrowings of Eurodollar Loans prior to the 90th day after the Initial Borrowing Date than are permitted under Sections 1.01(a), 1.01(b) and 1.01(c) and (iv) no conversion pursuant to this Section 1.06 shall result in a greater number of Borrowings of Eurodollar Loans than is permitted under Section 1.02. Each such conversion shall be effected by the Borrower by giving the Administrative Agent at its Notice Office prior to 1:00 P.M. (New York time) at least three Business Days' prior notice (each a "Notice of Conversion") specifying the Loans to be so converted, the Borrowing or Borrowings pursuant to which such Loans were made and, if to be converted into Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall give each Bank prompt notice of any such proposed conversion affecting any of its Loans. Upon any such conversion the proceeds thereof will be deemed to be applied directly on the day of such conversion to prepay the outstanding principal amount of the Loans being converted. 1.07 Pro Rata Borrowings. All Borrowings of Tranche A Term Loans, Tranche B Term Loans and Revolving Loans under this Agreement shall be incurred from the Banks pro rata on the basis of their Tranche A Term Loan Commitments, Tranche B Term Loan Commitments or Revolving Loan Commitments, as the case may be, provided, that all Borrowings of Revolving Loans made pursuant to a Mandatory Borrowing shall be incurred from the Banks with Revolving Loan Commitments pro rata on the basis of their Adjusted RL Percentages. It is understood that no Bank shall be responsible for any default -9- 17 by any other Bank of its obligation to make Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to make its Loans hereunder. 1.08 Interest. (a) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Base Rate Loan from the date the proceeds thereof are made available to the Borrower until the earlier of (i) the maturity thereof (whether by acceleration or otherwise) and (ii) the conversion of such Base Rate Loan into a Eurodollar Loan pursuant to Section 1.06, at a rate per annum which shall be equal to the sum of the Applicable Margin plus the Base Rate in effect from time to time. (b) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Eurodollar Loan from the date the proceeds thereof are made available to the Borrower until the earlier of (i) the maturity thereof (whether by acceleration or otherwise) and (ii) the conversion of such Eurodollar Loan into a Base Rate Loan pursuant to Section 1.06, 1.09 or 1.10, as applicable, at a rate per annum which shall, during each Interest Period applicable thereto, be equal to the sum of the Applicable Margin plus the Eurodollar Rate for such Interest Period. (c) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan and any other overdue amount payable hereunder shall, in each case, bear interest at a rate per annum equal to 2% per annum in excess of the rate otherwise applicable to Base Rate Loans of the respective Tranche of Loans from time to time with such interest to be payable on demand. (d) Accrued (and theretofore unpaid) interest shall be payable (i) in respect of each Base Rate Loan, quarterly in arrears on each Quarterly Payment Date, (ii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess of three months, on each date occurring at three month intervals after the first day of such Interest Period and (iii) in respect of each Loan, on any repayment or prepayment (on the amount repaid or prepaid), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. (e) Upon each Interest Determination Date, the Administrative Agent shall determine the Eurodollar Rate for each Interest Period applicable to Eurodollar Loans and shall promptly notify the Borrower and the Banks thereof. Each such determination shall, absent manifest error, be final and conclusive and binding on all parties hereto. 1.09 Interest Periods. At the time it gives any Notice of Borrowing or Notice of Conversion in respect of the making of, or conversion into, any Eurodollar Loan (in the case of the initial Interest Period applicable thereto) or on the third Business Day prior to the expiration of an Interest Period applicable to such Eurodollar Loan (in the case -10- 18 of any subsequent Interest Period), the Borrower shall have the right to elect, by giving the Administrative Agent notice thereof, the interest period (each an "Interest Period") applicable to such Eurodollar Loan, which Interest Period shall, at the option of the Borrower (but otherwise subject to the limitation set forth in clause (B) of the proviso in each of Sections 1.01(a)(ii), 1.01(b)(i) and 1.01(c)(i)), be a one, two, three or six-month period or, if available to all Banks with Loans of the respective Tranche at such time, a nine or twelve-month period, provided that: (i) all Eurodollar Loans comprising a Borrowing shall at all times have the same Interest Period; (ii) the initial Interest Period for any Eurodollar Loan shall commence on the date of Borrowing of such Eurodollar Loan (including the date of any conversion thereto from a Loan of a different Type) and each Interest Period occurring thereafter in respect of such Eurodollar Loan shall commence on the day on which the next preceding Interest Period applicable thereto expires; (iii) if any Interest Period for a Eurodollar Loan begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iv) if any Interest Period for a Eurodollar Loan would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided, however, that if any Interest Period for a Eurodollar Loan would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (v) no Interest Period may be selected at any time when a Default or an Event of Default is then in existence; (vi) no Interest Period in respect of any Borrowing of any Tranche of Loans shall be selected which extends beyond the respective Maturity Date for such Tranche of Loans; and (vii) no Interest Period in respect of any Borrowing of Tranche A Term Loans or Tranche B Term Loans, as the case may be, shall be selected which extends beyond any date upon which a mandatory repayment of such Tranche of Term Loans will be required to be made under Section 4.02(b) or (c), as the case may be, if the aggregate principal amount of Tranche A Term Loans or Tranche B Term Loans, as the case may be, which have Interest Periods which will expire after such -11- 19 date will be in excess of the aggregate principal amount of Tranche A Term Loans or Tranche B Term Loans, as the case may be, then outstanding less the aggregate amount of such required repayment. If upon the expiration of any Interest Period applicable to a Borrowing of Eurodollar Loans, the Borrower has failed to elect, or is not permitted to elect, a new Interest Period to be applicable to such Eurodollar Loans as provided above, the Borrower shall be deemed to have elected to convert such Eurodollar Loans into Base Rate Loans effective as of the expiration date of such current Interest Period. 1.10 Increased Costs, Illegality, etc. (a) In the event that any Bank shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto but, with respect to clause (i) below, may be made only by the Administrative Agent): (i) on any Interest Determination Date that, by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate; or (ii) at any time, that such Bank shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loan because of (x) any change since the date of this Agreement in any applicable law or governmental rule, regulation, order, guideline or request (whether or not having the force of law) or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, order, guideline or request, such as, for example, but not limited to: (A) a change in the basis of taxation of payment to any Bank of the principal of or interest on the Notes or any other amounts payable hereunder (except for changes in the rate of tax on, or determined by reference to, the net income or profits of such Bank pursuant to the laws of the jurisdiction in which it is organized or in which its principal office or applicable lending office is located or any subdivision thereof or therein) or (B) a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Eurodollar Rate and/or (y) other circumstances since the date of this Agreement affecting the New York interbank Eurodollar market; or (iii) at any time, that the making or continuance of any Eurodollar Loan has been made (x) unlawful by any law or governmental rule, regulation or order, (y) impossible by compliance by any Bank in good faith with any governmental request (whether or not having force of law) or (z) impracticable as a result of a -12- 20 contingency occurring after the date of this Agreement which materially and adversely affects the interbank Eurodollar market; then, and in any such event, such Bank (or the Administrative Agent, in the case of clause (i) above) shall promptly give notice (by telephone promptly confirmed in writing) to the Borrower and, except in the case of clause (i) above, to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Banks). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Administrative Agent notifies the Borrower and the Banks that the circumstances giving rise to such notice by the Administrative Agent no longer exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower with respect to Eurodollar Loans which have not yet been incurred (including by way of conversion) shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower shall, subject to the provisions of Section 13.17 (to the extent applicable), pay to such Bank, within 5 Business Days after such Bank's written request therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Bank in its sole discretion shall determine (but without duplication of any amounts that may be payable to such Bank under Section 1.10(c)) as shall be required to compensate such Bank for such increased costs or reductions in amounts received or receivable hereunder (a written notice as to the additional amounts owed to such Bank, showing in reasonable detail the basis for the calculation thereof, submitted to the Borrower by such Bank shall, absent manifest error, be final and conclusive and binding on all the parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.10(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan is affected by the circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and in the case of a Eurodollar Loan affected by the circumstances described in Section 1.10(a)(iii) shall) either (x) if the affected Eurodollar Loan is then being made initially or pursuant to a conversion, by giving the Administrative Agent telephonic notice (confirmed in writing) on the same date that the Borrower was notified by the affected Bank or the Administrative Agent pursuant to Section 1.10(a)(ii) or (iii) or (y) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' written notice to the Administrative Agent, require the affected Bank to convert such Eurodollar Loan into a Base Rate Loan, provided that, if more than one Bank is affected at any time, then all affected Banks must be treated the same pursuant to this Section 1.10(b). (c) If at any time after the date of this Agreement any Bank determines that the introduction of or any change (which introduction or change shall have occurred after the date of this Agreement) in any applicable law or governmental rule, regulation, order, guideline, directive or request (whether or not having the force of law) concerning capital -13- 21 adequacy, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency, will have the effect of increasing the amount of capital required or expected to be maintained by such Bank or any corporation controlling such Bank based on the existence of such Bank's Commitments hereunder or its obligations hereunder, then the Borrower shall, subject to the provisions of Section 13.17 (to the extent applicable), pay to such Bank, within 5 Business Days after its written demand therefor, such additional amounts as shall be required to compensate such Bank or such other corporation for the increased cost to such Bank or such other corporation or the reduction in the rate of return to such Bank or such other corporation as a result of such increase of capital (but without duplication of any amounts that may be payable to such Bank under Section 1.10(a)). In determining such additional amounts, each Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable, provided that such Bank's determination of compensation owing under this Section 1.10(c) shall, absent manifest error, be final and conclusive and binding on all the parties hereto. Each Bank, upon determining that any additional amounts will be payable pursuant to this Section 1.10(c), will give prompt written notice thereof to the Borrower, which notice shall show in reasonable detail the basis for calculation of such additional amounts. 1.11 Compensation. The Borrower shall compensate each Bank, within 5 Business Days after its written request (which request shall set forth in reasonable detail the basis for requesting such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Bank to fund its Eurodollar Loans but excluding loss of anticipated profits) which such Bank may sustain: (i) if for any reason (other than a default by such Bank or the Administrative Agent) a Borrowing of, or conversion from or into, Eurodollar Loans does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a)); (ii) if any repayment (including any repayment made pursuant to Section 4.01, 4.02 or as a result of an acceleration of the Loans pursuant to Section 10) or conversion of any of its Eurodollar Loans occurs on a date which is not the last day of an Interest Period with respect thereto; (iii) if any prepayment of any of its Eurodollar Loans is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Loans when required by the terms of this Agreement or any Note held by such Bank or (y) any election made pursuant to Section 1.10(b). 1.12 Change of Lending Office. Each Bank agrees that on the occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c), Section 2.06 or Section 4.04 with respect to such Bank, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Bank) to designate another lending office for any Loans or Letters of Credit affected by such event, provided that such designation is made on such terms that such Bank and its lending office suffer no -14- 22 economic, legal or regulatory disadvantage which such Bank determines, in its sole discretion, to be adverse in any material respect, with the object of avoiding the consequence of the event giving rise to the operation of such Section. Nothing in this Section 1.12 shall affect or postpone any of the obligations of the Borrower or the right of any Bank provided in Sections 1.10, 2.06 and 4.04. 1.13 Replacement of Banks. (x) If any Bank becomes a Defaulting Bank or otherwise defaults in its obligations to make Loans or fund Unpaid Drawings, (y) upon the occurrence of an event giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c), Section 2.06 or Section 4.04 with respect to any Bank which results in such Bank charging to the Borrower increased costs in excess of those being generally charged by the other Banks or (z) in the case of a refusal by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as (and to the extent) provided in Section 13.12(b), the Borrower shall have the right, if no Default or Event of Default then exists (or, in the case of preceding clause (z), no Default or Event of Default will exist immediately after giving effect to such replacement), to either (1) replace such Bank (the "Replaced Bank") with one or more other Eligible Transferees, none of whom shall constitute a Defaulting Bank at the time of such replacement (collectively, the "Replacement Bank") and each of whom shall be required to be reasonably acceptable to the Administrative Agent or (2) at the option of the Borrower, replace only (a) the Revolving Loan Commitment (and outstandings pursuant thereto) of the Replaced Bank with an identical Revolving Loan Commitment provided by the Replacement Bank or (b) in the case of a replacement as provided in Section 13.12(b) where the consent of the respective Bank is required with respect to less than all Tranches of its Loans or Commitments, the Commitments and/or outstanding Term Loans of such Bank in respect of each Tranche where the consent of such Bank would otherwise be individually required, with identical Commitments and/or Term Loans of the respective Tranche provided by the Replacement Bank, provided that (i) at the time of any replacement pursuant to this Section 1.13, the Replacement Bank shall enter into one or more Assignment and Assumption Agreements pursuant to Section 13.04(b) (and with all fees payable pursuant to said Section 13.04(b) to be paid by the Replacement Bank) pursuant to which the Replacement Bank shall acquire all of the Commitments and outstanding Loans (or, in the case of the replacement of only (a) the Revolving Loan Commitment, the Revolving Loan Commitment and outstanding Revolving Loans and participations in outstanding Letters of Credit and/or (b) the outstanding Term Loans of the respective Tranche or Tranches) of, and in each case participations in Letters of Credit by, the Replaced Bank and, in connection therewith, shall pay to (x) the Replaced Bank in respect thereof an amount equal to the sum of (I) an amount equal to the principal of, and all accrued interest on, all outstanding Loans (or of the Loans of the respective Tranche or Tranches being replaced) of the Replaced Bank, (II) an amount equal to all Unpaid Drawings that have been funded by (and not reimbursed to) such Replaced Bank, together with all then unpaid interest with respect thereto at such time and (III) an amount equal to all accrued, but thereto- -15- 23 fore unpaid, Fees owing to the Replaced Bank (but only with respect to the relevant Tranche, in the case of the replacement of less than all Tranches of Loans then held by the respective Replaced Bank) pursuant to Section 3.01, (y) except in the case of the replacement of only the outstanding Term Loans of one or both Tranches of a Replaced Bank, each Issuing Bank an amount equal to such Replaced Bank's Adjusted RL Percentage (for this purpose, determined as if the adjustment described in clause (y) of the immediately succeeding sentence had been made with respect to such Replaced Bank) of any Unpaid Drawing (which at such time remains an Unpaid Drawing) to the extent such amount was not theretofore funded by such Replaced Bank to such Issuing Bank and (z) except in the case of the replacement of only the outstanding Term Loans of one or both Tranches of a Replaced Bank, the Swingline Bank an amount equal to such Replaced Bank's Adjusted RL Percentage of any Mandatory Borrowing to the extent such amount was not theretofore funded by such Replaced Bank, and (ii) all obligations of the Borrower due and owing to the Replaced Bank at such time (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Bank concurrently with such replacement. Upon the execution of the respective Assignment and Assumption Agreement, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Bank, delivery to the Replacement Bank of the appropriate Note or Notes executed by the Borrower, (x) the Replacement Bank shall become a Bank hereunder and, unless the respective Replaced Bank continues to have outstanding Term Loans or a Commitment hereunder, the Replaced Bank shall cease to constitute a Bank hereunder, except with respect to indemnification provisions under this Agreement (including, without limitation, Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01), which shall survive as to such Replaced Bank and (y) except in the case of the replacement of only outstanding Term Loans of one or both Tranches of a Replaced Bank, the Adjusted RL Percentages of the Banks shall be automatically adjusted at such time to give effect to such replacement (and to give effect to the replacement of a Defaulting Bank with one or more Non-Defaulting Banks). It is understood and agreed that replacements pursuant to this Section 1.13 shall be effected by means of assignments which otherwise meet the applicable requirements of Section 13.04(b). SECTION 2. Letters of Credit. 2.01 Letters of Credit. (a) Subject to and upon the terms and conditions set forth herein, the Borrower may request that any Issuing Bank issue, at any time and from time to time on and after the Initial Borrowing Date and prior to the 30th day prior to the Revolving Loan Maturity Date, (x) for the account of the Borrower and for the benefit of any holder (or any trustee, agent or other similar representative for any such holders) of L/C Supportable Obligations of the Borrower or any of its Subsidiaries or Joint Ventures, an irrevocable standby letter of credit, in a form customarily used by such Issuing Bank or in such other form as has been approved by such Issuing Bank (each such standby letter of credit, a "Standby Letter of Credit") in support of such L/C Supportable -16- 24 Obligations and (y) for the account of the Borrower and for the benefit of sellers of goods and materials used in the ordinary course of business of the Borrower or any of its Subsidiaries or Joint Ventures an irrevocable sight commercial letter of credit in a form customarily used by such Issuing Bank or in such other form as has been approved by such Issuing Bank (each such commercial letter of credit, a "Trade Letter of Credit", and each such Trade Letter of Credit and each Standby Letter of Credit, a "Letter of Credit") in support of commercial transactions of the Borrower and its Subsidiaries and Joint Ventures. All Letters of Credit shall be denominated in Dollars. (b) Subject to and upon the terms and conditions set forth herein, each Issuing Bank hereby agrees that it will, at any time and from time to time on and after the Initial Borrowing Date and prior to the 30th day prior to the Revolving Loan Maturity Date, following its receipt of the respective Letter of Credit Request, issue for the account of the Borrower, one or more Letters of Credit (x) in the case of Standby Letters of Credit, in support of such L/C Supportable Obligations of the Borrower or any of its Subsidiaries or Joint Ventures as are permitted to remain outstanding without giving rise to a Default or an Event of Default and (y) in the case of Trade Letters of Credit, in support of sellers of goods or materials used in the ordinary course of business of the Borrower or any of its Subsidiaries or Joint Ventures as referenced in Section 2.01(a), provided that the respective Issuing Bank shall be under no obligation to issue any Letter of Credit of the types described above if at the time of such issuance: (i) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain such Issuing Bank from issuing such Letter of Credit or any requirement of law applicable to such Issuing Bank or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over such Issuing Bank shall prohibit, or request that such Issuing Bank refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Issuing Bank with respect to such Letter of Credit any restriction or reserve or capital requirement (for which such Issuing Bank is not otherwise compensated) not in effect on the date hereof, or any unreimbursed loss, cost or expense which was not applicable, in effect or known to such Issuing Bank as of the date hereof and which such Issuing Bank reasonably and in good faith deems material to it; or (ii) such Issuing Bank shall have received notice from the Required Banks prior to the issuance of such Letter of Credit of the type described in the penultimate sentence of Section 2.03(b). 2.02 Maximum Letter of Credit Outstandings; Final Maturities. Notwithstanding anything to the contrary contained in this Agreement, (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (ex- -17- 25 clusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) at such time would exceed either (x) $20,000,000 or (y) when added to the aggregate principal amount of all Revolving Loans made by Non-Defaulting Banks then outstanding and the aggregate principal amount of all Swingline Loans then outstanding, an amount equal to the Adjusted Total Revolving Loan Commitment at such time and (ii) each Letter of Credit shall by its terms terminate on or before (A) in the case of Standby Letters of Credit, the earlier of (x) the date which occurs 12 months after the date of the issuance thereof (although any such Standby Letter of Credit may be extendable for successive periods of up to 12 months, but not beyond the third Business Day prior to the Revolving Loan Maturity Date, on terms acceptable to the Issuing Bank thereof) and (y) the third Business Day prior to the Revolving Loan Maturity Date and (B) in the case of Trade Letters of Credit, the earlier of (x) the date which occurs 360 days after the date of issuance thereof and (y) 30 days prior to the Revolving Loan Maturity Date. 2.03 Letter of Credit Requests. (a) Whenever the Borrower desires that a Letter of Credit be issued for its account, the Borrower shall give the Administrative Agent and the respective Issuing Bank at least five Business Days' (or such shorter period as is acceptable to the respective Issuing Bank) written notice thereof. Each notice shall be in the form of Exhibit C (each a "Letter of Credit Request"). The Administrative Agent shall promptly transmit copies of each Letter of Credit Request to each Bank with a Revolving Loan Commitment. (b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Borrower that such Letter of Credit may be issued in accordance with, and will not violate the requirements of, Section 2.02. Unless the respective Issuing Bank has received notice from the Required Banks before it issues a Letter of Credit that one or more of the conditions specified in Section 5 are not satisfied on the Initial Borrowing Date or Section 6 are not then satisfied, or that the issuance of such Letter of Credit would violate Section 2.02, then, subject to the terms and conditions of this Agreement, such Issuing Bank shall issue the requested Letter of Credit for the account of the Borrower in accordance with such Issuing Bank's usual and customary practices. Upon the issuance of or amendment or modification to a Letter of Credit, the respective Issuing Bank shall promptly notify the Borrower and the Administrative Agent of such issuance, amendment or modification and such notification shall be accompanied by a copy of the issued Letter of Credit or amendment or modification. 2.04 Letter of Credit Participations. (a) Immediately upon the issuance by the respective Issuing Bank of any Letter of Credit, such Issuing Bank shall be deemed to have sold and transferred to each Bank with a Revolving Loan Commitment, other than such Issuing Bank (each such Bank, in its capacity under this Section 2.04, a "Participant"), and each such Participant shall be deemed irrevocably and unconditionally to have -18- 26 purchased and received from such Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's Adjusted RL Percentage in such Letter of Credit, each drawing or payment made thereunder and the obligations of the Borrower under this Agreement with respect thereto, and any security therefor or guaranty pertaining thereto. Upon any change in the Revolving Loan Commitments or Adjusted RL Percentages of the Banks pursuant to Section 1.13 or 13.04, it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic adjustment to the participations pursuant to this Section 2.04 to reflect the new Adjusted RL Percentages of the assignor and assignee Bank, as the case may be. (b) In determining whether to pay under any Letter of Credit, the respective Issuing Bank shall have no obligation relative to the other Banks other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Issuing Bank under or in connection with any Letter of Credit if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Issuing Bank any resulting liability to the Borrower, any other Credit Party, any Bank or any other Person. (c) In the event that any Issuing Bank makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to such Issuing Bank pursuant to Section 2.05(a), such Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Participant of such failure, and each Participant shall promptly and unconditionally pay to such Issuing Bank the amount of such Participant's Adjusted RL Percentage of such unreimbursed payment in Dollars and in same day funds. If the Administrative Agent so notifies, prior to 11:00 A.M. (New York time) on any Business Day, any Participant required to fund a payment under a Letter of Credit, such Participant shall make available to such Issuing Bank in Dollars such Participant's Adjusted RL Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Participant shall not have so made its Adjusted RL Percentage of the amount of such payment available to such Issuing Bank, such Participant agrees to pay to such Issuing Bank, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to such Issuing Bank at the overnight Federal Funds Rate for the first three days and at the interest rate applicable to Revolving Loans maintained as Base Rate Loans for each day thereafter. The failure of any Participant to make available to such Issuing Bank its Adjusted RL Percentage of any payment under any Letter of Credit shall not relieve any other Participant of its obligation hereunder to make available to such Issuing Bank its Adjusted RL Percentage of any Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to such Issuing Bank such other Participant's Adjusted RL Percentage of any such payment. -19- 27 (d) Whenever any Issuing Bank receives a payment of a reimbursement obligation as to which it has received any payments from the Participants pursuant to clause (c) above, such Issuing Bank shall pay to each Participant which has paid its Adjusted RL Percentage thereof, in Dollars and in same day funds, an amount equal to such Participant's share (based upon the proportionate aggregate amount originally funded by such Participant to the aggregate amount funded by all Participants) of the principal amount of such reimbursement obligation and interest thereon accruing after the purchase of the respective participations. (e) Upon the request of any Participant, each Issuing Bank shall furnish to such Participant copies of any Letter of Credit issued by it and such other documentation as may reasonably be requested by such Participant. (f) The obligations of the Participants to make payments to each Issuing Bank with respect to Letters of Credit issued by it shall be irrevocable and not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, setoff, defense or other right which the Borrower or any of its Subsidiaries or Joint Ventures may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, any Participant, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower or any Subsidiary or Joint Venture of the Borrower and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; or (v) the occurrence of any Default or Event of Default. -20- 28 2.05 Agreement to Repay Letter of Credit Drawings. (a) The Borrower hereby agrees to reimburse the respective Issuing Bank, by making payment to the Administrative Agent in immediately available funds at the Payment Office, for any payment or disbursement made by such Issuing Bank under any Letter of Credit issued by it (each such amount, so paid until reimbursed, an "Unpaid Drawing"), immediately after, and in any event on the date of, such payment or disbursement, with interest on the amount so paid or disbursed by such Issuing Bank, to the extent not reimbursed prior to 1:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but excluding the date such Issuing Bank was reimbursed by the Borrower therefor at a rate per annum which shall be the Base Rate in effect from time to time plus the Applicable Margin for Revolving Loans maintained as Base Rate Loans; provided, however, to the extent such amounts are not reimbursed prior to 1:00 P.M. (New York time) on the third Business Day following the receipt by the Borrower of notice of such payment or disbursement or following the occurrence of a Default or an Event of Default under Section 10.05, interest shall thereafter accrue on the amounts so paid or disbursed by such Issuing Bank (and until reimbursed by the Borrower) at a rate per annum which shall be the Base Rate in effect from time to time plus the Applicable Margin for Revolving Loans maintained as Base Rate Loans plus 2%, in each such case, with interest to be payable on demand. The respective Issuing Bank shall give the Borrower prompt written notice of each Drawing under any Letter of Credit, provided that the failure to give any such notice shall in no way affect, impair or diminish the Borrower's obligations hereunder. (b) The obligations of the Borrower under this Section 2.05 to reimburse the respective Issuing Bank with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any Bank (including in its capacity as issuer of the Letter of Credit or as Participant), including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit (each a "Drawing") to conform to the terms of the Letter of Credit or any nonapplication or misapplication by the beneficiary of the proceeds of such Drawing; provided, however, that the Borrower shall not be obligated to reimburse any Issuing Bank for any wrongful payment made by such Issuing Bank under a Letter of Credit as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Issuing Bank. 2.06 Increased Costs. If at any time after the date of this Agreement, the introduction of or any change in any applicable law, rule, regulation, order, guideline or request or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Issuing Bank or any Participant with any request or directive by any such authority (whether or not having the force of law), shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against letters of credit issued by any -21- 29 Issuing Bank or participated in by any Participant, or (ii) impose on any Issuing Bank or any Participant any other conditions relating, directly or indirectly, to this Agreement; and the result of any of the foregoing is to increase the cost to any Issuing Bank or any Participant of issuing, maintaining or participating in any Letter of Credit, or reduce the amount of any sum received or receivable by any Issuing Bank or any Participant hereunder or reduce the rate of return on its capital with respect to Letters of Credit (except for changes in the rate of tax on, or determined by reference to, the net income or profits of such Issuing Bank or such Participant pursuant to the laws of the jurisdiction in which it is organized or in which its principal office or applicable lending office is located or any subdivision thereof or therein), then, within 5 Business Days of the delivery of the certificate referred to below to the Borrower by such Issuing Bank or any Participant (a copy of which certificate shall be sent by such Issuing Bank or such Participant to the Agent), the Borrower shall, subject to the provisions of Section 13.17 (to the extent applicable), pay to such Issuing Bank or such Participant such additional amount or amounts as will compensate such Bank for such increased cost or reduction in the amount receivable or reduction on the rate of return on its capital. Any Issuing Bank or any Participant, upon determining that any additional amounts will be payable pursuant to this Section 2.06, will give prompt written notice thereof to the Borrower, which notice shall include a certificate submitted to the Borrower by such Issuing Bank or such Participant (a copy of which certificate shall be sent by such Issuing Bank or such Participant to the Agent), setting forth in reasonable detail the basis for the calculation of such additional amount or amounts necessary to compensate such Issuing Bank or such Participant. In determining such additional amounts, each Issuing Bank and each Participant will act reasonably and in good faith, provided that the certificate required to be delivered pursuant to this Section 2.06 shall, absent manifest error, be final and conclusive and binding on the Borrower. SECTION 3. Commitment Commission; Fees; Reductions of Commitment. 3.01 Fees. (a) The Borrower agrees to pay to the Administrative Agent for distribution to each Non-Defaulting Bank with a Term Loan Commitment, a commitment commission (the "Term Loan Commitment Commission") for the period from and including the Effective Date to but excluding the date on which the Total Term Loan Commitment shall have been terminated, computed at a rate for each day equal to the Applicable Commitment Commission Percentage on the daily average Term Loan Commitment of such Bank. Accrued Term Loan Commitment Commission shall be due and payable on the Initial Borrowing Date, quarterly in arrears on each Quarterly Payment Date and on the date on which the Total Term Loan Commitment shall have been terminated. (b) The Borrower agrees to pay to the Administrative Agent for distribution to each Non-Defaulting Bank with a Revolving Loan Commitment a commitment commission (the "Revolving Loan Commitment Commission") for the period from and including -22- 30 the Effective Date to but excluding the Revolving Loan Maturity Date (or such earlier date as the Total Revolving Loan Commitment shall have been terminated), computed at a rate for each day equal to the Applicable Commitment Commission Percentage on the daily average Unutilized Revolving Loan Commitment of such Non-Defaulting Bank. Accrued Revolving Loan Commitment Commission shall be due and payable quarterly in arrears on each Quarterly Payment Date and on the Revolving Loan Maturity Date or such earlier date upon which the Total Revolving Loan Commitment is terminated. (c) The Borrower agrees to pay to the Administrative Agent for distribution to each Non-Defaulting Bank with a Revolving Loan Commitment (based on each such Non-Defaulting Bank's respective Adjusted RL Percentage) a fee in respect of each Letter of Credit issued hereunder (the "Letter of Credit Fee"), for the period from and including the date of issuance of such Letter of Credit to and including the date of termination or expiration of such Letter of Credit, computed at a rate per annum equal to the Applicable Margin for Revolving Loans maintained as Eurodollar Loans on the daily Stated Amount of such Letter of Credit. Accrued Letter of Credit Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and on the first day after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (d) The Borrower agrees to pay to each Issuing Bank, for its own account, a facing fee in respect of each Letter of Credit issued by such Issuing Bank (the "Facing Fee"), for the period from and including the date of issuance of such Letter of Credit to and including the date of the termination of such Letter of Credit, computed at a rate equal to 1/4 of 1% per annum of the daily Stated Amount of such Letter of Credit. Accrued Facing Fees shall be due and payable quarterly in arrears on each Quarterly Payment Date and upon the first day after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (e) The Borrower agrees to pay, upon each drawing under, issuance of, or amendment to, any Letter of Credit, such amount as shall at the time of such event be the administrative charge and the reasonable expenses which the applicable Issuing Bank is generally imposing in connection with such occurrence with respect to letters of credit. (f) The Borrower agrees to pay to the Agents, for their own account, such other fees as have been agreed to in writing by the Borrower and the Agents. 3.02 Voluntary Termination of Unutilized Commitments. (a) Upon at least one Business Day's prior written notice to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Banks), the Borrower shall have the right, at any time or from time to time, without premium or penalty, to terminate the Total Unutilized Revolving Loan Commitment, in whole or in part, in integral multiples of $1,000,000 in the case of partial reductions to the Total Unutilized -23- 31 Revolving Loan Commitment, provided that (i) each such reduction shall apply proportionately to permanently reduce the Revolving Loan Commitment of each Bank with such a Commitment and (ii) the reduction to the Total Unutilized Revolving Loan Commitment shall in no case be in an amount which would cause the Revolving Loan Commitment of any Bank to be reduced (as required by preceding clause (i)) by an amount which exceeds the remainder of (x) the Unutilized Revolving Loan Commitment of such Bank as in effect immediately before giving effect to such reduction minus (y) such Bank's Adjusted RL Percentage of the aggregate principal amount of Swingline Loans then outstanding. (b) (i) On the Initial Borrowing Date (but before giving effect to the incurrence of any Term Loans on such date) and upon notice to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Banks), the Borrower shall have the right, without premium or penalty, to reduce the Total Term Loan Commitment up to an amount equal to the amount of the Retained Net Equity Proceeds from the Equity Financing in excess of $250,000,000 so long as the Borrower utilizes such Retained Net Equity Proceeds on the Initial Borrowing Date to make payments owing in connection with the Transaction. The reduction to the Total Term Loan Commitment pursuant to this Section 3.02(b)(i) shall be applied pro rata to the Total Tranche A Term Loan Commitment (in an amount equal to the Tranche A Term Loan Percentage of such reduction) and to the Total Tranche B Term Loan Commitment (in an amount equal to the Tranche B Term Loan Percentage of such reduction), provided that the first $36,000,000 of reductions pursuant to this Section 3.02(b)(i) (less any amount by which the outstanding Tranche B Term Loans have been repaid or the Total Tranche B Term Loan Commitment has been reduced pursuant to the proviso of the first sentence of Section 4.02(k)) shall only be applied to reduce the Total Tranche B Term Loan Commitment. The amount of each reduction to the Total Term Loan Commitment pursuant to this Section 3.02(b)(i) shall be applied to reduce the then remaining Scheduled Repayments of the respective Tranche of Term Loans pro rata based upon the then remaining amount of each Scheduled Repayment of the respective Tranche of Term Loans after giving effect to all prior reductions thereto, provided that the first $36,000,000 of reductions pursuant to this Section 3.02(b)(i) (less any amount by which the outstanding Tranche B Term Loans have been repaid or the Total Tranche B Term Loan Commitment has been reduced pursuant to the proviso of the first sentence of Section 4.02(k)) shall be applied only to reduce the final six Tranche B Term Loans Scheduled Repayments pro rata based upon the then remaining amount of each such Tranche B Term Loan Scheduled Repayment after giving effect to all prior reductions thereto. Any reduction to the Total Tranche A Term Loan Commitment and the Total Tranche B Term Loan Commitment pursuant to this Section 3.02(b)(i) shall be applied proportionately to permanently reduce the Tranche A Term Loan Commitment or the Tranche B Term Loan Commitment, as the case may be, of each Bank with such a Commitment. -24- 32 (ii) At any time after the Initial Borrowing Date and prior to the termination of the Total Tranche A Term Loan Commitment and upon notice to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Banks), the Borrower shall have the right, without premium or penalty, to terminate the remaining Total Tranche A Term Loan Commitment in the event that the Borrower has determined after the Initial Borrowing Date to keep the Existing Glendale Debt outstanding and not have it be part of the Indebtedness to be Refinanced. The amount by which the Total Tranche A Term Loan Commitment is terminated pursuant to this Section 3.02(b)(ii) shall be applied to reduce the then remaining Tranche A Term Loan Scheduled Repayments pro rata based upon the then remaining amount of each such Tranche A Term Loan Scheduled Repayment. The termination of the Total Tranche A Term Loan Commitment pursuant to this Section 3.02(b)(ii) shall be applied to terminate the Tranche A Term Loan Commitment of each Bank with such a Commitment. (c) In the event of a refusal by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as (and to the extent) provided in Section 13.12(b), the Borrower may, subject to its compliance with the requirements of Section 13.12(b), upon five Business Days' prior written notice to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Banks) terminate all of the Revolving Loan Commitment of such Bank, so long as all Loans, together with accrued and unpaid interest, Fees and all other amounts, owing to such Bank (other than amounts owing in respect of any Tranche of Loans maintained by such Bank which are not being repaid pursuant to Section 13.12(b)) are repaid concurrently with the effectiveness of such termination pursuant to Section 4.01(b) (at which time Schedule I shall be deemed modified to reflect such changed amounts), and at such time, unless the respective Bank continues to have outstanding Loans of one or more Tranches hereunder, such Bank shall no longer constitute a "Bank" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01), which shall survive as to such repaid Bank. 3.03 Mandatory Reduction of Commitments. (a) The Total Commitments (and the Tranche A Term Loan Commitment, the Tranche B Term Loan Commitment and the Revolving Loan Commitment of each Bank) shall terminate in their entirety on January 31, 1997 unless the Initial Borrowing Date has occurred on or before such date. (b) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, the Total Tranche A Term Loan Commitment (and the Tranche A Term Loan Commitment of each Bank) shall (i) be reduced on each Term Loan Borrowing Date (after giving effect to the making of Tranche A Term Loans on such date), in an amount equal to the aggregate principal amount of Tranche A Term Loans incurred on such date, (ii) terminate in its entirety (to the extent not theretofore terminated) at 5:00 P.M. (New -25- 33 York time) on the Tranche A Term Loan Commitment Termination Date, whether or not any Tranche A Term Loans are incurred on such date and (iii) prior to the termination of the Total Tranche A Term Loan Commitment, be reduced from time to time to the extent required by Section 4.02. In the event that the Total Tranche A Term Loan Commitment is terminated on the Tranche A Term Loan Commitment Termination Date and no Tranche A Term Loans are incurred on such date, the amount by which the Total Tranche A Term Loan Commitment is terminated shall be applied to reduce the then remaining Tranche A Term Loan Scheduled Repayments pro rata based upon the then remaining amount of each such Tranche A Term Loan Scheduled Repayment. (c) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, the Total Tranche B Term Loan Commitment (and the Tranche B Term Loan Commitment of each Bank) shall (i) terminate in its entirety on the Initial Borrowing Date (after giving effect to the making of the Tranche B Term Loans on such date) and (ii) prior to the termination of the Total Tranche B Term Loan Commitment, be reduced from time to time to the extent required by Section 4.02. (d) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, the Total Revolving Loan Commitment (and the Revolving Loan Commitment of each Bank) shall terminate in its entirety on the Revolving Loan Maturity Date. (e) In addition to any other mandatory commitment reductions pursuant to this Section 3.03, on each date after the Effective Date upon which a mandatory repayment of Term Loans or a mandatory reduction to the Total Term Loan Commitment pursuant to any of Sections 4.02(d) through (i), inclusive, is required (and exceeds in amount the aggregate principal amount of Term Loans then outstanding and the Total Term Loan Commitment was then in effect) or would be required if Term Loans were then outstanding or the Total Term Loan Commitment was then in effect, the Total Revolving Loan Commitment shall be permanently reduced by the amount, if any, by which the amount required to be applied pursuant to said Sections (determined as if an unlimited amount of Term Loans were actually outstanding) exceeds the aggregate principal amount of Term Loans then outstanding and the Total Term Loan Commitment then in effect. (f) Each reduction to the Total Tranche A Term Loan Commitment, the Total Tranche B Term Loan Commitment and the Total Revolving Loan Commitment pursuant to this Section 3.03 (or pursuant to Section 4.02) shall be applied proportionately to permanently reduce the Tranche A Term Loan Commitment, the Tranche B Term Loan Commitment or the Revolving Loan Commitment, as the case may be, of each Bank with such a Commitment. -26- 34 SECTION 4. Prepayments; Payments; Taxes. 4.01 Voluntary Prepayments. (a) The Borrower shall have the right to prepay the Loans, without premium or penalty, in whole or in part at any time and from time to time on the following terms and conditions: (i) the Borrower shall give the Administrative Agent prior to 1:00 P.M. (New York time) at its Notice Office (x) at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay Base Rate Loans and (y) at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay Eurodollar Loans, whether Tranche A Term Loans, Tranche B Term Loans, Revolving Loans or Swingline Loans shall be prepaid, the amount of such prepayment and the Types of Loans to be prepaid and, in the case of Eurodollar Loans, the specific Borrowing or Borrowings pursuant to which made, which notice the Administrative Agent shall promptly transmit to each of the Banks; (ii) each prepayment shall be in an aggregate principal amount of at least $500,000 (or $100,000 in the case of Swingline Loans), provided that if any partial prepayment of Eurodollar Loans made pursuant to any Borrowing shall reduce the outstanding principal amount of Eurodollar Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto, then such Borrowing may not be continued as a Borrowing of Eurodollar Loans and any election of an Interest Period with respect thereto given by the Borrower shall have no force or effect; (iii) prepayments of Eurodollar Loans made pursuant to this Section 4.01(a) may only be made on the last day of an Interest Period applicable thereto except that the Borrower may make prepayments of Eurodollar Loans on a day which is not the last day of an Interest Period applicable to the Loans being prepaid so long as the Borrower shall compensate each Bank for any breakage costs and any other amounts due such Bank in accordance with Section 1.11; (iv) each prepayment in respect of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans; (v) except as provided below in this clause (v), each voluntary prepayment of Term Loans pursuant to this Section 4.01(a) shall be applied pro rata to each Tranche of Term Loans (with each Tranche of Term Loans to be allocated its respective Term Loan Percentage of the amount to be applied), and (a) in the case of repayments of Tranche A Term Loans, such repayments shall be applied to reduce the then remaining Tranche A Term Loan Scheduled Repayments pro rata based upon the then remaining amount of each Tranche A Term Loan Scheduled Repayment after giving effect to all prior reductions thereto, and (b) in the case of repayments of Tranche B Term Loans, such repayments shall be applied to reduce the then remaining Tranche B Scheduled Term Loan Scheduled Repayments pro rata based upon the then remaining amount of each Tranche B Term Loan Scheduled Repayment after giving effect to all prior reductions thereto, provided that (A) any voluntary prepayment of Term Loans pursuant to this Section 4.01(a) which are made with proceeds of the Retained Excess Cash Flow Amount or with proceeds of the Retained Net Equity Proceeds Amount may be applied, at the Borrower's option (and upon written notice to the Administrative Agent at the time notice of such prepayment is given by the Borrower), to prepay only one Tranche of Term Loans, and with -27- 35 each such prepayment to reduce the then remaining Scheduled Repayments of such Tranche of Term Loans pro rata based upon the then remaining amount of each such Scheduled Repayment after giving effect to all prior reductions thereto and (B) no more than $10,000,000 (or $15,000,000 commencing on January 1, 2000) of Term Loans may be applied in any calendar year in accordance with this proviso; and (vi) at the Borrower's election in connection with any prepayment of Revolving Loans pursuant to this Section 4.01(a), such prepayment shall not be applied to any Revolving Loan of a Defaulting Bank. (b) In the event of a refusal by a Bank to consent to certain proposed changes, waivers, discharges or terminations with respect to this Agreement which have been approved by the Required Banks as (and to the extent) provided in Section 13.12(b), the Borrower may, upon five Business Days' prior written notice to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Banks) repay all Loans, together with accrued and unpaid interest, Fees, and other amounts owing to such Bank (or owing to such Bank with respect to each Tranche which gave rise to the need to obtain such Bank's individual consent) in accordance with, and subject to the requirements of, said Section 13.12(b) so long as (A) in the case of the repayment of Revolving Loans of any Bank pursuant to this clause (b) the Revolving Loan Commitment of such Bank is terminated concurrently with such repayment pursuant to Section 3.02(c) (at which time Schedule I shall be deemed modified to reflect the changed Revolving Loan Commitments), and (B) the consents, if any, required by Section 13.12(b) in connection with the repayment pursuant to this clause (b) have been obtained. 4.02 Mandatory Repayments and Commitment Reductions. (a) (i) On any day on which the sum of the aggregate outstanding principal amount of the Revolving Loans made by Non-Defaulting Banks, Swingline Loans and the Letter of Credit Outstandings exceeds the Adjusted Total Revolving Loan Commitment as then in effect, the Borrower shall prepay on such day principal of Swingline Loans and, after all Swingline Loans have been repaid in full, Revolving Loans of Non-Defaulting Banks in an amount equal to such excess. If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Loans of Non-Defaulting Banks, the aggregate amount of the Letter of Credit Outstandings exceeds the Adjusted Total Revolving Loan Commitment as then in effect, the Borrower shall pay to the Administrative Agent at the Payment Office on such day an amount of cash or Cash Equivalents equal to the amount of such excess (up to a maximum amount equal to the Letter of Credit Outstandings at such time), such cash or Cash Equivalents to be held as security for all obligations of the Borrower to the Issuing Banks and the Non-Defaulting Banks hereunder in a cash collateral account to be established by the Administrative Agent. (ii) On any day on which the aggregate outstanding principal amount of the Revolving Loans made by any Defaulting Bank exceeds the Revolving Loan Commitment -28- 36 of such Defaulting Bank, the Borrower shall prepay on such day principal of Revolving Loans of such Defaulting Bank in an amount equal to such excess. (iii) If on December 1 of each year commencing on December 1, 1997, a Clean-Down Period shall not have occurred since January 30 of such year, the Borrower shall repay Revolving Loans and/or Swingline Loans in an amount necessary to reduce the aggregate outstanding principal amount of Revolving Loans and Swingline Loans to $50,000,000, which amount may not be exceeded until the Clean-Down Period for such year has ended. (b) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, on each date set forth below, the Borrower shall be required to repay that principal amount of Tranche A Term Loans, to the extent then outstanding, as is set forth opposite such date (each such repayment, as the same may be reduced as provided in Sections 4.01(a) and 4.02(k), a "Tranche A Term Loan Scheduled Repayment," and each such date, a "Tranche A Term Loan Scheduled Repayment Date"):
Tranche A Term Loan Scheduled Repayment Date Amount ------------------------ ------ March 31, 1997 $ 1,250,000 June 30, 1997 $ 1,250,000 September 30, 1997 $ 1,250,000 December 31, 1997 $ 1,250,000 March 31, 1998 $12,500,000 June 30, 1998 $12,500,000 September 30, 1998 $12,500,000 December 31, 1998 $12,500,000 March 31, 1999 $16,000,000 June 30, 1999 $16,000,000 September 30, 1999 $16,000,000 December 31, 1999 $16,000,000 March 31, 2000 $18,500,000 June 30, 2000 $18,500,000 September 30, 2000 $18,500,000 December 31, 2000 $18,500,000
-29- 37 March 31, 2001 $22,250,000 June 30, 2001 $22,250,000 September 30, 2001 $22,250,000 December 31, 2001 $22,250,000 March 31, 2002 $23,500,000 June 30, 2002 $23,500,000 September 30, 2002 $23,500,000 Tranche A Term Loan Maturity Date $23,500,000
(c) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, on each date set forth below, the Borrower shall be required to repay that principal amount of Tranche B Term Loans, to the extent then outstanding, as is set forth opposite such date (each such repayment, as the same may be reduced as provided in Sections 4.01(a) and 4.02(k), a "Tranche B Term Loan Scheduled Repayment," and each such date, a "Tranche B Term Loan Scheduled Repayment Date," and the Tranche A Term Loan Scheduled Repayments and the Tranche B Term Loan Scheduled Repayments are collectively referred to as the "Scheduled Repayments"):
Tranche B Term Loan Scheduled Repayment Date Amount ------------------------ ------ March 31, 1997 $ 500,000 June 30, 1997 $ 500,000 September 30, 1997 $ 500,000 December 31, 1997 $ 500,000 March 31, 1998 $ 500,000 June 30, 1998 $ 500,000 September 30, 1998 $ 500,000 December 31, 1998 $ 500,000 March 31, 1999 $ 500,000 June 30, 1999 $ 500,000 September 30, 1999 $ 500,000 December 31, 1999 $ 500,000 March 31, 2000 $ 500,000 June 30, 2000 $ 500,000 September 30, 2000 $ 500,000 December 31, 2000 $ 500,000
-30- 38 March 31, 2001 $ 500,000 June 30, 2001 $ 500,000 September 30, 2001 $ 500,000 December 31, 2001 $ 500,000 March 31, 2002 $ 500,000 June 30, 2002 $ 500,000 September 30, 2002 $ 500,000 December 31, 2002 $ 500,000 March 31, 2003 $33,833,333 June 30, 2003 $33,833,333 September 30, 2003 $33,833,333 December 31, 2003 $33,833,333 March 31, 2003 $33,833,334 Tranche B Term Loan Maturity Date $33,833,334
(d) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, on each date after on or the Effective Date upon which the Borrower or any of its Wholly-Owned Subsidiaries or Joint Ventures receives any cash proceeds from any capital contribution or any sale or issuance of its equity (other than (i) the first $250,000,000 of gross cash proceeds received by the Borrower as part of the Equity Financing, (ii) cash proceeds received from capital contributions to, or equity investments in, any Wholly-Owned Subsidiary or Joint Venture of the Borrower to the extent made by the Borrower, any other Subsidiary of the Borrower or the respective joint venture partner of such Joint Venture and (iii) cash proceeds received from sales or issuances of equity to officers or directors of the Borrower or any of its Subsidiaries in an aggregate amount not to exceed $1,000,000 in any fiscal year of the Borrower), an amount equal to 50% of the Net Equity Proceeds of such capital contribution or sale or issuance shall be applied as a mandatory repayment of principal of outstanding Term Loans (and/or, if the Total Term Loan Commitment has not yet been terminated, as a mandatory reduction to the Total Term Loan Commitment) in accordance with the requirements of Sections 4.02(j) and (k) (or in the case of any capital contribution to, or any sale or issuance of equity by, any Joint Venture, an amount equal to 50% of the Borrower's Allocable Share of such Net Equity Proceeds shall be applied as provided above in this Section 4.02(d), but such amount shall be applied only as, when and to the extent such Net Equity Proceeds are distributed by such Joint Venture to the Borrower or a Wholly-Owned Subsidiary thereof). (e) (i) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, on each date on or after the Effective Date upon which the Borrower or any of its Wholly-Owned Subsidiaries or Joint Ventures receives any cash proceeds from any incurrence by the Borrower or any of its Wholly-Owned Subsidiaries or Joint Ventures of Indebtedness for borrowed money (other than Indebtedness for borrowed money permitted to be incurred pursuant to Section 9.04 as such Section is in effect -31- 39 on the Effective Date), an amount equal to 100% of the Net Debt Proceeds of the respective incurrence of Indebtedness shall be applied as a mandatory repayment of principal of outstanding Term Loans (and/or, if the Total Term Loan Commitment has not yet been terminated, as a mandatory reduction to the Total Term Loan Commitment) in accordance with the requirements of Sections 4.02(j) and (k) (or in the case of any incurrence of Indebtedness for borrowed money by any Joint Venture, an amount equal to 100% of the Borrower's Allocable Share of such Net Debt Proceeds shall be applied as provided above in this Section 4.02(e), but such amount shall be applied only as, when and to the extent such Net Debt Proceeds are distributed by such Joint Venture to the Borrower or a Wholly-Owned Subsidiary thereof). (ii) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, (x) on the Initial Borrowing Date (but before giving effect to the incurrence of any Term Loans on such date), the Total Term Loan Commitment shall be reduced in an amount equal to $40,000,000 in the event that the Existing Glendale Debt is to remain outstanding after the Initial Borrowing Date and has been designated by the Borrower as not being part of the Indebtedness to be Refinanced pursuant to Section 5.08, with such reduction to be effected in accordance with the requirements of Section 4.02(k) and (y) on any date after the Initial Borrowing Date and prior to the termination of the Total Tranche A Term Loan Commitment on which the Existing Glendale Debt is refinanced with proceeds of a loan made by any Person (other than the Borrower, any Subsidiary thereof or any Bank under this Agreement), the Total Tranche A Term Loan Commitment shall be reduced in accordance with the requirements of Section 4.02(k) in an amount equal to the principal amount of such loan. (f) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, on each date on or after the Effective Date upon which the Borrower or any of its Wholly-Owned Subsidiaries or Joint Ventures receives cash proceeds from any Asset Sale or any Specified Red Lion Event, an amount equal to the Applicable Recapture Percentage of the Net Sale Proceeds from the respective Asset Sale or the Applicable Recapture Percentage of the Specified Existing Red Lion Investment Proceeds from the respective Specified Red Lion Event shall be applied as a mandatory repayment of principal of outstanding Term Loans (and/or, if the Total Term Loan Commitment has not yet been terminated, as a mandatory reduction to the Total Term Loan Commitment) in accordance with the requirements of Sections 4.02(j) and (k) (or in the case of any Asset Sale by any Joint Venture, an amount equal to the Applicable Recapture Percentage of the Borrower's Allocable Share of the Net Sale Proceeds therefrom shall be applied as provided above in this Section 4.02(f), but such amount shall be applied only as, when and to the extent such Net Sale Proceeds are distributed by such Joint Venture to the Borrower or a Wholly-Owned Subsidiary thereof); provided that, so long as no Default or Event of Default then exists, up to $75,000,000 in the aggregate over any three-year period (but no more than $35,000,000 in any fiscal year of the Borrower) of Net Sale Proceeds -32- 40 from Asset Sales (other than proceeds from an Asset Sale pursuant to Section 9.02(xiv), which proceeds shall be applied as provided above in this Section 4.02(f) without regard to this proviso) and of Specified Existing Red Lion Investment Proceeds from Specified Red Lion Events may be used to purchase like assets pursuant to Section 9.07(h) within 360 days following the date of the respective Asset Sale or Specified Red Lion Event (and the Applicable Recapture Percentage therefrom shall not be required to be applied on the date of receipt of such Net Sale Proceeds or Specified Existing Red Lion Investment Proceeds pursuant to this Section 4.02(f)) so long as (x) the Borrower delivers a certificate to the Agents on or prior to such date stating that such Net Sale Proceeds or Specified Existing Red Lion Investment Proceeds shall be used to purchase like assets within 360 days following the date of such Asset Sale or Specified Red Lion Event (which certificate shall set forth the estimates of the proceeds to be so expended) and (y) within 180 days following the date of such Asset Sale or Specified Red Lion Event, the Borrower or the applicable Wholly-Owned Subsidiary or Joint Venture has entered into a binding commitment to purchase such replacement assets, and, provided further, that if all or any portion of such Net Sale Proceeds or Specified Existing Red Lion Investment Proceeds are not so reinvested in like assets within such 360 day period (or committed to be so reinvested within such 180-day period), the Applicable Recapture Percentage of such remaining portion shall be applied on the last day of such applicable period as a mandatory repayment of principal of outstanding Term Loans as provided above in this Section 4.02(f) without regard to this proviso. Notwithstanding the foregoing provisions of this Section 4.02(f), in the case of an Asset Sale by Red Lion Properties at a time when Red Lion Properties is subject to the minimum net worth requirement described in Schedule XV, the Applicable Recapture Percentage of the Net Sale Proceeds from the respective Asset Sale, to the extent not reinvested as permitted by the first proviso of the immediately preceding sentence, shall only be required to be applied to the Obligations to the extent that Red Lion Properties can distribute the Applicable Recapture Percentage of such Net Sale Proceeds to the Borrower without violating such minimum net worth covenant. (g) In addition to any other mandatory repayments pursuant to this Section 4.02, on each Excess Cash Payment Date, an amount equal to 50% of the Excess Cash Flow for the relevant Excess Cash Payment Period shall be applied as a mandatory repayment of principal of outstanding Term Loans in accordance with the requirements of Sections 4.02(j) and (k). (h) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, within 10 days following each date on or after the Effective Date upon which the Borrower or any of its Wholly-Owned Subsidiaries or Joint Ventures receives any cash proceeds from any Recovery Event, an amount equal to 100% of the Net Insurance Proceeds of such Recovery Event shall be applied as a mandatory repayment of principal of outstanding Term Loans (and/or, if the Total Term Loan Commitment has not yet been terminated, as a mandatory reduction to the Total Term Loan -33- 41 Commitment) in accordance with the requirements of Sections 4.02(j) and (k) (or in the case of any Recovery Event by any Joint Venture, an amount equal to 100% of the Borrower's Allocable Share of such Net Insurance Proceeds shall be applied as provided above in this Section 4.02(h), but such amount shall be applied only as, when and to the extent such Net Insurance Proceeds are distributed by such Joint Venture to the Borrower or a Wholly-Owned Subsidiary thereof); provided that, so long as no Default or Event of Default then exists, such proceeds shall not be required to be so applied on such date to the extent that the Borrower has delivered a certificate to the Agents on or prior to such date stating that such proceeds shall be used or shall be contractually committed to be used to replace or restore any properties or assets in respect of which such proceeds were paid within one year following the date of the receipt of such proceeds (which certificate shall set forth the estimates of the proceeds to be so expended), and provided further, that if all or any portion of such proceeds not required to be applied to the repayment of outstanding Term Loans (and/or as a reduction to the Total Term Loan Commitment) are either (A) not so used or contractually committed to be used within one year after the date of the receipt of such proceeds or (B) if contractually committed to be used within one year after the date of receipt of such proceeds and not so used within three years after the date of receipt of such proceeds (so long as the Borrower or such Wholly-Owned Subsidiary or Joint Venture is diligently proceeding with such replacement or restoration in accordance with the terms of the contractual arrangements applicable thereto) then, in either such case, such remaining portion not used or contractually committed to be used in the case of preceding clause (A) and not used in the case of preceding clause (B) shall be applied on the date which is the first anniversary of the date of the receipt of such proceeds in the case of clause (A) above or the date occurring three years after the date of the receipt of such proceeds (or such earlier date on which the Borrower or such Wholly-Owned Subsidiary or Joint Venture is no longer diligently proceeding with such replacement or restoration) in the case of clause (B) above as a mandatory repayment of principal of outstanding Term Loans as provided above in this Section 4.02(h) without regard to the preceding proviso. (i) In addition to any other mandatory repayments or commitment reductions pursuant to this Section 4.02, on each date on or after the Effective Date upon which the Borrower or any of its Wholly-Owned Subsidiaries receives cash proceeds from any Designated Event, an amount equal to 100% of the cash proceeds therefrom shall be applied as a mandatory repayment of principal of outstanding Term Loans (and/or, if the Total Term Loan Commitment has not yet been terminated, as a mandatory reduction to the Total Term Loan Commitment) in accordance with the requirements of Section 4.02(j) and (k); provided that, so long as no Default or Event of Default then exists, up to $25,000,000 in the aggregate of such cash proceeds in any fiscal year of the Borrower shall not be required to be applied pursuant to this Section 4.02(i). Notwithstanding the foregoing provisions of this Section 4.02(i), in the event that RFS or RFS Sub sells the RFS Equity at a time when RFS and/or RFS Sub are subject to the minimum net worth requirement described above on Schedule XV, the cash proceeds from the respective sale, to the extent that same would -34- 42 otherwise be required to be applied as provided above in this Section 4.02(i), shall only be required to be so applied to the extent that RFS and/or RFS Sub can distribute such cash proceeds to the Borrower without violating such minimum net worth covenant. (j) With respect to each repayment of Loans required by this Section 4.02, the Borrower may designate the Types of Loans of the respective Tranche which are to be repaid and, in the case of Eurodollar Loans, the specific Borrowing or Borrowings of the respective Tranche pursuant to which made, provided that: (i) repayments of Eurodollar Loans pursuant to this Section 4.02 may only be made on the last day of an Interest Period applicable thereto unless all Eurodollar Loans of the respective Tranche with Interest Periods ending on such date of required repayment and all Base Rate Loans of the respective Tranche have been paid in full; (ii) if any repayment of Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Eurodollar Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto, such Borrowing shall be converted at the end of the then current Interest Period into a Borrowing of Base Rate Loans; and (iii) each repayment of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans. In the absence of a designation by the Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its sole discretion. Notwithstanding the foregoing provisions of this Section 4.02(j), if at any time a mandatory repayment of Loans pursuant to this Section 4.02(j) would result, after giving effect to the procedures set forth above in this Section 4.02(j), in the Borrower incurring breakage costs under Section 1.11 as a result of Eurodollar Loans being prepaid other than on the last day of an Interest Period applicable thereto (the "Affected Eurodollar Loans"), then the Borrower may in its sole discretion, and upon notice to the Administrative Agent, initially deposit a portion (up to 100%) of the amount that otherwise would have been paid in respect of the Affected Eurodollar Loans with the Administrative Agent (which deposit must be equal in amount to the amount of the Affected Eurodollar Loans not immediately repaid) to be held as security for the Obligations of the Borrower pursuant to a cash collateral arrangement satisfactory to the Administrative Agent and the Borrower which shall permit investments in Cash Equivalents reasonably satisfactory to the Administrative Agent, with such cash collateral to be directly applied upon the earlier of (x) the first occurrence (or occurrences) thereafter of the last day of an Interest Period applicable to the relevant Affected Eurodollar Loans of the respective Tranche or Tranches that were initially required to be repaid (or such earlier date or dates as shall be requested by the Borrower) and (y) the date which is 180 days after such initial deposit, to repay an aggregate principal amount of such Loans equal to the Affected Eurodollar Loans not initially repaid pursuant to this sentence. Notwithstanding anything to the contrary contained in the immediately preceding sentence, all amounts deposited as cash collateral pursuant to the immediately preceding sentence shall be held first for the sole benefit of the Banks whose Loans would otherwise have been immediately repaid with the amounts deposited and upon the taking of any action by the Administrative Agent or the Banks pursuant to the remedial provisions of Section 10, any -35- 43 amounts held as cash collateral pursuant to this Section 4.02(j) shall first be immediately applied to such Loans and thereafter to the other Obligations of the Borrower. (k) Each amount required to be applied to Term Loans (and/or to the Total Term Loan Commitment) pursuant to Sections 4.02(d), (e) (other than clause (ii)(y) thereof), (f), (g), (h) and (i) shall be applied pro rata to each Tranche of Term Loans (in an amount equal to the Tranche A Term Loan Percentage and/or the Tranche B Term Loan Percentage, as the case may be, of such prepayment or reduction), provided that the first $36,000,000 of Net Equity Proceeds from the Equity Financing in excess of $250,000,000 that are required to be applied pursuant to this Section 4.02(k) (less any amount by which the Total Tranche B Term Loan Commitment has been, or is concurrently being, reduced pursuant to Section 3.02(b)(i)) shall be applied only to the Tranche B Term Loans and/or the Total Tranche B Term Loan Commitment. Any amount required to be applied to either Tranche of Term Loans pursuant to Sections 4.02(d), (e) (other than clause (ii)(y) thereof), (f), (g), (h) and (i) shall be applied (i) first, to repay the outstanding principal amount of Term Loans of the respective Tranche and (ii) second, to the extent in excess thereof, to reduce the Total Tranche A Term Loan Commitment or the Total Tranche B Term Loan Commitment, as the case may be). The amount of each principal repayment of Term Loans (and the amount of each reduction to the Term Loan Commitments) made as required by said Sections 4.02(d), (e) (other than clause (ii)(y) thereof), (f), (g), (h) and (i) shall be applied to reduce the then remaining Scheduled Repayments of the respective Tranche of Term Loans pro rata based upon the then remaining amount of each Scheduled Repayment of the respective Tranche after giving effect to all prior reductions thereto, provided that the first $36,000,000 of Net Equity Proceeds from the Equity Financing in excess of $250,000,000 that are required to be applied pursuant to this Section 4.02(k) (less any amount by which the Total Tranche B Term Loan Commitment has been, or is concurrently being, reduced pursuant to Section 3.02(b)(i)) shall be applied only to reduce the final six Tranche B Term Loan Scheduled Repayments pro rata based upon the then remaining amount of each such Tranche B Term Loan Scheduled Repayment after giving effect to all prior reductions thereto. Notwithstanding anything to the contrary contained above in this Section 4.02(k), any amount required to be applied to reduce the Total Tranche A Term Loan Commitment pursuant to clause (y) of Section 4.02(e)(ii) shall be applied to reduce the then remaining Tranche A Term Loan Scheduled Repayments pro rata based upon the then remaining amount of each such Tranche A Term Loan Scheduled Repayment after giving effect to all prior reductions thereto. (l) Notwithstanding anything to the contrary contained in this Agreement or in any other Credit Document, all then outstanding Loans of any Tranche shall be repaid in full on the respective Maturity Date for such Tranche of Loans. (m) Notwithstanding anything to the contrary contained in Section 4.02(k), with respect to any mandatory repayments of Tranche A Term Loans or Tranche B Term -36- 44 Loans required pursuant to Sections 4.02(d), (e) (other than clause (ii)(y) thereof), (f), (g), (h) and (i), but only so long as both Tranche A Term Loans and Tranche B Term Loans are outstanding on the date of any such mandatory repayment, if on or prior to the date the respective mandatory repayment is otherwise required to be made pursuant to such Sections, the Borrower has given the Agents written notification that the Borrower has elected to give each Bank with a Tranche A Term Loan or each Bank with a Tranche B Term Loan, as the case may be, the right to waive such Bank's rights to receive such repayment (the "Waivable Mandatory Repayment") (it being understood that with respect to any particular Waivable Mandatory Repayment, the Borrower shall only be entitled to exercise its rights pursuant to this Section 4.02(m) with respect to a single Tranche of Term Loans), the Administrative Agent shall notify such Banks of such receipt and the amount of the repayment required to be applied to each such Bank's Tranche A Term Loans or Tranche B Term Loans, as the case may be. In the event any such Bank with a Tranche A Term Loan or a Tranche B Term Loan, as the case may be, desires to waive such Bank's right to receive any such Waivable Mandatory Repayment in whole or in part, such Bank shall so advise the Administrative Agent no later than 5:00 P.M. (New York time) five Business Days after the date of such notice from the Administrative Agent which notice shall also include the amount such Bank desires to receive. If any such Bank does not reply to the Administrative Agent within the five Business Day period, such Bank will be deemed to have accepted the total payment. If any such Bank does not specify the amount that such Bank wishes to receive, such Bank will be deemed to have accepted 100% of the total payment. In the event that any such Bank waives such Bank's right (in whole or in part) to any such Waivable Mandatory Repayment, the Administrative Agent shall apply 100% of the amount so waived by such Banks (i) first, to repay the other Tranche of Term Loans in accordance with Sections 4.02(j) and (k), (ii) second, to the extent such other Tranche of Term Loans have been (or are concurrently being) repaid in full, any excess amount shall be applied to repay such Tranche of Term Loans (including the Term Loans of any Bank or Banks that have initially waived their right to receive such repayment), and (iii) third, to the extent in excess of the amount required to be applied pursuant to the preceding clauses (i) and (ii), to reduce the Total Revolving Loan Commitment as provided in Section 3.03(e) (as if no Term Loans were then outstanding). If the Borrower elects to give the notice described above in this Section 4.02(m) with respect to the applicable mandatory repayment, the amount of the respective Waivable Mandatory Repayment shall be deposited with the Administrative Agent on the date the mandatory repayment would otherwise be required pursuant to the relevant provisions of Section 4.02(d), (e) (other than clause (ii)(y) thereof), (f), (g), (h) or (i), as the case may be (and held by the Administrative Agent as cash collateral for the Tranche A Term Loans or the Tranche B Term Loans, as the case may be, and, but only to the extent Banks with Tranche A Term Loans or Tranche B Term Loans, as the case may be, waive their right to receive their share of the Waivable Mandatory Repayment, for the benefit of the other Tranche of Term Loans, in a cash collateral account which shall permit the investment thereof in Cash Equivalents reasonably satisfactory to the Administrative Agent until the proceeds are applied to the secured -37- 45 obligations), and the respective mandatory repayment shall not be required to be made until the eighth Business Day occurring after the date the respective mandatory repayment would otherwise have been required to be made pursuant to any such Section (and with interest continuing to accrue on such Loans during such period at the rate otherwise provided for herein with respect to such Loans). Notwithstanding anything to the contrary contained above, if one or more Banks waives its right to receive all or any part of any Waivable Mandatory Repayment, but less than all the Banks holding Tranche A Term Loans or Tranche B Term Loans, as the case may be, waive in full their right to receive 100% of the total payment otherwise required with respect to the Tranche A Term Loans or Tranche B Term Loans, as the case may be, then of the amount actually applied to the repayment of Tranche A Term Loans or Tranche B Term Loans, as the case may be, of Banks which have waived in part, but not in full, their right to receive 100% of such repayment, such amount shall be applied to each then outstanding Borrowing of Tranche A Term Loans or Tranche B Term Loans, as the case may be, on a pro rata basis (so that each Bank holding Tranche A Term Loans or Tranche B Term Loans, as the case may be, shall, after giving effect to the application of the respective repayment, maintain the same percentage (as determined for such Bank, but not the same percentage as the other Banks hold and not the same percentage held by such Bank prior to repayment) of each Borrowing of Tranche A Term Loans or Tranche B Term Loans, as the case may be, which remains outstanding after giving effect to such application). 4.03 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement or under any Note shall be made to the Administrative Agent for the account of the Bank or Banks entitled thereto not later than 1:00 P.M. (New York time) on the date when due and shall be made in Dollars in immediately available funds at the Payment Office of the Administrative Agent. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable at the applicable rate during such extension. 4.04 Net Payments. (a) All payments made by the Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 4.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax imposed on or measured by the net income or profits of a Bank pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Bank is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect to such non-excluded taxes, -38- 46 levies, imposts, duties, fees, assessments or other charges (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes (other than Taxes or other amounts deducted or withheld pursuant to the third sentence of Section 4.04(b)) are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any such Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the Borrower agrees to reimburse each Bank, upon the written request of such Bank, for taxes imposed on or measured by the net income or profits of such Bank pursuant to the laws of the jurisdiction in which such Bank is organized or in which the principal office or applicable lending office of such Bank is located or under the laws of any political subdivision or taxing authority of any such jurisdiction in which such Bank is organized or in which the principal office or applicable lending office of such Bank is located and for any withholding of taxes as such Bank shall determine are payable by, or withheld from, such Bank, in respect of such amounts so paid to or on behalf of such Bank pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Bank pursuant to this sentence. The Borrower will furnish to the Administrative Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Bank, and reimburse such Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank. All amounts payable pursuant to this Section 4.04(a) shall be subject to the provisions of Section 13.17 (to the extent applicable). (b) Each Bank that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes agrees to deliver to the Borrower and the Administrative Agent on or prior to the Effective Date, or in the case of a Bank that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.13 or 13.04 (unless the respective Bank was already a Bank hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Bank, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Bank is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit D (any such certificate, a "Section 4.04(b)(ii) Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Bank's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note (the Internal Revenue Service forms -39- 47 described in preceding clauses (i) and (ii) are hereinafter referred to as the "U.S. Internal Revenue Service Forms"). In addition, each Bank agrees that from time to time after the Effective Date as required by applicable U.S. Federal income tax law, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, such Bank will deliver to the Borrower and the Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 4.04(b)(ii) Certificate, as the case may be, and such other certifications or forms as may be required by U.S. Federal income tax law and timely requested by the Borrower in writing in order to confirm or establish the entitlement of such Bank to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or such Bank shall immediately notify the Borrower and the Administrative Agent of its inability under applicable law to deliver any such Form or Certificate, in which case such Bank shall not be required to deliver any such Form or Certificate pursuant to this Section 4.04(b). Notwithstanding anything to the contrary contained in Section 4.04(a), but subject to Section 13.04(b) and the immediately succeeding sentence, (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, Fees or other amounts payable hereunder for the account of any Bank which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that such Bank has not provided to the Borrower U.S. Internal Revenue Service Forms and such other certifications or forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 4.04(a) hereof to gross-up payments to be made to a Bank in respect of income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) if (I) such Bank has not provided to the Borrower the Internal Revenue Service Forms and such other certifications or forms as are required to be provided to the Borrower pursuant to this Section 4.04(b) or (II) in the case of a payment, other than interest, to a Bank described in clause (ii) above, to the extent that such Forms do not establish a complete exemption from the deduction or withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 4.04 and except as set forth in Section 13.04(b), the Borrower agrees to pay any additional amounts and to indemnify each Bank in the manner set forth in Section 4.04(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. -40- 48 SECTION 5. Conditions Precedent to Initial Credit Events. The obligation of each Bank to make Loans, and the obligation of any Issuing Bank to issue Letters of Credit, on the Initial Borrowing Date, is subject at the time of the making of such Loans or the issuance of such Letters of Credit to the satisfaction of the following conditions: 5.01 Execution of Agreement; Notes. On or prior to the Initial Borrowing Date, (i) the Effective Date shall have occurred and (ii) there shall have been delivered to the Agents for the account of each of the Banks the appropriate Tranche A Term Note, Tranche B Term Note and/or Revolving Note executed by the Borrower and to the Swingline Bank, the Swingline Note executed by the Borrower, in each case in the amount, maturity and as otherwise provided herein. 5.02 Officer's Certificate. On the Initial Borrowing Date, the Agents shall have received a certificate, dated the Initial Borrowing Date and signed on behalf of the Borrower by the President or any Vice President of the Borrower, stating that all of the conditions in Sections 5.05, 5.06, 5.07, 5.08, 5.09, 5.10 and 6.01 have been satisfied on such date. 5.03 Opinions of Counsel. On the Initial Borrowing Date, the Agents shall have received from (i) Dewey Ballantine and Wolf, Block, Schorr and Solis-Cohen, each counsel to the Credit Parties, opinions addressed to the Administrative Agent, the Syndication Agent, the Collateral Administrative Agent and each of the Banks and dated the Initial Borrowing Date, covering the matters set forth in Exhibits E-1 and E-2, respectively, and such other matters incident to the transactions contemplated herein as any Agent may reasonably request and (ii) local counsel (reasonably satisfactory to the Agents), opinions each of which (x) shall be addressed to the Administrative Agent, the Syndication Agent, the Collateral Administrative Agent and each of the Banks and dated the Initial Borrowing Date, (y) shall be in form and substance reasonably satisfactory to the Agents and (z) shall cover the perfection of the security interests granted pursuant to the Security Documents and such other matters incident to the transactions contemplated herein as any Agent may reasonably request. 5.04 Corporate Documents; Proceedings; etc. (a) On the Initial Borrowing Date, the Agents shall have received a certificate from each Credit Party, dated the Initial Borrowing Date, signed by the President or any Vice President of such Credit Party, and attested to by the Secretary or any Assistant Secretary of such Credit Party, in the form of Exhibit F with appropriate insertions, together with copies of the certificate of incorporation (or equivalent organizational document) and by-laws of such Credit Party and the resolutions of such Credit Party referred to in such certificate, and each such certificate of incorporation and by-laws shall be in the form provided to the Agents prior to the Effective Date or in such other form as is reasonably acceptable to the Agents, and the foregoing resolutions shall be in form and substance reasonably acceptable to the Agents. -41- 49 (b) All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Documents shall be reasonably satisfactory in form and substance to the Agents, and the Agents shall have received all information and copies of all documents and papers, including records of corporate proceedings, governmental approvals, good standing certificates and (in the case of the Borrower, Merger Sub and Red Lion) bring-down telegrams or facsimiles, if any, which any Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. 5.05 Employee Benefit Plans; Shareholders' Agreements; Management Agreements; Collective Bargaining Agreements; Existing Indebtedness Agreements; Tax Sharing Agreements; Joint Venture Agreements; Property Management Agreements; Material Leases. On or prior to the Initial Borrowing Date, there shall have been made available for review by the Agents true and correct copies of the following documents: (i) all Plans (and for each Plan that is required to file an annual report on Internal Revenue Service Form 5500-series, a copy of the most recent such report (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information), and for each Plan that is a "single-employer plan," as defined in Section 4001(a)(15) of ERISA, the most recently prepared actuarial valuation therefor) and any other "employee benefit plans," as defined in Section 3(3) of ERISA, and any other material agreements, plans or arrangements, with or for the benefit of current or former employees of the Borrower or any of its Subsidiaries or any ERISA Affiliate (provided that the foregoing shall apply in the case of any multiemployer plan, as defined in 4001(a)(3) of ERISA, only to the extent that any document described therein is in the possession of the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate or reasonably available thereto from the sponsor or trustee of any such plan)(collectively, the "Employee Benefit Plans"); (ii) all material agreements entered into by the Borrower or any of its Subsidiaries or any of the Existing Red Lion Joint Ventures governing the terms and relative rights of its capital stock and any agreements entered into by shareholders relating to any such entity with respect to its capital stock (collectively, the "Shareholders' Agreements"); (iii) all material agreements with members of, or with respect to, the senior management and management of the Borrower or any of its Subsidiaries or any of the Existing Red Lion Joint Ventures (collectively, the "Management Agreements"); -42- 50 (iv) all collective bargaining agreements applying or relating to any employee of the Borrower or any of its Subsidiaries (collectively, the "Collective Bargaining Agreements"); (v) all agreements evidencing or relating to Indebtedness of the Borrower or any of its Subsidiaries or any of its Existing Red Lion Joint Ventures which is to remain outstanding after giving effect to the incurrence of Loans on the Initial Borrowing Date to the extent such Indebtedness exceeds (or upon the utilization of any unused commitments may exceed) $1,000,000 (collectively, the "Existing Indebtedness Agreements"); (vi) all tax sharing, tax allocation and other similar agreements entered into by the Borrower or any of its Subsidiaries or any of its Existing Red Lion Joint Ventures (collectively, the "Tax Sharing Agreements"); (vii) all articles of incorporation, joint venture agreements and/or partnership agreements relating to all Joint Ventures in existence on the Initial Borrowing Date (collectively, the "Joint Venture Agreements"); (viii) without duplication of the Management Agreements referred to in clause (iii) above, all material Hotel Property property management agreements (including the Red Lion Master Property Management Agreement) under which the Borrower or any of its Subsidiaries is the hotel manager (collectively, the "Hotel Property Management Agreements"); and (ix) all material leases (including the Red Lion Master Lease and the Doubletree Master REIT Lease) under which the Borrower or any of its Subsidiaries lease (as lessee) any Hotel Property (collectively, the "Material Leases"); all of which Employee Benefit Plans, Shareholders' Agreements, Management Agreements, Collective Bargaining Agreements, Existing Indebtedness Agreements, Tax Sharing Agreements, Joint Venture Agreements, Hotel Property Management Agreements and Material Leases shall be in full force and effect on the Initial Borrowing Date. 5.06 Equity Financing; Equity Rollover. (a) On or prior to the Initial Borrowing Date, (i) the Borrower shall have received at least $250,000,000 of gross cash proceeds from the Equity Financing and (ii) the Borrower shall have utilized at least $250,000,000 of gross cash proceeds from the Equity Financing to make payments owing in connection with the Transaction prior to utilizing any proceeds of Loans for such purpose. -43- 51 (b) On or prior to the Initial Borrowing Date, (i) the Agents shall have received true and correct copies of the Equity Financing Documents, all of which shall be required to be in form and substance (including as to all of the terms and conditions thereof) reasonably satisfactory to the Agents and the Required Banks and (ii) each of the conditions precedent set forth in the Equity Financing Documents shall have been satisfied and not waived (unless waived with the consent of the Agents and the Required Banks). (c) On or prior to the Initial Borrowing Date, the Borrower shall have issued for the account of the selling shareholders of Red Lion shares of the Borrower's common stock having an implied value of $283,000,000 (subject to adjustment as set forth in the Acquisition Agreement), and the Agents shall have received true and correct copies of the Acquisition Agreement and all SEC filings made in connection with the Transaction, each of which shall be in full force and effect and shall be in form and substance reasonably satisfactory to the Agents and the Required Banks. 5.07 Consummation of Acquisition; Cash on Hand. (a) On the Initial Borrowing Date, (i) the Acquisition shall have been consummated in accordance with the Acquisition Documents and all applicable laws and (ii) each of the conditions precedent set forth in the Acquisition Documents shall have been satisfied in all material respects, and not waived except with the reasonable consent of the Agents and the Required Banks, to the reasonable satisfaction of the Agents and the Required Banks, (iii) the Agents shall have received true and complete copies of all Acquisition Documents, and with those Acquisition Documents which were delivered to the Agents on or before September 12, 1996 to be in the form so delivered with such changes thereto or waivers therefrom to be reasonably satisfactory to the Agents and the Required Banks, and with all other Acquisition Documents to be in form and substance reasonably satisfactory to the Agents and the Required Banks and (iv) the Agents shall have received copies of the "comfort letters" referred to in Sections 6.2(f) and 6.3(e) of the Acquisition Agreement. (b) On the Initial Borrowing Date, the Agents shall have received evidence satisfactory to them that the Borrower and/or Red Lion have cash on hand, when added to the amount of the Total Term Loan Commitment, up to $15,0000,000 of the Total Revolving Loan Commitment and the amount received (or to be received on the Initial Borrowing Date) from the Equity Financing, that is sufficient to consummate the Acquisition and the Refinancing and to pay the fees and expenses incurred in connection with the Transaction. 5.08 Refinancing. On the Initial Borrowing Date and after giving effect to the Acquisition and the Loans incurred on the Initial Borrowing Date, neither the Borrower nor any of its Subsidiaries shall have any Indebtedness outstanding except for (x) the Obligations and (y) the Existing Indebtedness. Schedule IV sets forth a true and complete list of all Indebtedness to be Refinanced, in each case showing the aggregate principal -44- 52 amount thereof and accrued interest thereon (immediately before giving effect to the Initial Borrowing Date) and the name of the respective borrower thereof. On the Initial Borrowing Date, all Indebtedness to be Refinanced (other than the Existing Glendale Debt to the extent that same is to be refinanced after the Initial Borrowing Date) shall have been repaid in full and all commitments in respect thereof shall have been terminated and all Liens and guaranties in connection therewith shall have been terminated (and all appropriate releases, termination statements or other instruments of assignment with respect thereto shall have been obtained) to the reasonable satisfaction of the Agents. The Agents shall have received evidence, in form and substance reasonably satisfactory to them, that the matters set forth in the immediately preceding sentence have been satisfied as of the Initial Borrowing Date. In addition, on or prior to the Initial Borrowing Date, the Borrower shall have informed the Agents in writing as to whether the Borrower intends to refinance the Existing Glendale Debt as part of the Refinancing. 5.09 Adverse Change, etc. (a) On or prior to the Initial Borrowing Date, nothing shall have occurred (and (x) neither the Agents nor the Banks shall have become aware of any facts or conditions not previously disclosed to them and (y) no information previously submitted by or on behalf of the Borrower to the Agents (including, without limitation, financial, accounting and tax information) shall be inaccurate, incomplete or misleading) which (in any such case) has had, or could reasonably be expected to have, a material adverse effect on the Transaction or on the business, property, assets, operations, liabilities or financial condition of the Borrower, Red Lion and their respective Subsidiaries taken as a whole. (b) All necessary governmental approvals and/or consents (other than approvals and/or consents required to effect the transfer of liquor licenses), all necessary shareholder and board of director approvals and/or consents and the approval of the lenders to Red Lion Inns Operating, L.P. (or the written acknowledgment by such lenders that such approval is not necessary or the issuance of an opinion of counsel of the Borrower, satisfactory in form and substance to the Agents, that no such approval is necessary), in each case in connection with the Transaction and the other transactions contemplated by the Documents and otherwise referred to herein or therein shall have been obtained and remain in effect, and all applicable waiting periods with respect thereto shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon, the consummation of the Transaction or the other transactions contemplated by the Documents or otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon the Transaction or the other transactions contemplated by the Documents. -45- 53 (c) On or prior to the Initial Borrowing Date, there shall not have occurred and be continuing a material disruption of or a material adverse change in financial, banking or capital markets that would have a material adverse effect on the successful syndication of the Commitments as determined by the Agents in their reasonable discretion. The Borrower and Red Lion shall have fully cooperated in the Agents' syndication efforts, including, without limitation, by promptly providing the Agents with all information deemed necessary by the Agents to successfully complete such syndication. 5.10 Litigation. On the Initial Borrowing Date, no material litigation by any entity (private or governmental) shall be pending or threatened with respect to the Transaction or any Document. 5.11 Pledge Agreement. On the Initial Borrowing Date, each Credit Party shall have duly authorized, executed and delivered the Pledge Agreement in the form of Exhibit G (as amended, modified or supplemented from time to time, the "Pledge Agreement") and shall have delivered to the Collateral Administrative Agent, as Pledgee thereunder, all of the Pledged Securities, if any, referred to therein then owned by such Credit Party, (x) endorsed in blank in the case of promissory notes constituting Pledged Securities and (y) together with executed and undated stock powers in the case of capital stock constituting Pledged Securities. 5.12 Security Agreement. On the Initial Borrowing Date, each Credit Party shall have duly authorized, executed and delivered the Security Agreement in the form of Exhibit H (as modified, supplemented or amended from time to time, the "Security Agreement") covering all of such Credit Party's present and future Security Agreement Collateral, together with: (i) proper Financing Statements (Form UCC-1 or the equivalent) fully executed for filing under the UCC or other appropriate filing offices of each jurisdiction as may be necessary or, in the reasonable opinion of the Collateral Administrative Agent, desirable to perfect the security interests purported to be created by the Security Agreement; (ii) certified copies of Requests for Information or Copies (Form UCC-11), or equivalent reports, listing all effective financing statements that name any Credit Party or any of its Subsidiaries as debtor and that are filed in the jurisdictions referred to in clause (i) above, together with copies of such other financing statements that name any Credit Party or any of its Subsidiaries as debtor (none of which shall cover the Collateral except to the extent evidencing Permitted Liens or in respect of which the Collateral Administrative Agent shall have received termination statements (Form UCC-3) or such other termination statements as shall be required by local law fully executed for filing); and -46- 54 (iii) evidence that all other actions necessary or, in the reasonable opinion of the Collateral Administrative Agent, desirable to perfect and protect the security interests purported to be created by the Security Agreement have been (or within 10 days following the Initial Borrowing Date will be) taken. 5.13 Subsidiaries Guaranty. On the Initial Borrowing Date, each Subsidiary Guarantor shall have duly authorized, executed and delivered the Subsidiaries Guaranty in the form of Exhibit I (as amended, modified or supplemented from time to time, the "Subsidiaries Guaranty"). 5.14 Mortgages; Title Insurance; Survey; etc. On the Initial Borrowing Date, the Collateral Administrative Agent shall have received: (i) fully executed counterparts of Mortgages, in form and substance reasonably satisfactory to the Agents, which Mortgages shall cover the Mortgaged Properties owned or leased by the Credit Parties on the Initial Borrowing Date as designated on Schedule III, together with evidence that counterparts of such Mortgages have been delivered to the title insurance company insuring the Lien of such Mortgages for recording in all places to the extent necessary or, in the reasonable opinion of the Collateral Administrative Agent, desirable, to effectively create a valid and enforceable first priority mortgage lien on each such Mortgaged Property in favor of the Collateral Administrative Agent (or such other trustee as may be required or desired under local law) for the benefit of the Secured Creditors; (ii) a mortgagee title insurance policy on each such Mortgaged Property issued by a title insurer reasonably satisfactory to the Agents (the "Mortgage Policies") in amounts satisfactory to the Agents assuring the Collateral Administrative Agent that the Mortgages on such Mortgaged Properties are valid and enforceable first priority mortgage liens on the respective Mortgaged Properties, free and clear of all defects and encumbrances except Permitted Encumbrances and such Mortgage Policies shall otherwise be in form and substance reasonably satisfactory to the Agents and shall include, as appropriate, an endorsement for future advances under this Agreement and the Notes and for any other matter that any Agent in its reasonable discretion may reasonably request, shall not include (to the extent permissible under applicable state law) an exception for mechanics' liens, and shall provide for affirmative insurance and such reinsurance as any Agent in its discretion may reasonably request; (iii) a survey, in form and substance reasonably satisfactory to the Agents, of each such Mortgaged Property, certified by a licensed professional surveyor reasonably satisfactory to the Agents; -47- 55 (iv) such landlord waivers and/or estoppel certificates as any Agent may have reasonably required, which landlord waivers and/or estoppel certificates shall be in form and substance reasonably satisfactory to the Agents; and (v) fully executed counterparts of Collateral Assignments, in form and substance reasonably satisfactory to the Agents, which Collateral Assignments shall be executed in respect of those Pledged Notes issued by any Joint Venture or other Persons that are required to be delivered pursuant to the Pledge Agreement to the extent that such Pledged Notes are secured by all or a portion of the assets of such Joint Venture or other Person. 5.15 Projections; Pro Forma Balance Sheet. On or prior to the Initial Borrowing Date, the Agents shall have received copies of the financial statements (including the pro forma financial statements) and Projections referred to in Sections 7.05(a) and (d). 5.16 Solvency Opinion; Insurance Certificates. On the Initial Borrowing Date, the Borrower shall have delivered to the Agents: (i) a solvency certificate from the Chief Financial Officer of the Borrower in the form of Exhibit J; and (ii) certificates of insurance complying with the requirements of Section 8.03 for the business and properties of the Borrower and its Subsidiaries, in form and substance satisfactory to the Agents and naming the Collateral Administrative Agent as an additional insured and as loss payee, and stating that such insurance shall not be cancelled without at least 30 days prior written notice by the insurer to the Collateral Administrative Agent (or such shorter period of time as a particular insurance company generally provides). 5.17 Fees, etc. On the Initial Borrowing Date, the Borrower shall have paid to the Agents and each Bank all costs, fees and expenses (including, without limitation, legal fees and expenses) payable to the Agents and such Bank to the extent then due. SECTION 6. Conditions Precedent to All Credit Events. The obligation of each Bank to make Loans (including Loans made on the Initial Borrowing Date), and the obligation of any Issuing Bank to issue any Letter of Credit, is subject, at the time of each such Credit Event (except as hereinafter indicated), to the satisfaction of the following conditions: 6.01 No Default; Representations and Warranties. At the time of each such Credit Event and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein and in the other Credit -48- 56 Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on the date of such Credit Event (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date). 6.02 Notice of Borrowing; Letter of Credit Request. (a) Prior to the making of each Loan (other than a Swingline Loan or a Revolving Loan made pursuant to a Mandatory Borrowing), the Administrative Agent shall have received a Notice of Borrowing meeting the requirements of Section 1.03(a). Prior to the making of each Swingline Loan, the Swingline Bank shall have received the notice referred to in Section 1.03(b)(i). (b) Prior to the issuance of each Letter of Credit, the Administrative Agent and the respective Issuing Bank shall have received a Letter of Credit Request meeting the requirements of Section 2.03. The acceptance of the proceeds of each Loan and the making of each Letter of Credit Request shall constitute a representation and warranty by the Borrower to the Agents and each of the Banks that all the conditions specified in Section 5 (with respect to Credit Events on the Initial Borrowing Date) and in this Section 6 (with respect to Credit Events on and after the Initial Borrowing Date) and applicable to such Credit Event exist as of that time. All of the Notes, certificates, legal opinions and other documents and papers referred to in Section 5 and in this Section 6, unless otherwise specified, shall be delivered to the Administrative Agent at the Notice Office for the account of each of the Banks and, except for the Notes, in sufficient counterparts or copies for each of the Banks and shall be in form and substance reasonably satisfactory to the Agents and the Required Banks. SECTION 7. Representations, Warranties and Agreements. In order to induce the Banks to enter into this Agreement and to make the Loans, and issue (or participate in) the Letters of Credit as provided herein, the Borrower makes the following representations, warranties and agreements, in each case after giving effect to the Transaction, all of which shall survive the execution and delivery of this Agreement and the Notes and the making of the Loans and issuance of the Letters of Credit, with the occurrence of each Credit Event on or after the Initial Borrowing Date being deemed to constitute a representation and warranty that the matters specified in this Section 7 are true and correct in all material respects on and as of the Initial Borrowing Date and on the date of each such Credit Event (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct only as of such specified date). -49- 57 7.01 Corporate and Other Status. Each Credit Party and each of its Subsidiaries (i) is a duly organized and validly existing corporation or partnership, as the case may be, in good standing under the laws of the jurisdiction of its organization, (ii) has the corporate or partnership power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good standing in each jurisdiction where the ownership, leasing or operation of its property or the conduct of its business requires such qualifications except for failures to be so qualified which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 7.02 Corporate and Other Power and Authority. Each Credit Party has the corporate or partnership power and authority to execute, deliver and perform the terms and provisions of each of the Documents to which it is party and has taken all necessary corporate or partnership action to authorize the execution, delivery and performance by it of each of such Documents. Each Credit Party has duly executed and delivered each of the Documents to which it is party, and each of such Documents constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). 7.03 No Violation. Neither the execution, delivery or performance by any Credit Party of the Documents to which it is a party, nor compliance by it with the terms and provisions thereof, (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality (other than contraventions relating to an Acquisition Document which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect (x) on the Acquisition or the Transaction or (y) on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole), (ii) will conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (except pursuant to the Security Documents) upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement or loan agreement, or any other material agreement, contract or instrument, to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the certificate of incorporation, by-laws or partnership agreement (or equivalent organizational documents) of the Borrower or any of its Subsidiaries (other than violations of immaterial partnership agreements existing on the Initial Borrowing Date by reason of the Acquisition). -50- 58 7.04 Approvals. (a) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with ((x) other than those required to effect the transfer of liquor licenses as part of the Acquisition and (y) except for those that have otherwise been obtained or made on or prior to the Initial Borrowing Date and which remain in full force and effect on the Initial Borrowing Date, or to the extent not required to be obtained or made on or prior to the Initial Borrowing Date pursuant to the Documents, as will be obtained or made on or prior to the required date therefor), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Document or (ii) the legality, validity, binding effect or enforceability of any such Document. (b) All necessary shareholder and board of director approvals and/or consents and all material third party non-governmental approvals and/or consents, in each case in connection with the Transaction and the execution, delivery and performance of any Document have been obtained and remain in full force and effect on the Initial Borrowing Date. 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc. (a) The consolidated balance sheet of the Borrower and its Subsidiaries at December 31, 1995 and September 30, 1996 and the related consolidated statements of operations, cash flows and shareholders' equity of the Borrower and its Subsidiaries for the fiscal year and nine-month period ended on such date, as the case may be, copies of which have been furnished to the Banks prior to the Initial Borrowing Date, present fairly the financial position of the Borrower and its Subsidiaries at the date of such balance sheets and the results of the operations of the Borrower and its Subsidiaries for the periods covered thereby. The consolidated balance sheet of Red Lion and its Subsidiaries at December 31, 1995 and September 30, 1996 and the related consolidated statements of income, cash flows and shareholders' equity of Red Lion and its Subsidiaries for the fiscal year and nine- month period ended on such date, as the case may be, copies of which have been furnished to the Banks prior to the Initial Borrowing Date, present fairly the financial position of Red Lion and its Subsidiaries at the date of such balance sheets and the results of the operations of Red Lion and its Subsidiaries for the periods covered thereby. The pro forma consolidated balance sheet of the Borrower and its Subsidiaries (including Red Lion and its Subsidiaries) at June 30, 1996 and the pro forma income statements of the Borrower and its Subsidiaries (including Red Lion and its Subsidiaries) for the periods ended December 31, 1995 and June 30, 1996, copies of which have been furnished to the Banks prior to the Initial Borrowing Date, present fairly the pro forma financial position of the Borrower and its Subsidiaries (including Red Lion and its Subsidiaries) at June 30, 1996 and the results of the operations of the Borrower and its Subsidiaries (including Red Lion and its Subsidiaries) for the periods ended December 31, 1995 and June 30, 1996 and, in the case of the pro forma income statements, have been prepared on the assumption that the Transaction had -51- 59 been consummated on January 1, 1995. All such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied, subject to normal year-end audit adjustments in the case of the nine-month financial statements referred to above. After giving effect to the Transaction (but for this purpose assuming that the Transaction had occurred prior to December 31, 1995), since December 31, 1995, there has been no material adverse change in the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole (it being understood and agreed, however, that the representation and warranty made pursuant to this sentence is only being made in connection with Credit Events that occur after the Initial Borrowing Date). (b) (i) On and as of the Initial Borrowing Date and after giving effect to the Transaction and to all Indebtedness (including the Loans) being incurred or assumed and Liens created by the Credit Parties in connection therewith, (a) the sum of the assets, at a fair valuation, of each of the Borrower on a stand alone basis and of the Borrower and its Subsidiaries taken as a whole will exceed its debts; (b) each of the Borrower on a stand alone basis and the Borrower and its Subsidiaries taken as a whole has not incurred and does not intend to incur, and does not believe that they will incur, debts beyond their ability to pay such debts as such debts mature; and (c) each of the Borrower on a stand alone basis and the Borrower and its Subsidiaries taken as a whole will have sufficient capital with which to conduct its business. For purposes of this Section 7.05(b), "debt" means any liability on a claim, and "claim" means (i) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured or (ii) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (c) Except as fully disclosed in the financial statements delivered pursuant to Section 7.05(a), there were as of the Initial Borrowing Date no liabilities or obligations with respect to the Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in aggregate, could reasonably be expected to be material to the Borrower and its Subsidiaries taken as a whole. As of the Initial Borrowing Date, the Borrower does not know of any basis for the assertion against it or any of its Subsidiaries of any liability or obligation of any nature whatsoever that is not fully disclosed in the financial statements delivered pursuant to Section 7.05(a) which, either individually or in the aggregate, could reasonably be expected to be material to the Borrower and its Subsidiaries taken as a whole. -52- 60 (d) On and as of the Initial Borrowing Date, the Projections delivered to the Agents and the Banks prior to the Initial Borrowing Date have been prepared in good faith and are based on reasonable assumptions, and there are no statements or conclusions in the Projections which are based upon or include information known to the Borrower to be misleading in any material respect or which fail to take into account material information known to the Borrower regarding the matters reported therein. On the Initial Borrowing Date, the Borrower believes that the Projections are reasonable, it being understood that the Projections include assumptions as to future event that are not to be viewed as facts and that actual results may differ from the projected results and such differences may be material. 7.06 Litigation. There are no actions, suits or proceedings pending or, to the best knowledge of the Borrower, threatened (i) with respect to any Document or (ii) that are reasonably likely to materially and adversely affect the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole (it being understood and agreed, however, that the representation and warranty made pursuant to this Section 7.06 is only being made in connection with Credit Events that occur after the Initial Borrowing Date). 7.07 True and Complete Disclosure. All factual information (taken as a whole) furnished by any Credit Party in writing to any Agent or any Bank (including, without limitation, all information contained in the Documents and in the Confidential Information Memorandum) for purposes of or in connection with this Agreement, the other Credit Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of any Credit Party in writing to any Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. 7.08 Use of Proceeds; Margin Regulations. (a) All proceeds of the Term Loans will be used by the Borrower (i) to effect the Acquisition and the Refinancing and (ii) to pay fees and expenses related to the Transaction. (b) (i) Up to $15,000,000 of proceeds of Revolving Loans may be used on the Initial Borrowing Date for the purposes described in Section 7.08(a) and (ii) the proceeds of all other Revolving Loans and all Swingline Loans will be used for the Borrower's and its Subsidiaries' general corporate and working capital purposes. (c) No part of any Credit Event (or the proceeds thereof) will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Loan nor the use of the proceeds -53- 61 thereof nor the occurrence of any other Credit Event will violate or be inconsistent with the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. 7.09 Tax Returns and Payments. Each of the Borrower and each of its Subsidiaries has filed all federal income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, except for those contested in good faith and adequately disclosed and fully provided for on the financial statements of the Borrower and its Subsidiaries in accordance with generally accepted accounting principles. The Borrower and each of its Subsidiaries have at all times paid, or have provided adequate reserves (in the good faith judgment of the management of the Borrower) for the payment of, all federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to date. There is no material (to the Borrower and its Subsidiaries taken as a whole) action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Borrower threatened, by any authority regarding any taxes relating to the Borrower or any of its Subsidiaries. As of the Initial Borrowing Date, neither the Borrower nor any of its Subsidiaries has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of the Borrower or any of its Subsidiaries, or is aware of any circumstances that would cause the taxable years or other taxable periods of the Borrower or any of its Subsidiaries not to be subject to the normally applicable statute of limitations. 7.10 Compliance with ERISA. (i) Except as disclosed on Schedule XIV, each Plan and to the knowledge of the Borrower each Multiemployer Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including, without limitation, ERISA and the Code; except as disclosed on Schedule XIV, each Plan and to the knowledge of the Borrower each Multiemployer Plan (and each related trust, if any) which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable Event has occurred with respect to a Plan; to the knowledge of the Borrower, no Multiemployer Plan is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan and to the knowledge of the Borrower no Multiemployer Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA; all material contributions required to be made by the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate with respect to a Plan or a Multiemployer Plan have been timely made; neither the Borrower nor any Subsidiary of the Borrower nor any ERISA Affiliate has incurred any material liability (including any indirect or secondary liability) to or on -54- 62 account of a Plan pursuant to Section 409, 502(i), 502(l), 4062, 4063, 4064 or 4069 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any such material liability under any of the foregoing sections with respect to any Plan; to the knowledge of the Borrower, no condition exists which presents a material risk to the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate of incurring a material liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA; no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending or, to the knowledge of the Borrower, threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Borrower and its Subsidiaries and its ERISA Affiliates to all Multiemployer Plans in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the date of this Agreement, would not exceed $2,000,000 and with respect to fiscal years ended prior to the date of each Credit Event would not be material; each group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate has at all times been operated in substantial compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate exists or is likely to arise on account of any Plan; neither the Borrower nor any Subsidiary of the Borrower nor any ERISA Affiliate has incurred any material liability (including any indirect or secondary liability) under Sections 515, 4201, 4202 or 4212 of ERISA with respect to any Multiemployer Plan; to the knowledge of the Borrower, no condition exists which presents a material risk to the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate of incurring a material liability to or on account of a Multiemployer Plan pursuant to the foregoing provisions of ERISA; to the knowledge of the Borrower, no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Multiemployer Plan (other than routine claims for benefits) that could reasonably be expected to be material to the Borrower and its Subsidiaries taken as a whole is pending or threatened; and the Borrower and its Subsidiaries do not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA), which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan or Multiemployer Plan, the obligations with respect to which could reasonably be expected to have a material adverse effect on the ability of the Borrower and its Subsidiaries to perform their obligations under the Credit Documents. (ii) To the knowledge of the Borrower, each Foreign Pension Plan has been maintained in substantial compliance with its terms and with the requirements of any and -55- 63 all applicable laws, statutes, rules, regulations and orders and has been maintained, where required, in good standing with applicable regulatory authorities. All material contributions required to be made with respect to a Foreign Pension Plan have been timely made. Neither the Borrower nor any of its Subsidiaries has incurred any material obligation in connection with the termination of or withdrawal from any Foreign Pension Plan. The Borrower and its Subsidiaries do not maintain or contribute to any Foreign Pension Plan the obligations with respect to which could reasonably be expected to have a material adverse effect on the ability of the Borrower and its Subsidiaries to perform their obligations under the Credit Documents. 7.11 The Security Documents. (a) The provisions of the Security Agreement are effective to create in favor of the Collateral Administrative Agent for the benefit of the Secured Creditors a legal, valid and enforceable security interest in all right, title and interest of the Credit Parties party thereto in the Security Agreement Collateral described therein, and the Collateral Administrative Agent, for the benefit of the Secured Creditors, has a fully perfected lien on, and security interest in, all right, title and interest in all of the Security Agreement Collateral described therein, subject to no other Liens other than Permitted Liens. The recordation of the Assignment of Security Interest in U.S. Patents and Trademarks in the form attached to the Security Agreement in the United States Patent and Trademark Office together with filings on Form UCC-1 made pursuant to the Security Agreement will create, as may be perfected by such filing and recordation, a perfected security interest granted to the Collateral Administrative Agent in the trademarks and patents covered by the Security Agreement and the recordation of the Assignment of Security Interest in U.S. Copyrights in the form attached to the Security Agreement with the United States Copyright Office together with filings on Form UCC-1 made pursuant to the Security Agreement will create, as may be perfected by such filing and recordation, a perfected security interest granted to the Collateral Administrative Agent in the copyrights covered by the Security Agreement. (b) The security interests created in favor of the Collateral Administrative Agent, as Pledgee, for the benefit of the Secured Creditors, under the Pledge Agreement constitute first priority perfected security interests in the Pledged Securities described in the Pledge Agreement, subject to no security interests of any other Person. No filings or recordings are required in order to perfect (or maintain the perfection or priority of) the security interests created in the Pledged Securities under the Pledge Agreement. (c) The Mortgages create, for the obligations purported to be secured thereby, a valid and enforceable perfected security interest in and mortgage lien on all of the Mortgaged Properties in favor of the Collateral Administrative Agent (or such other trustee as may be required or desired under local law) for the benefit of the Secured Creditors, superior to and prior to the rights of all third persons (except that the security interest and mortgage lien created in the Mortgaged Properties may be subject to the Per- -56- 64 mitted Encumbrances related thereto) and subject to no other Liens (other than Liens permitted under Section 9.01). Schedule III contains a true and complete list of each parcel of Real Property owned or leased by the Borrower and its Subsidiaries on the Initial Borrowing Date, and the type of interest therein held by the Borrower or such Subsidiary. The Borrower and each of its Subsidiaries have good and marketable title to all fee-owned Real Property and valid leasehold title to all Leaseholds, in each case free and clear of all Liens except those described in the first sentence of this subsection (c). (d) The provisions of the Collateral Assignments are effective to create in favor of the Collateral Administrative Agent for the benefit of the Secured Creditors a legal, valid and enforceable security interest in all right, title and interest of the Credit Parties party thereto in the Collateral Assignment Collateral described therein, and the Collateral Administrative Agent, for the benefit of the Secured Creditors, has a fully perfected lien on, and security interest in, all right, title and interest in all of the Collateral Assignment Collateral described therein, subject to no other Liens other than Permitted Liens. 7.12 Representations and Warranties in Acquisition Documents. All representations and warranties set forth in the other Documents were true and correct in all material respects at the time as of which such representations and warranties were (or are) made (or deemed made). 7.13 Properties. The Borrower and each of its Subsidiaries have good and marketable title to all material properties owned by them, including all material property reflected in the balance sheets referred to in Section 7.05(a) and all property acquired pursuant to the Acquisition (except as sold or otherwise disposed of since the date of such balance sheet in the ordinary course of business or in compliance with the terms of this Agreement), free and clear of all Liens, other than Liens permitted by Section 9.01. 7.14 Capitalization. On the Initial Borrowing Date, the authorized capital stock of the Borrower shall consist of (i) 100,000,000 shares of common stock, $.01 par value per share and (ii) 5,000,000 shares of preferred stock, $.01 par value per value, of which no shares of such preferred stock are issued or outstanding. All outstanding shares of capital stock of the Borrower have been duly and validly issued, are fully paid and nonassessable. Except (i) as set forth on Schedule V and (ii) for options or warrants to purchase shares of common stock of the Borrower, as of the Initial Borrowing Date, the Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. 7.15 Subsidiaries and Joint Ventures. As of the Initial Borrowing Date, the Borrower has no Subsidiaries or Joint Ventures other than those Subsidiaries and Joint -57- 65 Ventures listed on Schedule VI. Schedule VI correctly sets forth, as of the Initial Borrowing Date, (i) the percentage ownership (direct or indirect) of the Borrower in each class of capital stock or other equity of each of its Subsidiaries and Joint Ventures and also identifies the direct owner thereof and (ii) which Joint Venture Agreements prohibit the assignment by a Credit Party of its equity interest in the respective Joint Venture. 7.16 Compliance with Statutes, etc. Each of the Borrower and each of its Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 7.17 Investment Company Act. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 7.18 Public Utility Holding Company Act. Neither the Borrower nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7.19 Environmental Matters. (a) The Borrower and each of its Subsidiaries have complied with, and on the date of such Credit Event are in compliance with, all applicable Environmental Laws and the requirements of any permits issued under such Environmental Laws. There are no pending or, to the best knowledge of the Borrower, threatened Environmental Claims against the Borrower or any of its Subsidiaries (including any such claim arising out of the ownership or operation by the Borrower or any of its Subsidiaries of any Real Property no longer owned or operated by the Borrower or any of its Subsidiaries) or any Real Property owned or operated by the Borrower or any of its Subsidiaries. There are no facts, circumstances, conditions or occurrences with respect to any Real Property owned or operated by the Borrower or any of its Subsidiaries (including any Real Property formerly owned or operated by the Borrower or any of its Subsidiaries but no longer owned or operated by the Borrower or any of its Subsidiaries) or, to the best knowledge of the Borrower, any property adjoining or adjacent to any such Real Property that could reasonably be expected (i) to form the basis of an Environmental Claim against the Borrower or any of its Subsidiaries or any Real Property owned or operated by the Borrower or any of its Subsidiaries, or (ii) to cause any Real Property owned or operated -58- 66 by the Borrower or any of its Subsidiaries to be subject to any restrictions on the ownership, occupancy or transferability of such Real Property by the Borrower or any of its Subsidiaries under any applicable Environmental Law. (b) Hazardous Materials have not at any time been generated, used, treated or stored on, or transported to or from, any Real Property owned or operated by the Borrower or any of its Subsidiaries where such generation, use, treatment or storage has violated or could reasonably be expected to violate any Environmental Law. Hazardous Materials have not at any time been Released on or from any Real Property owned or operated by the Borrower or any of its Subsidiaries where such Release has violated or could reasonably be expected to violate any applicable Environmental Law. (c) Notwithstanding anything to the contrary in this Section 7.19, the representations made in this Section 7.19 shall not be untrue unless the aggregate effect of all violations, claims, restrictions, failures and noncompliances of the types described above could reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 7.20 Labor Relations. Neither the Borrower nor any of its Subsidiaries is engaged in any unfair labor practice that could reasonably be expected to have a material adverse effect on the Borrower and its Subsidiaries taken as a whole. There is (i) no unfair labor practice complaint pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries and (iii) no union representation question exists with respect to the employees of the Borrower or any of its Subsidiaries, except (with respect to any matter specified in clause (i), (ii) or (iii) above, either individually or in the aggregate) such as could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 7.21 Patents, Licenses, Franchises and Formulas. Each of the Borrower and each of its Subsidiaries owns all the patents, trademarks, permits, service marks, trade names, copyrights, licenses, franchises, proprietary information (including but not limited to rights in computer programs and databases) and formulas, or rights with respect to the foregoing, and has obtained assignments of all leases and other rights of whatever nature, necessary for the present conduct of its business, without any known conflict with the rights -59- 67 of others which, or the failure to obtain which, as the case may be, could reasonably be expected to result in a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 7.22 Indebtedness. Schedule VII sets forth a true and complete list of all Indebtedness (including Contingent Obligations) of the Borrower and its Subsidiaries as of the Initial Borrowing Date and which is to remain outstanding after giving effect to the Transaction (excluding the Loans and the Letters of Credit (but including the Existing Glendale Debt to the extent that same is to be refinanced after the Initial Borrowing Date as part of the Refinancing or is to remain outstanding without being so refinanced), the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof and the name of the respective borrower and any Credit Party or any of its Subsidiaries which directly or indirectly guaranteed such debt. 7.23 Transaction. At the time of consummation thereof, the Transaction shall have been consummated in accordance with the terms of the respective Documents and all applicable laws. At the time of consummation thereof, all material consents and approvals of, and filings and registrations with, and all other actions in respect of, all governmental agencies, authorities or instrumentalities required in order to make or consummate the Transaction to the extent then required have been obtained, given, filed or taken and are or will be in full force and effect (or effective judicial relief with respect thereto has been obtained). All applicable waiting periods with respect thereto have or, prior to the time when required, will have, expired without, in all such cases, any action being taken by any competent authority which restrains, prevents, or imposes material adverse conditions upon the Transaction. Additionally, there does not exist any judgment, order or injunction prohibiting or imposing material adverse conditions upon the Transaction, or the occurrence of any Credit Event or the performance by any Credit Party of its obligations under the Documents to which it is party. All actions taken by each Credit Party pursuant to or in furtherance of the Transaction have been taken in compliance in all material respects with the respective Documents and all applicable laws. SECTION 8. Affirmative Covenants. The Borrower hereby covenants and agrees that on and after the Effective Date and until the Total Commitments and all Letters of Credit have terminated and the Loans, Notes and Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder and thereunder, are paid in full: 8.01 Information Covenants. The Borrower will furnish to each Bank: (a) Quarterly Financial Statements. Within 50 days after the close of the first three quarterly accounting periods in each fiscal year of the Borrower, (i) the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such quarterly -60- 68 accounting period and the related consolidated statements of income and retained earnings and statement of cash flows for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly accounting period, in each case setting forth comparative figures for the related periods in the prior fiscal year, all of which shall be certified by the Chief Financial Officer of the Borrower or another senior financial officer of the Borrower, subject to normal year-end audit adjustments and (ii) management's discussion and analysis of the important operational and financial developments during the quarterly and year-to-date periods, it being understood that the delivery by the Borrower of its Form 10-Q as filed with the SEC shall satisfy the requirements of this Section 8.01(a). (b) Annual Financial Statements. (A) Within 95 days after the close of each fiscal year of the Borrower, (i) the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for such fiscal year setting forth comparative figures for the preceding fiscal year and certified by KPMG Peat Marwick LLP, any other "Big Six" independent certified public accountants or such other independent certified public accountants of recognized national standing reasonably acceptable to the Agents and (ii) management's discussion and analysis of the important operational and financial developments during the respective fiscal year, it being understood that the delivery by the Borrower of its Form 10-K as filed with the SEC shall satisfy the requirements of this Section 8.01(b)(A). (B) At the time of the delivery of the annual financial statements pursuant to clause (A) above, a report of the applicable accounting firm stating that in the course of its regular audit of the financial statements of the Borrower and its Subsidiaries, which audit was conducted in accordance with generally accepted auditing standards, such accounting firm obtained no knowledge of any Default or Event of Default which has occurred and is continuing under any of Sections 9.07 through 9.11, inclusive, or, if in the opinion of such accounting firm such a Default or an Event of Default has occurred and is continuing under any such Sections, a statement as to the nature thereof. (c) Management Letters. Promptly after the Borrower's or any of its Subsidiaries' receipt thereof, a copy of any "management letter" received from its certified public accountants. (d) Budgets. No later than the 30th day of each fiscal year of the Borrower, a budget in form satisfactory to the Agents (including budgeted statements of income and sources and uses of cash and balance sheets) prepared by the Borrower for each of the months of such fiscal year prepared in detail, setting forth, with appropriate discussion, the principal assumptions upon which such budget was based. -61- 69 (e) Officer's Certificates. At the time of the delivery of the financial statements provided for in Sections 8.01(a) and (b), a certificate of the Chief Financial Officer of the Borrower or another senior financial officer of the Borrower to the effect that, to the best of such officer's knowledge, no Default or Event of Default has occurred and is continuing or, if any Default or Event of Default has occurred and is continuing, specifying the nature and extent thereof, which certificate shall (x) set forth in reasonable detail the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of Sections 9.08 through 9.11, inclusive, at the end of such fiscal quarter or year, as the case may be, (y) if delivered with the financial statements required by Section 8.01(b), set forth in reasonable detail the calculations required to establish whether the Borrower and its Subsidiaries were in compliance with the provisions of Sections 4.02(g) and 9.07 as at the end of such fiscal year and the amount of (and the calculations required to establish the amount of) Excess Cash Flow for the respective Excess Cash Payment Period and (z) set forth the amount of the Retained Net Equity Proceeds Amount and the Retained Excess Cash Flow Amount at the end of such fiscal quarter or year, as the case may be. (f) Notice of Default or Litigation. Promptly upon, and in any event within three Business Days (or five Business Days in the case of clause (ii) below) after, an officer of the Borrower obtains knowledge thereof, notice of (i) the occurrence of any event which constitutes a Default or an Event of Default and (ii) any litigation or governmental investigation or proceeding pending (x) against the Borrower or any of its Subsidiaries which could reasonably be expected to materially and adversely affect the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (y) with respect to the Transaction or any Document. (g) Other Reports and Filings. Promptly after the filing or delivery thereof, copies of all financial information, proxy materials and reports, if any, which the Borrower or any of its Subsidiaries shall publicly file with the Securities and Exchange Commission or any successor thereto (the "SEC") or deliver to holders of its Indebtedness pursuant to the terms of the documentation governing such Indebtedness (or any trustee, agent or other representative therefor). (h) Environmental Matters. Promptly upon, and in any event within ten Business Days after, an officer of the Borrower obtains knowledge thereof, notice of one or more of the following environmental matters, unless such environmental matters could not, individually or when aggregated with all other such environmental matters, be reasonably expected to materially and adversely affect the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole: -62- 70 (i) any pending or threatened Environmental Claim against the Borrower or any of its Subsidiaries or any Real Property owned or operated by the Borrower or any of its Subsidiaries; (ii) any condition or occurrence on or arising from any Real Property owned or operated by the Borrower or any of its Subsidiaries that (a) results in noncompliance by the Borrower or any of its Subsidiaries with any applicable Environmental Law or (b) could reasonably be expected to form the basis of an Environmental Claim against the Borrower or any of its Subsidiaries or any such owned or operated Real Property; (iii) any condition or occurrence on any Real Property owned or operated by the Borrower or any of its Subsidiaries that could reasonably be expected to cause such Real Property to be subject to any restrictions on the ownership, occupancy, use or transferability by the Borrower or any of its Subsidiaries of such Real Property under any Environmental Law; and (iv) the taking of any removal or remedial action in response to the actual or alleged presence of any Hazardous Material on any Real Property owned or operated by the Borrower or any of its Subsidiaries as required by any Environmental Law or any governmental or other administrative agency; provided, that in any event the Borrower shall deliver to each Bank all notices received by the Borrower or any of its Subsidiaries from any government or governmental agency under, or pursuant to, CERCLA which identify the Borrower or any of its Subsidiaries as potentially responsible parties for remediation costs or which otherwise notify the Borrower or any of its Subsidiaries of potential liability under CERCLA. All such notices shall describe in reasonable detail the nature of the claim, investigation, condition, occurrence or removal or remedial action and the Borrower's or such Subsidiary's response thereto. (i) Certain Pro Forma Financial Information. For each Test Period which ends on or before September 30, 1997, the consolidated income statement of the Borrower and its Subsidiaries for such Test Period which shall contain historical financial information for that portion of the Test Period which occurs on and after the Initial Borrowing Date and pro forma financial information for that portion of the Test Period which occurs prior to the Initial Borrowing Date, which pro forma financial information shall be calculated as if the Transaction, the related financing thereof and the other transactions contemplated hereby had been consummated on the first day of such Test Period (and shall exclude any extraordinary adjustments as a result of the Transaction), shall be calculated and presented in a manner -63- 71 consistent with the pro forma income statements referred to in Section 7.05(a) which were furnished to the Banks on or prior to the Initial Borrowing Date, and shall be delivered at the same time as the annual financial statements are delivered pursuant to Section 8.01(b). (j) Other Information. From time to time, such other information or documents (financial or otherwise) with respect to the Borrower or any of its Subsidiaries or Joint Ventures as any Agent or any Bank may reasonably request. 8.02 Books, Records and Inspections. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and accounts in which full, true and correct entries in conformity with generally accepted accounting principles and all requirements of law shall be made of all dealings and transactions in relation to its business and activities. Upon reasonable notice to the Borrower, the Borrower will, and will cause each of its Subsidiaries to, permit officers and designated representatives of any Agent or any Bank to visit and inspect, under guidance of officers of the Borrower or such Subsidiary, any of the properties owned or leased by the Borrower or such Subsidiary, and to examine the books of account of the Borrower or such Subsidiary and discuss the affairs, finances and accounts of the Borrower or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as such Agent or such Bank may reasonably request (provided that the Borrower shall have the right to take part in any discussions with its independent accountants). 8.03 Maintenance of Property; Insurance. (a) Schedule VIII sets forth a true and complete listing of all insurance maintained by the Borrower and its Subsidiaries as of the Initial Borrowing Date. The Borrower will, and will cause each of its Subsidiaries to, (i) keep all property owned or leased by the Borrower and its Subsidiaries necessary to the business of the Borrower and its Subsidiaries in reasonably good working order and condition, ordinary wear and tear excepted, (ii) maintain, with financially sound and reputable insurers, insurance on all such property in at least such amounts and against at least such risks as is consistent and in accordance with industry practice for companies similarly situated owning similar properties in the same general areas in which the Borrower or any of its Subsidiaries operates, and (iii) furnish to any Agent or any Bank, upon written request, full information as to the insurance carried. (b) The Borrower will, and will cause each of the other Credit Parties to, at all times keep its property insured in favor of the Collateral Administrative Agent, and all policies (including Mortgage Policies) or certificates (or certified copies thereof) with respect to such insurance (and any other insurance maintained by the Borrower and/or such other Credit Parties) (i) shall be endorsed to the Collateral Administrative Agent's satisfaction for the benefit of the Collateral Administrative Agent (including, without limita- -64- 72 tion, by naming the Collateral Administrative Agent as loss payee and/or additional insured), (ii) shall state that such insurance policies shall not be cancelled without at least 30 days' prior written notice thereof by the respective insurer to the Collateral Administrative Agent (or such shorter period of time as a particular insurance company policy generally provides), (iii) shall provide that the respective insurers irrevocably waive any and all rights of subrogation with respect to the Collateral Administrative Agent and the Secured Creditors, (iv) shall contain the standard non-contributing mortgage clause endorsement in favor of the Collateral Administrative Agent with respect to hazard liability insurance, (v) shall, except in the case of public liability insurance, provide that any losses shall be payable notwithstanding (A) any act or neglect of the Borrower or any such other Credit Party, (B) the occupation or use of the properties for purposes more hazardous than those permitted by the terms of the respective policy if such coverage is obtainable at commercially reasonable rates and is of the kind from time to time customarily insured against by Persons owning or using similar property and in such amounts as are customary, (C) any foreclosure or other proceeding relating to the insured properties or (D) any change in the title to or ownership or possession of the insured properties and (vi) shall be deposited with the Collateral Administrative Agent. (c) If the Borrower or any of its Subsidiaries shall fail to insure its property in accordance with this Section 8.03, or if the Borrower or any of its Subsidiaries shall fail to so endorse and deposit all policies or certificates with respect thereto, the Collateral Administrative Agent shall have the right (but shall be under no obligation), after giving the Borrower prior written notice, to procure such insurance and the Borrower agrees to reimburse the Collateral Administrative Agent for all costs and expenses of procuring such insurance. 8.04 Corporate Franchises. The Borrower will, and will cause each of its Subsidiaries to, do or cause to be done, all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises, licenses and patents; provided, however, that nothing in this Section 8.04 shall prevent (i) sales of assets and other transactions by the Borrower or any of its Subsidiaries in accordance with Section 9.02 or (ii) the withdrawal by the Borrower or any of its Subsidiaries of its qualification as a foreign corporation in any jurisdiction where such withdrawal could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 8.05 Compliance with Statutes, etc. The Borrower will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards -65- 73 and controls), except such noncompliances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 8.06 Compliance with Environmental Laws. (a) The Borrower will com-ply, and will cause each of its Subsidiaries to comply, with all Environmental Laws applicable to the ownership or use of its Real Property now or hereafter owned or operated by the Borrower or any of its Subsidiaries (except such noncompliance, as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole), will promptly pay or cause to be paid all costs and expenses incurred in connection with such compliance, and will keep or cause to be kept all such Real Property free and clear of any Liens imposed pursuant to such Environmental Laws. Neither the Borrower nor any of its Subsidiaries will generate, use, treat, store, release or dispose of, or permit the generation, use, treatment, storage, release or disposal of Hazardous Materials on any Real Property now or hereafter owned or operated by the Borrower or any of its Subsidiaries, or transport or permit the transportation of Hazardous Materials to or from any such Real Property, except to the extent that any such generation, use, treatment, storage, release or disposal could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. (b) At the reasonable written request of the Agents or the Required Banks, which request shall specify in reasonable detail the basis therefor, at any time and from time to time, the Borrower will provide, at the sole expense of the Borrower, an environmental site assessment report concerning any Real Property owned or operated by the Borrower or any of its Subsidiaries, prepared by an environmental consulting firm reasonably approved by the Agents, indicating the presence or absence of Hazardous Materials and the potential cost of any removal or remedial action in connection with such Hazardous Materials on such Real Property, provided that in no event shall such request be made more often than once every two years for any particular Real Property unless either (i) the Obligations have been declared (or have become) due and payable pursuant to Section 10 or (ii) the Banks receive notice under Section 8.01(h) of any event for which notice is required to be delivered for any such Real Property. If the Borrower fails to provide the same within ninety days after such request was made, the Agents may order the same, the cost of which shall be borne by the Borrower, and the Borrower shall grant and hereby grants to the Agents and the Banks and their agents access to such Real Property and specifically grants the Agents and the Banks an irrevocable non-exclusive license, subject to the rights of tenants, to undertake such an assessment at any reasonable time -66- 74 upon reasonable notice to the Borrower, all at the sole and reasonable expense of the Borrower. 8.07 ERISA. As soon as possible and, in any event, within ten (10) Business Days after the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following, the Borrower will deliver to each of the Banks a certificate of the Chief Financial Officer of the Borrower setting forth the full details as to such occurrence and the action, if any, that the Borrower, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Borrower, the Subsidiary, the ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator with respect thereto: that a Reportable Event has occurred; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan or a Multiemployer Plan; that a contribution for a material amount required to be made with respect to a Plan, a Multiemployer Plan or a Foreign Pension Plan has not been timely made; that a Plan or a Multiemployer Plan has been or may be terminated under Section 4041(c) or 4042 of ERISA, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan or a Multiemployer Plan which is subject to Title IV of ERISA; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Multiemployer Plan; that the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate will or may incur any material liability (including any indirect or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064 or 4069 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409 or 502(i) or 502(l) of ERISA or under Section 4980B(a) of the Code with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code or with respect to a Multiemployer Plan under Sections 4201, 4204 or 4212 of ERISA; or that the Borrower or any Subsidiary of the Borrower may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan which is subject to Title IV of ERISA, any Multiemployer Plan or any Foreign Pension Plan. Upon written request of any Agent, the Borrower will deliver to each of the Banks a complete copy of the annual report (on Internal Revenue Service Form 5500-series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service or any other material financial information the Borrower or any Subsidiary has with -67- 75 respect to any Plan. In addition to any certificates or notices delivered to the Banks pursuant to the first sentence hereof, copies of any material notices pertaining to the foregoing events received by the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate with respect to any Plan, Multiemployer Plan or Foreign Pension Plan shall be delivered to the Banks no later than ten (10) Business Days after the date such notice has been received by the Borrower, the Subsidiary or the ERISA Affiliate, as applicable. 8.08 End of Fiscal Years; Fiscal Quarters. The Borrower will cause (i) each of its, and each of its Subsidiaries', fiscal years to end on December 31, and (ii) each of its, and each of its Subsidiaries', fiscal quarters to end on March 31, June 30, September 30 and December 31. 8.09 Performance of Obligations. The Borrower will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement, loan agreement or credit agreement and each other material agreement, contract or instrument by which it is bound, except such non-performances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 8.10 Payment of Taxes. The Borrower will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 9.01(i); provided, that neither the Borrower nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with generally accepted accounting principles. 8.11 Interest Rate Protection. No later than 90 days following the Initial Borrowing Date, the Borrower will enter into, and shall for 2 years thereafter maintain, Interest Rate Protection Agreements acceptable to the Agents establishing a fixed or maximum interest rate acceptable to the Agents for an aggregate amount equal to at least 40% of the aggregate principal amount of all Term Loans then outstanding and the amount of the Total Tranche A Term Loan Commitment then in effect. 8.12 Additional Security; Further Assurances. (a) The Borrower will, and will cause each of the Subsidiary Guarantors to, grant to the Collateral Administrative Agent security interests and mortgages in such assets and properties (including Real Property) of the Borrower and such Subsidiary Guarantors which are of the type required -68- 76 to be pledged or assigned pursuant to the original Security Documents and as are not covered by such original Security Documents, and as may be requested from time to time by the Agents or the Required Banks (collectively, the "Additional Security Documents"). All such security interests and mortgages shall be granted pursuant to documentation reasonably satisfactory in form and substance to the Agents and shall constitute valid and enforceable perfected security interests and mortgages superior to and prior to the rights of all third Persons and subject to no other Liens except for Permitted Liens. The Additional Security Documents or instruments related thereto shall have been duly recorded or filed in such manner and in such places as are required by law to establish, perfect, preserve and protect the Liens in favor of the Collateral Administrative Agent required to be granted pursuant to the Additional Security Documents and all taxes, fees and other charges payable in connection therewith shall have been paid in full. (b) The Borrower will, and will cause each of the Subsidiary Guarantors to, at the expense of the Borrower, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Administrative Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, real property surveys, reports and other assurances or instruments and take such further steps relating to the collateral covered by any of the Security Documents as the Collateral Administrative Agent may reasonably require. Furthermore, the Borrower will cause to be delivered to the Collateral Administrative Agent such opinions of counsel, title insurance and other related documents as may be reasonably requested by the Agents to assure itself that this Section 8.12 has been complied with. (c) The Borrower agrees that each action required above by this Section 8.12 shall be completed within 90 days after such action is either requested to be taken by the Agents or the Required Banks or required to be taken by the Borrower and the Subsidiary Guarantors pursuant to the terms of this Section 8.12; provided that in no event will the Borrower or any Subsidiary Guarantor be required to take any action, other than using its reasonable efforts, to obtain consents from third parties with respect to its compliance with this Section 8.12. 8.13 Foreign Subsidiaries Security. If following a change in the relevant sections of the Code or the regulations, rules, rulings, notices or other official pronouncements issued or promulgated thereunder, counsel for the Borrower reasonably acceptable to the Agents does not within 30 days after a request from the Agents or the Required Banks deliver evidence, in form and substance mutually satisfactory to the Agents and the Borrower, with respect to any Foreign Subsidiary of the Borrower which has not already had all of its stock pledged pursuant to the Pledge Agreement that (i) a pledge of 66-2/3% or more of the total combined voting power of all classes of capital stock of such Foreign Subsidiary entitled to vote, (ii) the entering into by such Foreign Subsidiary of a security agreement in substantially the form of the Security Agreement and (iii) the entering into by -69- 77 such Foreign Subsidiary of a guaranty in substantially the form of the Subsidiaries Guaranty, in any such case would cause the undistributed earnings of such Foreign Subsidiary as determined for Federal income tax purposes to be treated as a deemed dividend to such Foreign Subsidiary's United States parent for Federal income tax purposes, then in the case of a failure to deliver the evidence described in clause (i) above, that portion of such Foreign Subsidiary's outstanding capital stock not theretofore pledged pursuant to the Pledge Agreement shall be pledged to the Collateral Administrative Agent for the benefit of the Secured Creditors pursuant to the Pledge Agreement (or another pledge agreement in substantially similar form, if needed), and in the case of a failure to deliver the evidence described in clause (ii) above, such Foreign Subsidiary (to the extent that same is a Wholly-Owned Foreign Subsidiary and would otherwise constitute a Subsidiary Guarantor) will execute and deliver the Security Agreement (or another security agreement in substantially similar form, if needed), granting the Collateral Administrative Agent for the benefit of the Secured Creditors a security interest in all of such Foreign Subsidiary's assets and securing the Obligations of the Borrower under the Credit Documents and under any Interest Rate Protection Agreement or Other Hedging Agreement and, in the event the Subsidiaries Guaranty shall have been executed by such Foreign Subsidiary, the obligations of such Foreign Subsidiary thereunder, and in the case of a failure to deliver the evidence described in clause (iii) above, such Foreign Subsidiary (to the extent that same is a Wholly- Owned Foreign Subsidiary and would otherwise constitute a Subsidiary Guarantor) will execute and deliver the Subsidiaries Guaranty (or another guaranty in substantially similar form, if needed), guaranteeing the Obligations of the Borrower under the Credit Documents and under any Interest Rate Protection Agreement or Other Hedging Agreement, in each case to the extent that the entering into such Security Agreement or Subsidiaries Guaranty is permitted by the laws of the respective foreign jurisdiction and with all documents delivered pursuant to this Section 8.13 to be in form and substance reasonably satisfactory to the Agents. 8.14 Joint Venture Distributions. To the extent any Joint Venture receives any proceeds from any of the events specified in Sections 4.02(d), (e), (f) and (h) then, to the extent the Net Equity Proceeds, Net Debt Proceeds, Net Sale Proceeds or Net Insurance Proceeds, as the case may be, from any such event would have to be applied to repay outstanding Term Loans or outstanding Revolving Loans (as a result of a reduction to the Total Revolving Loan Commitment), if received by the Borrower or a Wholly-Owned Subsidiary of the Borrower, the Borrower will use its best efforts to cause such Joint Venture to distribute to the Borrower or a Wholly-Owned Subsidiary thereof, concurrently with or as soon after the respective event as is practicable, the Borrower's Allocable Share of such proceeds received by such Joint Venture, provided that the Borrower's obligations under this Section 8.14 are subject to (i) the ability of the Borrower or a Wholly-Owned Subsidiary thereof to control the timing of distributions by such Joint Venture, (ii) any applicable contractual restrictions, (iii) any fiduciary responsibility that the Borrower or such Wholly-Owned Subsidiary may have to the other joint venture partner, (iv) in the case of any Non- -70- 78 Subsidiary Joint Venture (other than an Existing Red Lion Joint Venture), the right of such Non-Subsidiary Joint Venture to use such proceeds in the ordinary course of its business (including to repay any Indebtedness of such Non-Subsidiary Joint Venture) and (v) in the case of Net Equity Proceeds received by any non-Wholly-Owned Subsidiary of the Borrower, the right of such Subsidiary to use such Net Equity Proceeds for the purpose or purposes for which such Net Equity Proceeds were initially received. 8.15 Maintenance of Corporate Separateness. The Borrower will, and will cause each of its Subsidiaries and Unrestricted Subsidiaries to, satisfy customary corporate formalities, including the holding of regular board of directors' and shareholders' meetings or action by directors or shareholders without a meeting and the maintenance of corporate offices and records. Neither the Borrower nor any of its Subsidiaries shall make any payment to a creditor of any Unrestricted Subsidiaries in respect of any liability of any Unrestricted Subsidiaries, and no bank account of any Unrestricted Subsidiary shall be commingled with any bank account of the Borrower or any of its Subsidiaries. Any financial statements distributed to any creditors of any Unrestricted Subsidiaries shall clearly establish or indicate the corporate separateness of such Unrestricted Subsidiary from the Borrower and its Subsidiaries. Finally, neither the Borrower nor any of its Subsidiaries shall take any action, or conduct its affairs in a manner, which is likely to result in the corporate existence of the Borrower or any of its Subsidiaries or Unrestricted Subsidiaries being ignored, or in the assets and liabilities of the Borrower or any of its Subsidiaries being substantively consolidated with those of any other such Person or any Unrestricted Subsidiary in a bankruptcy, reorganization or other insolvency proceeding. SECTION 9. Negative Covenants. The Borrower hereby covenants and agrees that on and after the Effective Date and until the Total Commitments and all Letters of Credit have terminated and the Loans, Notes and Unpaid Drawings, together with interest, Fees and all other Obligations incurred hereunder and thereunder, are paid in full: 9.01 Liens. The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets (real or personal, tangible or intangible) of the Borrower or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable with recourse to the Borrower or any of its Subsidiaries), or assign any right to receive income or permit the filing of any financing statement under the UCC or any other similar notice of Lien under any similar recording or notice statute; provided that the provisions of this Section 9.01 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as "Permitted Liens"): -71- 79 (i) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles; (ii) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers', warehousemen's, materialmen's and mechanics' liens and other similar Liens arising in the ordinary course of business, and (x) which do not in the aggregate materially detract from the value of the Borrower's or such Subsidiary's property or assets or materially impair the use thereof in the operation of the business of the Borrower or such Subsidiary or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; (iii) Liens in existence on the Initial Borrowing Date which are listed, and the property subject thereto described, in Schedule IX, but only to the respective date, if any, set forth in such Schedule IX for the removal, replacement and termination of any such Liens, plus renewals, replacements and extensions of such Liens to the extent set forth on Schedule IX, provided that (x) except to the extent specifically set forth on Schedule IX, the aggregate principal amount of the Indebtedness, if any, secured by such Liens does not increase from that amount outstanding at the time of any such renewal, replacement or extension and (y) any such renewal, replacement or extension does not encumber any additional assets or properties of the Borrower or any of its Subsidiaries; (iv) Permitted Encumbrances; (v) Liens created pursuant to the Security Documents; (vi) leases or subleases granted to other Persons not materially interfering with the conduct of the business of the Borrower or any of its Subsidiaries; (vii) Liens upon assets of the Borrower or any of its Subsidiaries subject to Capitalized Lease Obligations to the extent such Capitalized Lease Obligations are permitted by Section 9.04(iv), provided that (x) such Liens only serve to secure the payment of Indebtedness arising under such Capitalized Lease Obligation and (y) the Lien encumbering the asset giving rise to the Capitalized Lease Obligation does not encumber any other asset of the Borrower or any Subsidiary of the Borrower; -72- 80 (viii) Liens placed upon equipment or machinery used in the ordinary course of business of the Borrower or any of its Subsidiaries at the time of acquisition thereof by the Borrower or any such Subsidiary or within 90 days thereafter to secure Indebtedness incurred to pay all or a portion of the purchase price thereof or to secure Indebtedness incurred solely for the purpose of financing the acquisition of any such equipment or machinery or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that (x) the aggregate outstanding principal amount of all Indebtedness secured by Liens permitted by this clause (viii) shall not at any time exceed $10,000,000 and (y) in all events, the Lien encumbering the equipment or machinery so acquired does not encumber any other asset of the Borrower or such Subsidiary; (ix) easements, rights-of-way, restrictions, encroachments and other similar charges or encumbrances, and minor title deficiencies, in each case not securing Indebtedness and not materially interfering with the conduct of the business of the Borrower or any of its Subsidiaries; (x) Liens arising from precautionary UCC financing statement filings regarding operating leases; (xi) Liens arising out of judgments or awards in respect of which the Borrower or any of its Subsidiaries shall in good faith be prosecuting an appeal or proceedings for review in respect of which there shall have been secured a subsisting stay of execution pending such appeal or proceedings, provided that the aggregate amount of such judgments and the aggregate amount of any cash and the fair market value of any property subject to consensual security interests securing such Liens does not exceed $10,000,000 at any time outstanding; (xii) statutory and common law landlords' liens under leases to which the Borrower or any of its Subsidiaries is a party; (xiii) Liens (other than Liens imposed under ERISA) incurred in the ordinary course of business in connection with workers compensation claims, unemployment insurance and social security benefits and Liens securing the performance of bids, tenders, leases and contracts in the ordinary course of business, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money), provided that the aggregate value of all cash and property encumbered by consensual Liens permitted pursuant to this clause (xiii) shall not at any time exceed $10,000,000; -73- 81 (xiv) Liens on property or assets acquired pursuant to a Hotel Acquisition, or on property or assets of a Subsidiary of the Borrower in existence at the time such Subsidiary is acquired pursuant to a Hotel Investment, provided that (x) any Indebtedness that is secured by such Liens is permitted to exist under Section 9.04(xiii), (y) the aggregate amount of Indebtedness secured by such Liens, when added to the aggregate amount of Indebtedness secured by Liens permitted under clause (xvii) of this Section 9.01, does not exceed $25,000,000 and (z) such Liens are not incurred in connection with, or in contemplation or anticipation of, such Hotel Acquisition or Hotel Investment and do not attach to any other asset of the Borrower or any of its Subsidiaries; (xv) Liens securing any Indebtedness incurred by a non-Wholly-Owned Subsidiary of the Borrower to refinance any unsecured Existing Indebtedness of such non-Wholly-Owned Subsidiary owing to the Borrower or any Wholly-Owned Subsidiary thereof, provided that (x) such Existing Indebtedness is permitted to be refinanced pursuant to Section 9.04(ii) and (y) in all events, the Lien securing such Indebtedness does not encumber any assets or property other than the assets or property of the non-Wholly-Owned Subsidiary incurring such Indebtedness; (xvi) Liens securing Non-Recourse Indebtedness of Specified Subsidiaries, provided that (x) such Non-Recourse Indebtedness is permitted to be incurred under Section 9.04(xi) and (y) in all events, the Lien securing such Non-Recourse Indebtedness does not encumber any assets or property other than the assets or property of the Specified Subsidiary incurring such Non-Recourse Indebtedness; (xvii) Liens securing Indebtedness of Subsidiaries of the Borrower incurred under Section 9.04(xiii), provided that (x) the aggregate amount of Indebtedness secured by such Liens, when added to the aggregate amount of Indebtedness secured by Liens permitted under clause (xiv) of this Section 9.01, does not exceed $25,000,000 and (y) in all events, the Lien securing such Indebtedness only encumbers property or assets acquired after the Initial Borrowing Date and does not encumber any Collateral or any assets or property other than the assets or property of the Subsidiary incurring such Indebtedness; and (xviii) preferences that arise solely by reason of the Borrower or any of its Subsidiaries agreeing to contractually subordinate any management fees payable to them as required by any lender to a hotel property managed by the Borrower or any of its Subsidiaries. In connection with the granting of Liens of the type described in clauses (vii), (viii) and (xiv) of this Section 9.01 by the Borrower or any of its Subsidiaries, the Administrative Agent and the Collateral Agent shall be authorized to take any actions deemed appropriate -74- 82 by it in connection therewith (including, without limitation, by executing appropriate lien releases or lien subordination agreements in favor of the holder or holders of such Liens, in either case solely with respect to the item or items of equipment or other assets subject to such Liens). 9.02 Consolidation, Merger, Purchase or Sale of Assets, etc. The Borrower will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of all or any part of its property or assets, or enter into any sale-leaseback transactions, or purchase or otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person (or agree to do any of the foregoing at any future time), except that: (i) Capital Expenditures by the Borrower and its Subsidiaries shall be permitted to the extent not in violation of Section 9.07; (ii) each of the Borrower and its Subsidiaries may in the ordinary course of business sell, lease or otherwise dispose of any equipment or materials which, in the reasonable judgment of such Person, are obsolete or worn out; (iii) each of the Borrower and its Subsidiaries may sell assets (other than the capital stock of any Subsidiary Guarantor and any Designated Hotel Property), so long as (i) no Default or Event of Default then exists or would result therefrom, (ii) each such sale is in an arm's-length transaction and the Borrower or the respective Subsidiary receives at least fair market value (as determined in good faith by the Borrower or such Subsidiary, as the case may be), (iii) at least 75% of the total consideration received by the Borrower or such Subsidiary is cash and is paid at the time of the closing of such sale, (iv) the Net Sale Proceeds therefrom are applied as (and to the extent) required by Section 4.02(f) and (v) the aggregate amount of the proceeds received from all assets sold pursuant to this clause (iii) shall not exceed $20,000,000 in any fiscal year of the Borrower; (iv) each of the Borrower and its Subsidiaries may sell the Designated Hotel Properties (other than pursuant to a sale- leaseback transaction), so long as (i) no Default or Event of Default then exists or would result therefrom, (ii) each such sale is in an arms'-length transaction and the Borrower or the respective Subsidiary receives at least fair market value (as determined in good faith by the Borrower or such Subsidiary, as the case may be), (iii) at least 75% of the total consideration received by the Borrower or such Subsidiary is cash and is paid at the time of the closing of such sale, (iv) the Net Sale Proceeds therefrom are applied as (and to the extent) required by Section 4.02(f) and (v) (I) based on calculations made by the -75- 83 Borrower on a Pro Forma Basis after giving effect to the respective sale, no Default or Event of Default will exist under, or would have existed during the Test Period last reported (or required to be reported pursuant to Section 8.01(a) or (b), as the case may be) prior to the date of the respective sale pursuant to, the financial covenants contained in Sections 9.08 through 9.11, inclusive and (II) the Borrower shall have delivered to the Agents an officer's certificate executed by the Chief Financial Officer of the Borrower, certifying to the best of such officer's knowledge, compliance with the requirements of this clause (v) and containing the calculations (in reasonable detail) required by this clause (v); (v) RFS and RFS Subsidiary may sell the RFS REIT Equity back to the RFS REIT on terms and conditions no less favorable to RFS than those that exist on the Initial Borrowing Date so long as the Net Sale Proceeds therefrom are applied as (and to the extent) required by Section 4.02(i); (vi) each of the Borrower and its Subsidiaries may sell all or a portion of their equity interests in the Existing Red Lion Joint Ventures, so long as (i) no Default or Event of Default then exists or would result therefrom, (ii) each such sale is in an arms'-length transaction and the Borrower or the respective Subsidiary receives at least fair market value (as determined in good faith by the Borrower or such Subsidiary, as the case may be), (iii) at least 75% of the total consideration received by the Borrower or such Subsidiary is cash and is paid at the time of the closing of such sale, (iv) the Net Sale Proceeds therefrom are applied as (and to the extent) required by Section 4.02(f) and (v) (I) based on calculations made by the Borrower on a Pro Forma Basis after giving effect to the respective sale, no Default or Event of Default will exist under, or would have existed during the Test Period last reported (or required to be reported pursuant to Section 8.01(a) or (b), as the case may be) prior to the date of the respective sale pursuant to, the financial covenants contained in Sections 9.08 through 9.11, inclusive and (II) the Borrower shall have delivered to the Agents an officer's certificate executed by the Chief Financial Officer of the Borrower, certifying to the best of such officer's knowledge, compliance with the requirements of this clause (v) and containing the calculations (in reasonable detail) required by this clause (v); (vii) each of the Borrower and its Subsidiaries may sell Hotel Properties acquired by them after the Initial Borrowing Date pursuant to a Hotel Acquisition (except to the extent that such Hotel Property constitutes a newly acquired Designated Hotel Property), and each of the Borrower and its Subsidiaries may sell all or any portion of their equity interest in a Joint Venture acquired by them after the Initial Borrowing Date pursuant to a Hotel Investment, in either case, so long as (i) no Default or Event of Default then exists or would result therefrom, (ii) each such sale is in an arm's-length transaction and the Borrower or the respective -76- 84 Subsidiary receives at least fair market (as determined in good faith by the Borrower or such Subsidiary, as the case may be), (iii) at least 75% of the total consideration received by the Borrower or such Subsidiary is cash and is paid at the time of the closing of such sale and (iv) in the case of a sale of an equity interest in a Joint Venture, the cash proceeds therefrom are applied as (and to the extent) required by Section 4.02(i); (viii) each of the Borrower and its Subsidiaries may sell Hotel Properties as part of a Temporary Hotel Acquisition Transaction; (ix) Investments may be made to the extent permitted by Section 9.05; (x) each of the Borrower and its Subsidiaries may lease (as lessee) real or personal property (so long as any such lease does not create a Capitalized Lease Obligation except to the extent permitted by Section 9.04(iv)); (xi) each of the Borrower and its Subsidiaries may make sales of inventory in the ordinary course of business; (xii) the Transaction shall be permitted; (xiii) Hotel Acquisitions shall be permitted to the extent provided in Section 9.07; (xiv) each of the Borrower and its Subsidiaries may enter into sale-leaseback transactions with respect to owned Hotel Properties (including the Designated Hotel Properties), so long as each such transaction (w) is for at least 75% in cash and is paid at the time of the closing of such transaction, (x) is at fair market value (as determined in good faith by the Borrower or such Subsidiary, as the case may be), (y) all of the Net Sale Proceeds therefrom are applied as required by Section 4.02(f) and (z) no Default or Event of Default then exists or would result therefrom; (xv) any Subsidiary of the Borrower may merge or consolidate with and into, or be liquidated into, or transfer any of its assets to, the Borrower or any Subsidiary Guarantor, in each case, so long as (i) the Borrower or the respective Subsidiary Guarantor is the surviving corporation of any such transaction, (ii) in the case of any such transaction involving a non-Wholly-Owned Subsidiary, the only consideration paid to third parties in connection therewith are shares of common stock of the Borrower and cash in an aggregate amount for all such transactions not to exceed the amount permitted to be spent on Hotel Investments at such time pursuant to Section 9.07 (and with the amount of cash paid pursuant to this Section -77- 85 9.02(xv) to constitute a Hotel Investment pursuant to Section 9.07) and (iii) in the case of any transaction between or among the Borrower and the Subsidiary Guarantors, all Liens granted pursuant to the Security Documents on any property or assets involved shall remain in full force and effect (with at least the same priority as such Lien would have had if such transfer pursuant to the clause (xv) had not occurred); (xvi) each of the Borrower and its Subsidiaries may grant leases or subleases to other Persons not materially interfering with the conduct of the business of the Borrower or any of its Subsidiaries; (xvii) each of the Borrower and its Subsidiaries may sell Cash Equivalents permitted to be held by them pursuant to Section 9.05(ii) so long as each such sale is for cash and at fair market value (as determined in good by the Borrower or such Subsidiary, as the case may be); and (xviii) each of the Borrower and its Subsidiaries may, in the ordinary course of business, license, as licensor or licensee, patents, trademarks, copyrights and know-how to or from third Persons and to one another so long as any such license by the Borrower or any other Credit Party in its capacity as licensor is permitted to be assigned pursuant to the Security Agreement (to the extent that the security interest in such patents, trademarks, copyrights and know-how is granted thereunder) and does not otherwise prohibit the granting of a Lien by the Borrower or any other Credit Party pursuant to the Security Agreement in the intellectual property covered by such license. To the extent the Required Banks waive the provisions of this Section 9.02 with respect to the sale of any Collateral, or any Collateral is sold as permitted by this Section 9.02 (other than to the Borrower or a Subsidiary thereof), such Collateral shall be sold free and clear of the Liens created by the Security Documents, and the Administrative Agent and the Collateral Agent shall be authorized to take any actions deemed appropriate in order to effect the foregoing. 9.03 Dividends. The Borrower will not, and will not permit any of its Subsidiaries to, authorize, declare or pay any Dividends with respect to the Borrower or any of its Subsidiaries, except that: (i) any Subsidiary of the Borrower may pay cash Dividends to the Borrower or any Wholly-Owned Subsidiary of the Borrower; (ii) any non-Wholly-Owned Subsidiary of the Borrower may pay cash Dividends to its shareholders or partners generally so long as the Borrower or its respective Subsidiary which owns the equity interest or interests in the Subsidiary -78- 86 paying such Dividends receives at least its proportionate share thereof (based upon either its relative holdings of equity interests in the Subsidiary paying such Dividends and taking into account the relative preferences, if any, of the various classes of equity interests in such Subsidiary or the terms of any agreements applicable thereto); and (iii) so long as there shall exist no Default or Event of Default (both before and after giving effect to the payment thereof), the Borrower may repurchase outstanding shares of its common stock (or options to purchase such common stock) following the death, disability or termination of employment of employees of the Borrower or any of its Subsidiaries, provided that the aggregate amount of Dividends paid by the Borrower pursuant to this clause (iii) shall not exceed $3,500,000 in any fiscal year of the Borrower. 9.04 Indebtedness. The Borrower will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (i) Indebtedness incurred pursuant to this Agreement and the other Credit Documents; (ii) Existing Indebtedness outstanding on the Initial Borrowing Date and listed on Schedule VII, without giving effect to any subsequent extension, renewal or refinancing thereof except to the extent set forth on Schedule VII, provided that (x) except to the extent specifically set forth on Schedule VII, the aggregate principal amount of the Indebtedness to be extended, renewed or refinanced does not increase from that amount outstanding at the time of any such extension, renewal or refinancing and (y) to the extent that the Existing Glendale Debt is to be refinanced as part of the Refinancing after the Initial Borrowing Date, such Debt shall only be permitted to remain outstanding through the Tranche A Term Loan Commitment Termination Date (although the Borrower shall have the right at any time prior to the Tranche A Term Loan Commitment Termination Date to notify the Administrative Agent that the Existing Glendale Debt shall no longer constitute Indebtedness to be Refinanced); (iii) Indebtedness under Interest Rate Protection Agreements entered into with respect to other Indebtedness permitted under this Section 9.04; (iv) Indebtedness of the Borrower and its Subsidiaries evidenced by Capitalized Lease Obligations to the extent permitted pursuant to Section 9.07, provided that in no event shall the aggregate principal amount of Capitalized Lease Obligations permitted by this clause (iv) exceed $10,000,000 at any time outstanding; -79- 87 (v) Indebtedness subject to Liens permitted under Section 9.01(viii); (vi) intercompany Indebtedness to the extent permitted by Sections 9.05(viii), (ix) and (x); (vii) Indebtedness under Other Hedging Agreements providing protection against fluctuations in currency values in connection with the Borrower's or any of its Subsidiaries' ordinary course of business operations so long as management of the Borrower or such Subsidiary, as the case may be, has determined in good faith that the entering into of such Other Hedging Agreements are bona fide hedging activities; (viii) Indebtedness of the Borrower consisting of guaranties of Indebtedness of franchises of Candlewood, so long as (i) the Borrower's maximum exposure on any single Candlewood property or franchise does not exceed $2,000,000 and (ii) the Borrower's maximum exposure under all such guaranties does not exceed $30,000,000; (ix) Contingent Obligations of the Borrower and its Subsidiaries to maintain the net worth of those Persons listed on Schedule XV in accordance with the terms of the applicable agreements with respect thereto as in effect on the Initial Borrowing Date, provided that any payments made by the Borrower or a Subsidiary thereof to satisfy such obligations shall count as a Hotel Investment made pursuant to Section 9.07; (x) unsecured subordinated Indebtedness of the Borrower (the "New Subordinated Notes"), so long as (i) the aggregate outstanding principal amount thereof does not exceed $150,000,000 (less any repayments of principal thereof), (ii) at least 20 Business Days prior to the issuance thereof, the Borrower shall have delivered to each of the Banks substantially final drafts of the documents pursuant to which the New Subordinated Notes are to be issued and with any changes thereto made after the initial delivery of such documents to be delivered to the Agents and with any significant changes thereto made after such initial delivery to be delivered to each of the Banks at least five days prior to the issuance of such New Subordinated Notes, (iii) the final maturity date thereof is at least 270 days beyond the Tranche B Term Loan Maturity Date, (iv) there are no required amortization, mandatory redemption or sinking fund provisions or similar provisions prior to the 270th day after the Tranche B Term Loan Maturity Date, (v) all other terms and conditions thereof (including, without limitation, interest rates, covenants, defaults, remedies and subordination provisions) are reasonably satisfactory to the Agents, (vi) no Default or Event of Default then exists or would result therefrom and (vii) (I) based on calculations made by the Borrower on a Pro Forma Basis after giving -80- 88 effect to the respective incurrence, no Default or Event of Default will exist under, or would have existed during the Test Period last reported (or required to be reported pursuant to Section 8.01(a) or (b), as the case may be) prior to the date of the respective incurrence pursuant to, the financial covenants contained in Sections 9.08 through 9.11, inclusive, and (II) the Borrower shall have delivered to the Agents an officer's certificate executed by the Chief Financial Officer of the Borrower, certifying to the best of such officer's knowledge, compliance with the requirements of this clause (vii) and containing the calculations (in reasonable detail) required by this clause (vii); (xi) Non-Recourse Indebtedness of a Specified Subsidiary incurred to finance the development or acquisition (and the related working capital requirements) of a Hotel Property developed or acquired after the Initial Borrowing Date, so long as (i) the aggregate principal amount of all such Non-Recourse Indebtedness does not exceed $100,000,000 at any time outstanding, (ii) no Default or Event of Default then exists or would result therefrom and (iii) (I) based on calculations made by the Borrower on a Pro Forma Basis after giving effect to the respective incurrence, no Default or Event of Default will exist under, or would have existed during the Test Period last reported (or required to be reported pursuant to Section 8.01(a) or (b), as the case may be) prior to the date of the respective incurrence pursuant to, the financial covenants contained in Sections 9.08 through 9.11, inclusive, and (II) the Borrower shall have delivered to the Agents an officer's certificate executed by the Chief Financial Officer of the Borrower, certifying to the best of such officer's knowledge, compliance with the requirements of this clause (iii) and containing the calculations (in reasonable detail) required by this clause (iii); ; (xii) to the extent that the Existing Glendale Debt is refinanced with the proceeds of Loans as part of the Refinancing, Indebtedness of the Joint Venture that originally incurred such Existing Glendale Debt, so long as the proceeds thereof are used to refinance the intercompany loan made by the Borrower to such Joint Venture to refinance the Existing Glendale Debt, provided that the aggregate principal amount of the Indebtedness so incurred by such Joint Venture pursuant to this clause (xii) does not exceed the amount of the intercompany loan owing to the Borrower; and (xiii) additional Indebtedness of the Borrower and its Subsidiaries not to exceed $50,000,000 in aggregate principal amount at any time outstanding, provided that no more than $25,000,000 of such Indebtedness may be secured and then only to the extent permitted by Sections 9.01(xiv) and (xvii). -81- 89 9.05 Advances, Investments and Loans. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any other Person, or purchase or own a futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, or hold any cash or Cash Equivalents (each of the foregoing an "Investment" and, collectively, "Investments"), except that the following shall be permitted: (i) the Borrower and its Subsidiaries may acquire and hold accounts receivables owing to any of them, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary terms, and the Borrower and its Subsidiaries may own Investments received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (ii) the Borrower and its Subsidiaries may acquire and hold or invest in cash and Cash Equivalents; (iii) the Borrower and its Subsidiaries may receive non-cash consideration in connection with any asset sale permitted by Sections 9.02(iii), (iv), (vi), (vii) and (xiv) but only to the extent set forth in such Sections 9.02(iii), (iv), (vi), (vii) and (xiv); (iv) the Borrower and its Subsidiaries may hold the Investments held by them on the Initial Borrowing Date and described on Schedule X, provided that any additional Investments made with respect thereto shall be permitted only if independently justified under the other provisions of this Section 9.05; (v) the Borrower and its Subsidiaries may make loans and advances in the ordinary course of business to their respective employees so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $2,000,000; (vi) the Borrower may enter into Interest Protection Agreements to the extent permitted by Section 9.04(iii); (vii) the Borrower and its Subsidiaries may enter into Other Hedging Agreements to the extent permitted by Section 9.04(vii); -82- 90 (viii) the Borrower and the Subsidiary Guarantors may make intercompany loans and advances between or among one another (collectively, "Intercompany Loans"), so long as each Intercompany Loan shall be evidenced by an Intercompany Note that is pledged to the Collateral Administrative Agent pursuant to the Pledge Agreement, and the Borrower and the Subsidiary Guarantors may make cash Investments to their Subsidiaries to the extent that such Subsidiaries are Subsidiary Guarantors; (ix) the Borrower and the Subsidiary Guarantors may make intercompany loans and advances to non-Wholly-Owned Subsidiaries and other Persons to the extent permitted by Section 9.07, so long as any such intercompany loan or advance that is evidenced by a note shall be pledged to the Collateral Administrative Agent pursuant to (and to the extent required by) the Pledge Agreement; (x) to the extent that the Existing Glendale Debt is to be refinanced (in whole or in part) with proceeds of Loans made on or prior to the Tranche A Term Loan Commitment Termination Date, the Borrower may make an intercompany loan to the Joint Venture that has incurred the Existing Glendale Debt in an amount not to exceed the amount of such Existing Glendale Debt, so long as such intercompany loan shall be evidenced by a note that is pledged to the Collateral Administrative Agent pursuant to the Pledge Agreement; (xi) RFS may contribute to a newly-formed Wholly-Owned Subsidiary of RFS ("RFS Sub") one or more of the leasehold interests held by RFS in the RFS REIT Leases, together with a corresponding portion of the RFS REIT Equity held by RFS, in each case in connection with the securitization of RFS REIT's fee interest in the hotels leased to RFS pursuant to such RFS Leases; and (xii) the Borrower and its Subsidiaries may make additional Hotel Investments to the extent permitted by Section 9.07. 9.06 Transactions with Affiliates. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any Affiliate of the Borrower or any of its Subsidiaries, other than in the ordinary course of business and on terms and conditions substantially as favorable to the Borrower or such Subsidiary as would reasonably be obtained by the Borrower or such Subsidiary at that time in a comparable arm's-length transaction with a Person other than an Affiliate, except that the following in any event shall be permitted: (i) Dividends may be paid to the extent provided in Section 9.03, (ii) loans may be made and other transactions may be entered into by the Borrower and its Subsidiaries to the extent permitted by Sections 9.02, 9.04 and 9.05, (iii) customary fees may be paid to non-officer directors of the Borrower and (iv) Subsidiaries and Joint -83- 91 Ventures of the Borrower may pay management and similar fees to the Borrower or any Wholly-Owned Subsidiary of the Borrower. 9.07 Capital Expenditures; Permitted Hotel Acquisitions; Permitted Hotel Investments. (a) The Borrower will not, and will not permit any of its Subsidiaries to, make any Capital Expenditures, Hotel Acquisitions or Hotel Investments, except that (x) during the period from the Effective Date through and including December 31, 1996, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments in an aggregate amount not to exceed $25,000,000 and (y) during any fiscal year set forth below (taken as one accounting period), the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments so long as the aggregate amount of all such Capital Expenditures, Hotel Acquisitions and Hotel Investments does not exceed in any fiscal year set forth below the amount set forth opposite such fiscal year below:
Fiscal Year Ending Amount ------------------ ------ December 31, 1997 $40,000,000 December 31, 1998 $45,000,000 December 31, 1999 $50,000,000 and each fiscal year thereafter
; provided that during each fiscal year set forth in the table above, at least 3% of the aggregate gross revenues from Hotel Properties owned or leased by Red Lion and its Wholly-Owned Subsidiaries for such fiscal year shall be used to make maintenance Capital Expenditures pursuant to this clause (a). (b) (i) In addition to the foregoing, in the event that the amount of Capital Expenditures, Hotel Acquisitions and Hotel Investments permitted to be made by the Borrower and its Subsidiaries pursuant to clause (a) above in any fiscal year set forth in the table above (before giving effect to any increase in such permitted expenditure amount pursuant to this clause (b)(i) but after giving effect to any reduction in such amount as a result of Capital Expenditures, Hotel Acquisitions and Hotel Investments made pursuant to clause (b)(ii) below) is greater than the amount of such Capital Expenditures, Hotel Acquisitions and Hotel Investments made by the Borrower and its Subsidiaries during such fiscal year, such excess may be carried forward and utilized to make Capital Expenditures, Hotel Acquisitions and Hotel Investments in the immediately succeeding fiscal year, provided, that (x) any amount carried forward from the immediately preceding fiscal year may not be utilized during the current fiscal year unless and until the relevant amount for such current fiscal year shall have been utilized in full to make Capital Expenditures, Hotel Acquisitions and/or Hotel Investments during such current fiscal year, (y) in no event shall the aggregate -84- 92 amount of Capital Expenditures, Hotel Acquisitions and Hotel Investments made by the Borrower and its Subsidiaries during any fiscal year pursuant to Section 9.07(a), this clause (b)(i) and clause (b)(ii) below exceed 115% of the amount set forth opposite such fiscal year as set forth in the table in such Section 9.07(a) (before giving effect to any reduction in such amount pursuant to clause (b)(ii) below as a result of Capital Expenditures, Hotel Acquisitions and Hotel Investments made pursuant to clause (b)(ii) below) and (z) no amounts once carried forward to the next fiscal year may be carried forward to fiscal years thereafter. (ii) In addition to the foregoing, commencing in the Borrower's fiscal year beginning January 1, 1997, in the event that the Borrower and its Subsidiaries have made Capital Expenditures, Hotel Acquisitions and Hotel Investments in any fiscal year pursuant to clauses (a) and (b)(i) above in an amount equal to the maximum amount permitted to be made in such fiscal year pursuant to such clauses and so long as no Default or Event of Default then exists, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments in such fiscal year by utilizing expenditure amounts permitted to be made in the immediately succeeding fiscal year pursuant to clause (a) above, and with any Capital Expenditures, Hotel Acquisitions and Hotel Investments made pursuant to this clause (b)(ii) in such current fiscal year to reduce the amount of Capital Expenditures, Hotel Acquisitions and Hotel Investments permitted to be made in the immediately succeeding fiscal year, provided that in no event shall the aggregate amount of Capital Expenditures, Hotel Acquisitions and Hotel Investments made by the Borrower and its Subsidiaries during any fiscal year pursuant to Section 9.07(a), clause (b)(i) above and this clause (b)(ii) exceed 115% of the amount set forth opposite such fiscal year as set forth in the table in such Section 9.07(a) (before giving effect to any reduction in such amount pursuant to the clause (b)(ii) as a result of Capital Expenditures, Hotel Acquisitions and Hotel Investments made pursuant to this clause (b)(ii)). (c) In addition to the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures with the amount of Net Insurance Proceeds received by the Borrower or any of its Subsidiaries from any Recovery Event so long as such Net Insurance Proceeds are used to replace or restore any properties or assets in respect of which such Net Insurance Proceeds were paid within the applicable time periods set forth in Section 4.02(h) but only to the extent such Net Insurance Proceeds are not required to be applied pursuant to Section 4.02(h) (or Section 3.03(e), as the case may be). (d) In addition to the foregoing and so long as no Default or Event of Default then exists, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments in an amount not to exceed the Retained Net Equity Proceeds Amount at such time. -85- 93 (e) In addition to the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments in fiscal year 1997 as and to the extent set forth in Schedule XI. (f) In addition to the foregoing, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments in any fiscal year of the Borrower in an amount equal to the remainder of (1) the Retained Excess Cash Flow Amount for the immediately preceding fiscal year of the Borrower less (2) the amount of all voluntary prepayment of Term Loans made during such current fiscal year or during the immediately succeeding fiscal year, in either case pursuant to the proviso of Section 4.01(a)(v) and utilizing such Retained Excess Flow Amount, provided that (x) no Capital Expenditures, Hotel Acquisitions or Hotel Investments may be made pursuant to this clause (f) during any fiscal year of the Borrower unless the Borrower's EBITDA for the immediately preceding fiscal year exceeded 90% of the Borrower's Base Case EBITDA for such fiscal year and (y) in the event that the amount of Capital Expenditures, Hotel Acquisitions and Hotel Investments permitted to be made by the Borrower and its Subsidiaries pursuant to this clause (f) in any fiscal year of the Borrower is greater than the amount of such Capital Expenditures, Hotel Acquisitions and Hotel Investments made by the Borrower and its Subsidiaries during such fiscal year, such excess may be carried forward and utilized to make Capital Expenditures, Hotel Acquisitions and Hotel Investments in the immediately succeeding fiscal year, provided further, (i) that any amount carried forward from the immediately preceding fiscal year may not be utilized during the current fiscal year unless and until the relevant amount for such current fiscal year as set forth in the table in Section 9.07(a) shall have been utilized in full to make Capital Expenditures, Hotel Acquisitions and/or Hotel Investments during such current fiscal year, and (ii) that no amounts once carried forward to the next fiscal year may be carried forward to fiscal years thereafter. (g) In addition to the foregoing, commencing with the Borrower's fiscal year beginning January 1, 1998, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments in an aggregate amount not to exceed $20,000,000, provided that no more than $10,000,000 of such Capital Expenditures, Hotel Acquisitions and Hotel Investments may be made in any fiscal year of the Borrower. (h) In addition to the foregoing and so long as no Default or Event of Default then exists, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments with the Net Sale Proceeds received from any Asset Sale and with the Specified Existing Red Lion Investment Proceeds from any Specified Red Lion Event so long as (i) such Net Sale Proceeds or Specified Existing Red Lion Investment Proceeds are used to purchase like assets within the applicable time periods set forth in Section 4.02(f), (ii) the aggregate amount of Capital Expenditures, Hotel Acquisitions and Hotel Investments made pursuant to this Section 9.07(h) does not exceed -86- 94 that amount permitted by Section 4.02(f), (iii) such Net Sale Proceeds or Specified Existing Red Lion Investment Proceeds are not required to be applied pursuant to Section 4.02(f) (or Section 3.03(e), as the case may be) and (iv) to the extent that the asset so sold constitutes Collateral, the Collateral Administrative Agent is granted a first priority perfected security interest in the like asset acquired at least to the same extent (and with at least the same rights) as the Collateral Administrative Agent's security interest in the Collateral so sold. (i) In addition to the foregoing and as long as no Default or Event of Default then exists, the Borrower and its Wholly-Owned Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments with cash proceeds received from a Designated Event so long as such proceeds are not required to be applied pursuant to Section 4.02(i) (or Section 3.03(e), as the case may be). (j) In addition to the foregoing and so long as no Default or Event of Default then exists, the Borrower and its Subsidiaries may make Capital Expenditures, Hotel Acquisitions and Hotel Investments with the Net Sale Proceeds received from the sale of those Hotel Properties acquired by the Borrower and its Subsidiaries after the Initial Borrowing Date (except to the extent that such Hotel Property constitutes a newly acquired Designated Hotel Property). (k) In addition to the foregoing and so long as no Default or Event of Default then exists, the Borrower and its Wholly-Owned Subsidiaries may effect Hotel Acquisitions as part of a Temporary Hotel Acquisition Transaction, provided that, to the extent the Borrower or such Wholly-owned Subsidiary consummates a Hotel Acquisition and fails to sell the Hotel Property as part of the Temporary Hotel Acquisition Transaction within 120 days after the acquisition thereof or fails to sell the Hotel Property for at least the same purchase price as originally paid by the Borrower or such Wholly-Owned Subsidiary, such Hotel Acquisition (or such portion thereof to the extent that the Borrower or such Wholly-Owned Subsidiary fails to receive at least the same purchase price originally paid by the Borrower or such Wholly-Owned Subsidiary) shall constitute a Hotel Acquisition effected under one of the other provisions of this Section 9.07 and shall be required to be independently justified under such other provisions. Notwithstanding anything to the contrary contained above in this Section 9.07, in the case of any Hotel Acquisition or Hotel Investment in which the total consideration equals or exceeds $25,000,000 (other than a Hotel Acquisition pursuant to Section 9.07(k)), (I) based on calculations made by the Borrower on a Pro Forma Basis after giving effect to the respective Hotel Acquisition or Hotel Investment, no Default or Event of Default will exist under, or would have existed during the Test Period last reported (or required to be reported pursuant to Section 8.01(a) or (b), as the case may be) prior to the date of the respective Hotel Acquisition or Hotel Investment pursuant to, the financial covenants con- -87- 95 tained in Sections 9.08 through 9.11, inclusive and (II) the Borrower shall have delivered to the Agents an officer's certificate executed by the Chief Financial Officer of the Borrower, certifying to the best of such officer's knowledge, compliance with the requirements of this paragraph and containing the calculations (in reasonable detail) required by this paragraph. For purposes of determining the amount of any Capital Expenditures, Hotel Acquisitions and Hotel Investments made at any time, such amount shall include the amount of any Indebtedness assumed by the Borrower or any of its Subsidiaries in connection therewith. 9.08 Consolidated Fixed Charge Coverage Ratio. The Borrower will not permit the Consolidated Fixed Charge Coverage Ratio for the Test Period ending on June 30, 1997 and for each Test Period ending thereafter to be less than 1.00:1:00. 9.09 Consolidated Interest Coverage Ratio. The Borrower will not permit the Consolidated Interest Coverage Ratio for any Test Period ending on the last day of a fiscal quarter set forth below to be less than the ratio set forth opposite such fiscal quarter below:
Fiscal Quarter Ratio -------------- ----- March 31, 1997 2.50:1.00 June 30, 1997 2.75:1.00 September 30, 1997 2.75:1.00 December 31, 1997 3.00:1.00 March 31, 1998 3.00:1.00 June 30, 1998 3.00:1.00 September 30, 1998 3.00:1.00 December 31, 1998 3.50:1.00 March 31, 1999 3.50:1.00 June 30, 1999 3.50:1.00 September 30, 1999 3.50:1.00 December 31, 1999 4.00:1.00 and thereafter
-88- 96 9.10 Maximum Leverage Ratio. The Borrower will not permit the Leverage Ratio at any time during a period set forth below to be greater than the ratio set forth opposite such period below:
Period Ratio ------ ----- Initial Borrowing Date through and including December 30, 1997 4.75:1.00 December 31, 1997 through and including December 30, 1998 4.50:1.00 December 31, 1998 through and including December 30, 1999 4.00:1.00 December 31, 1999 through and including 3.50:1.00 December 30, 2000 December 31, 2000 and thereafter 3.00:1.00
9.11 Minimum Consolidated Net Worth. The Borrower will not permit Consolidated Net Worth at any time to be less than the Minimum Consolidated Net Worth at such time. 9.12 Limitation on Voluntary Payments and Modifications of Indebtedness; Modifications of Certificate of Incorporation, By- Laws and Certain Other Agreements; etc. The Borrower will not, and will not permit any of its Subsidiaries to, (i) make (or give any notice in respect of) any voluntary or optional payment or prepayment on or redemption or acquisition for value of, or make any prepayment or redemption as a result of any asset sale, change of control or similar event of (including, in each case, without limitation, by way of depositing with the trustee with respect thereto or any other Person, money or securities before due for the purpose of paying when due) any New Senior Subordinated Notes or the Existing Glendale Debt, except that the Existing Glendale Debt may be refinanced as part of the Refinancing or as otherwise permitted under Section 9.04, (ii) amend or modify, or permit the amendment or modification of, any provision of the New Senior Subordinated Notes or any New Senior Subordinated Note Documents or any provision of the Existing Glendale Debt, except for any amendments or modifications to the documentation for the Existing Glendale Debt which could not reasonably be expected to be adverse to the interests of the Banks in any material respect, (iii) amend, modify or change its certificate of incorporation (including, without limitation, by the filing or modification of any certificate of designation) or by-laws (or the equivalent organizational documents) or any agreement entered into by it with respect to its capital stock (including any Shareholders' Agreement), or enter into any new agreement with respect to its capital stock, unless such amendment, modification, change or other action contemplated by this clause (iii) could not reasonably be expected to be adverse to the interests of the Banks in any material respect, (iv) amend, modify or change any provision of any Tax Sharing Agreement or enter into -89- 97 any new tax sharing agreement, tax allocation agreement or similar agreement, unless such amendment, modification, change or other action contemplated by this clause (iv) cannot reasonably be expected to be adverse to the interests of the Banks in any material respect, (v) amend, modify or change any Joint Venture Agreement, unless such amendment, modification or change could not reasonably be expected to be adverse to the interests of the Banks in any material respect, (vi) amend, modify, change or terminate the Red Lion Master Lease or the Doubletree Master REIT Lease, unless such amendment, modification or change could not reasonably be expected to be adverse to the interests of the Banks in any material respect or (vii) amend, modify, change or terminate the Red Lion Master Property Management Agreement, unless such amendment, modification or change could not reasonably be expected to be adverse to the interests of the Banks in any material respect. 9.13 Limitation on Certain Restrictions on Subsidiaries. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by the Borrower or any Subsidiary the Borrower, or pay any Indebtedness owed to the Borrower or any Subsidiary of the Borrower, (b) make loans or advances to the Borrower or any Subsidiary of the Borrower or (c) transfer any of its properties or assets to the Borrower or any Subsidiary of the Borrower, except for such encumbrances or restrictions existing under or by reason of (i) applicable law, (ii) this Agreement and the other Credit Documents, (iii) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of the Borrower or any Subsidiary of the Borrower, (iv) customary provisions restricting assignment of any licensing agreement, management agreement or franchise agreement entered into by the Borrower or any Subsidiary of the Borrower in the ordinary course of business, (v) restrictions on the transfer of any asset subject to a Lien permitted by this Agreement and (vi) restrictions set forth on Schedule XV and similar net worth restriction imposed on RFS Sub and any other Subsidiary of the type described in clause (v) of the definition of Subsidiary Guarantor. 9.14 Limitation on Issuance of Capital Stock. (a) The Borrower will not, and will not permit any of its Subsidiaries to, issue (i) any preferred stock (other than Qualified Preferred Stock issued by the Borrower) or (ii) any redeemable common stock (other than at the sole option of the Borrower). (b) The Borrower will not permit any of its Subsidiaries to issue any capital stock (including by way of sales of treasury stock) or any options or warrants to purchase, or securities convertible into, capital stock, except (i) for transfers and replacements of then outstanding shares of capital stock, (ii) for stock splits, stock dividends and issuances which do not decrease the percentage ownership of the Borrower or any of its Subsidiaries in any -90- 98 class of the capital stock of such Subsidiary, (iii) to qualify directors to the extent required by applicable law or (iv) for issuances by newly created or acquired Subsidiaries in accordance with the terms of this Agreement. 9.15 Business. The Borrower will not, and will not permit any of its Subsidiaries to, engage (directly or indirectly) in any business other than the businesses in which the Borrower and its Subsidiaries are engaged on the Initial Borrowing Date and reasonable extensions thereof and those reasonably related thereto. 9.16 Limitation on Creation of Subsidiaries and Joint Ventures. (a) Notwithstanding anything to the contrary contained in this Agreement, the Borrower will not, and will not permit any of its Subsidiaries to, establish, create or acquire after the Initial Borrowing Date any Subsidiary, Unrestricted Subsidiary or Joint Venture, provided that the Borrower and its Wholly-Owned Subsidiaries shall be permitted to establish or create (x) non-Wholly-Owned Subsidiaries, Unrestricted Subsidiaries and Joint Ventures as provided in Section 9.16(b) and (y) Wholly-Owned Subsidiaries so long as (i) the capital stock of such new Wholly-Owned Subsidiary that is owned by any Credit Party is pledged pursuant to, and to the extent required by, the Pledge Agreement and the certificates representing such stock, together with stock powers duly executed in blank, are delivered to the Collateral Agent for the benefit of the Secured Creditors, (ii) the partnership interests of such new Wholly-Owned Subsidiary (to the extent that same is a partnership) are pledged and assigned pursuant to, and to the extent required by, the Pledge Agreement, (iii) such new Wholly-Owned Subsidiary (to the extent that same constitutes a Subsidiary Guarantor as described in the definition) executes a counterpart of the Subsidiaries Guaranty, the Pledge Agreement and the Security Agreement, and (iv) such new Wholly- Owned Subsidiary (to the extent that same constitutes a Subsidiary Guarantor as described in the definition thereof), to the extent requested by the Agents or the Required Banks, takes all actions required pursuant to Section 8.12. In addition, each new Subsidiary Guarantor shall execute and deliver, or cause to be executed and delivered, all other relevant documentation of the type described in Section 5 as such new Subsidiary Guarantor would have had to deliver if such new Subsidiary Guarantor were a Credit Party on the Initial Borrowing Date. (b) The Borrower will not, and will not permit any of its Subsidiaries to, establish, create or acquire any non-Wholly-Owned Subsidiaries, Unrestricted Subsidiaries or Joint Ventures after the Initial Borrowing Date, except that the Borrower or any Wholly-Owned Subsidiary of the Borrower may establish, create or acquire non-Wholly-Owned Subsidiaries, Unrestricted Subsidiaries and Joint Ventures to the extent that the Investment in such Person is permitted by Section 9.07 from time to time, in each case so long as (x) no Default or Event of Default exists at the time of the establishment, creation or acquisition of the respective non-Wholly-Owned Subsidiary, Unrestricted Subsidiary or Joint Venture or shall exist immediately after giving effect thereto, (y) all Hotel Investments therein are permitted pursuant to Section 9.07 and (z) all equity interests of such -91- 99 non-Wholly-Owned Subsidiary, Unrestricted Subsidiary or Joint Venture, to the extent owned by any Credit Party, are pledged pursuant to, and to the extent required by, the Pledge Agreement. SECTION 10. Events of Default. Upon the occurrence of any of the following specified events (each an "Event of Default"): 10.01 Payments. The Borrower shall (i) default in the payment when due of any principal of any Loan or any Note or (ii) default, and such default shall continue unremedied for three or more Business Days, in the payment when due of any interest on any Loan or Note, any Unpaid Drawing or any Fees or any other amounts owing hereunder or thereunder; or 10.02 Representations, etc. Any representation, warranty or statement made by any Credit Party herein or in any other Credit Document or in any certificate delivered to any Agent or any Bank pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 10.03 Covenants. Any Credit Party shall (i) default in the due performance or observance by it of any term, covenant or agreement contained in Section 8.01(f)(i), 8.08 or 8.11 or Section 9 or (ii) default in the due performance or observance by it of any other term, covenant or agreement contained in this Agreement or any other Credit Document (other than those set forth in Sections 10.01 and 10.02) and such default shall continue unremedied for a period of 30 days after written notice thereof to the defaulting party by any Agent or the Required Banks; or 10.04 Default Under Other Agreements. (i) The Borrower or any of its Subsidiaries shall (x) default in any payment of any Indebtedness (other than the Notes and/or the Austin Obligations) beyond the period of grace or cure, if any, provided in the instrument or agreement under which such Indebtedness was created or (y) default in the observance or performance of any agreement or condition relating to any Indebtedness (other than the Notes and/or the Austin Obligations) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause (determined without regard to whether any notice is required, but beyond the period of grace or cure, if any, provided in the instrument or agreement under which such Indebtedness was created), any such Indebtedness to become due prior to its stated maturity, or (ii) any Indebtedness (other than the Notes and/or the Austin Obligations) of the Borrower or any of its Subsidiaries shall be declared to be (or shall become) due and payable, or required to be prepaid other than by a regularly scheduled required prepayment, prior to the stated maturity thereof, provided that it shall not be a Default or an -92- 100 Event of Default under this Section 10.04 unless the aggregate principal amount of all Indebtedness as described in preceding clauses (i) and (ii) is at least $10,000,000; or 10.05 Bankruptcy, etc. The Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries) shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries), and the petition is not controverted within 15 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries), or the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries) commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries), or there is commenced against the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries) any such proceeding which remains undismissed for a period of 60 days, or the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries) is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries) suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries) makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Subsidiaries (excluding Immaterial Subsidiaries) for the purpose of effecting any of the foregoing; or 10.06 ERISA. (a) Any Plan shall fail to satisfy the minimum funding standard required for any plan year or part thereof under Section 412 of the Code or Section 302 of ERISA or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or Section 303 or 304 of ERISA, a Reportable Event shall have occurred, any Plan or Multiemployer Plan which is subject to Title IV of ERISA shall have had or is likely to have a trustee appointed to administer such Plan or Multiemployer Plan, any Plan or Multiemployer Plan which is subject to Title IV of ERISA is, shall have been or is likely to be terminated or to be the subject of termination proceedings under ERISA, any Plan or Multiemployer Plan shall have an Unfunded Current Liability, a contribution required to be made with respect to a Plan, a Multiemployer Plan or a Foreign Pension Plan has not been timely made, the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate has incurred or is likely to incur any liability to or on account of a Plan or Multiemployer Plan under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or on account of a group health plan (as defined in Section 607(1) of ERISA or -93- 101 Section 4980B(g)(2) of the Code) under Section 4980B(a) of the Code, or the Borrower or any Subsidiary of the Borrower has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) that provide benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or Plans or Foreign Pension Plans; (b) there shall result from any such event or events the imposition of a lien, the granting of a security interest, or a liability or a material risk of incurring a liability; and (c) such lien, security interest or liability, individually, and/or in the aggregate, in the opinion of the Required Banks, has had, or could reasonably be expected to have, a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole; or 10.07 Security Documents. At any time after the execution and delivery thereof, any of the Security Documents shall cease to be in full force and effect, or shall cease to give the Collateral Administrative Agent for the benefit of the Secured Creditors the Liens, rights, powers and privileges purported to be created thereby (including, without limitation, a perfected security interest in, and Lien on, all of the Collateral, in favor of the Collateral Administrative Agent, superior to and prior to the rights of all third Persons (except as permitted by Section 9.01), and subject to no other Liens (except as permitted by Section 9.01); or 10.08 Subsidiaries Guaranty. At any time after the execution and delivery thereof, the Subsidiaries Guaranty or any provision thereof shall cease to be in full force or effect as to any Subsidiary Guarantor, or any Subsidiary Guarantor or any Person acting by or on behalf of such Subsidiary Guarantor shall deny or disaffirm such Subsidiary Guarantor's obligations under the Subsidiaries Guaranty or any Subsidiary Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Subsidiaries Guaranty; or 10.09 Judgments. One or more judgments or decrees shall be entered against the Borrower or any Subsidiary of the Borrower (excluding any Immaterial Subsidiary) involving in the aggregate for the Borrower and its Subsidiaries (excluding Immaterial Subsidiaries) a liability (not paid or fully covered by a reputable and solvent insurance company) and such judgments and decrees either shall be final and non-appealable or shall not be vacated, discharged or stayed or bonded pending appeal for any period of 30 consecutive days, and the aggregate amount of all such judgments exceeds $10,000,000; or -94- 102 10.10 Change of Control. A Change of Control shall occur; or 10.11 Certain Master Leases. An Event of Default under, and as defined in, the Red Lion Master Lease or the Doubletree Master REIT Lease shall occur and be continuing (after giving effect to any applicable cure and grace periods), or the Red Lion Master Lease or the Doubletree Master REIT Lease (or any material provision thereof) shall cease to be in full force and effect; or 10.12 The Red Lion Master Property Management Agreement. The Red Lion Master Property Management Agreement shall terminate or any material provision thereof shall cease to be in full force and effect or the Borrower or any of its Subsidiaries shall default in a due performance or observance by it of any term, covenant or condition required to be performed by it after the expiration of any applicable cure and grace periods; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent, upon the written request of the Required Banks, shall by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of any Agent, any Bank or the holder of any Note to enforce its claims against any Credit Party (provided, that, if an Event of Default specified in Section 10.05 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice by the Administrative Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Commitments terminated, whereupon all Commitments of each Bank shall forthwith terminate immediately and any Commitment Commission shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and the Notes and all Obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Credit Party; (iii) terminate any Letter of Credit which may be terminated in accordance with its terms; (iv) direct the Borrower to pay (and the Borrower agrees that upon receipt of such notice, or upon the occurrence of an Event of Default specified in Section 10.05 with respect to the Borrower, it will pay) to the Collateral Administrative Agent at the Payment Office such additional amount of cash, to be held as security by the Collateral Administrative Agent, as is equal to the aggregate Stated Amount of all Letters of Credit issued for the account of the Borrower and then outstanding; (v) enforce, as Collateral Administrative Agent, all of the Liens and security interests created pursuant to the Security Documents; and (vi) apply any cash collateral held by the Administrative Agent pursuant to Section 4.02 to the repayment of the Obligations. -95- 103 SECTION 11. Definitions and Accounting Terms. 11.01 Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acquisition" shall mean the merger of Merger Sub with and into Red Lion pursuant to, and in accordance with the terms of, the Acquisition Documents and as a result of which Red Lion shall be a Wholly-Owned Subsidiary of the Borrower. "Acquisition Agreement" shall mean the Agreement and Plan of Merger, dated as of September 12, 1996, by and among the Borrower, Merger Sub and Red Lion. "Acquisition Documents" shall mean the Acquisition Agreement and all other agreements and documents entered into in connection with the Acquisition. "Additional Security Documents" shall have the meaning provided in Section 8.12. "Adjusted Consolidated Cash Income" for any period shall mean Consolidated Net Income for such period plus, without duplication, the sum of the amount of all net non-cash charges (including, without limitation, depreciation, amortization, deferred tax expense, non-cash interest expense) and net non-cash losses which were included in arriving at Consolidated Net Income for such period. "Adjusted Consolidated Working Capital" at any time shall mean Consolidated Current Assets (but excluding therefrom all cash and Cash Equivalents) less Consolidated Current Liabilities at such time. "Adjusted RL Percentage" shall mean (x) at a time when no Bank Default exists, for each Bank, such Bank's RL Percentage and (y) at a time when a Bank Default exists, (i) for each Bank that is a Defaulting Bank, zero and (ii) for each Bank that is a Non-Defaulting Bank, the percentage determined by dividing such Bank's Revolving Loan Commitment at such time by the Adjusted Total Revolving Loan Commitment at such time, it being understood that all references herein to Revolving Loan Commitments and the Adjusted Total Revolving Loan Commitment at a time when the Total Revolving Loan Commitment or Adjusted Total Revolving Loan Commitment, as the case may be, has been terminated shall be references to the Revolving Loan Commitments or Adjusted Total Revolving Loan Commitment, as the case may be, in effect immediately prior to such termination, provided that (A) a Bank's Adjusted RL Percentage shall only change upon the occurrence of a Bank Default from that in effect immediately prior to such Bank Default to the extent that after giving effect to such Bank Default, and any repayment of Revolving -96- 104 Loans and Swingline Loans at such time pursuant to Section 4.02(a) or otherwise, the sum of (i) the aggregate outstanding principal amount of Revolving Loans of such Bank plus (ii) such Bank's new Adjusted RL Percentage of the aggregate outstanding principal amount of Swingline Loans and the Letter of Credit Outstandings, would not exceed the Revolving Loan Commitment of such Bank at such time; (B) the changes to the Adjusted RL Percentage that would have become effective upon the occurrence of a Bank Default but that did not become effective as a result of the preceding clause (A) shall become effective on the first date after the occurrence of the relevant Bank Default on which the sum of (i) the aggregate outstanding principal amount of the Revolving Loans of all Non-Defaulting Banks, plus (ii) the aggregate outstanding principal amount of Swingline Loans, plus (iii) the Letter of Credit Outstandings, is equal to or less than the Adjusted Total Revolving Loan Commitment; and (C) if (i) a Non-Defaulting Bank's Adjusted RL Percentage is changed pursuant to the preceding clause (B) and (ii) any repayment of such Bank's Revolving Loans or of Unpaid Drawings or of Swingline Loans that were made during the period commencing after the date of the relevant Bank Default and ending on the date of such change to its Adjusted RL Percentage must be returned to the Borrower as a preferential or similar payment in any bankruptcy or similar proceeding of the Borrower, then the change to such Non-Defaulting Bank's Adjusted RL Percentage effected pursuant to said clause (B) shall be reduced to that positive change, if any, as would have been made to its Adjusted RL Percentage if (x) such repayments had not been made and (y) the maximum change to its Adjusted RL Percentage would have resulted in the sum of the outstanding principal of Revolving Loans made by such Bank plus such Bank's new Adjusted RL Percentage of the outstanding principal amount of Swingline Loans and of Letter of Credit Outstandings equalling such Bank's Revolving Loan Commitment at such time. "Adjusted Total Revolving Loan Commitment" shall mean at any time the Total Revolving Loan Commitment less the aggregate Revolving Loan Commitments of all Defaulting Banks. "Administrative Agent" shall mean Scotiabank, in its capacity as Administrative Agent for the Banks hereunder, and shall include any successor to the Administrative Agent appointed pursuant to Section 12.09. "Affected Eurodollar Loans" shall have the meaning provided in Section 4.02(j). "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. -97- 105 "Agent" shall mean and include the Administrative Agent and the Syndication Agent. "Agreement" shall mean this Credit Agreement, as modified, supplemented, amended, restated (including any amendment and restatement hereof), extended, renewed, refinanced or replaced from time to time. "Allocable Share" shall mean, for any Person with respect to any Joint Venture and event or circumstance under this Agreement that requires the determination thereof, that percentage of such Joint Venture's equity interests that are owned (directly or indirectly) by such Person. "Applicable Commitment Commission Percentage" shall mean a percentage per annum equal to 1/2 of 1%, provided that so long as no Default of the type described in Section 10.01 or 10.05 shall exist, or no Event of Default shall exist, the Applicable Commitment Commission Percentage shall be 3/8 of 1% at any time (and for so long as) the Interest Reduction Discount is determined by clauses (C), (D), (E) or (F) of clause (i) of the definition thereof. "Applicable Margin" shall mean a percentage per annum equal to (i) in the case of Tranche A Term Loans and Revolving Loans which (in either case) are maintained as Base Rate Loans and in the case of Swingline Loans, 1.125%, less the then applicable Interest Reduction Discount, if any, (ii) in the case of Tranche A Term Loans and Revolving Loans which are maintained as Eurodollar Loans, 2.125%, less the then applicable Interest Reduction Discount, if any, (iii) in the case of Tranche B Term Loans which are maintained as Base Rate Loans, 1.500%, less the then applicable Interest Reduction Discount, if any, and (iv) in the case of Tranche B Term Loans which are maintained as Eurodollar Loans, 2.500%, less the then applicable Interest Reduction Discount, if any. Notwithstanding the foregoing, (x) in the event that the Borrower receives gross cash proceeds in excess of $350,000,000 from the Equity Financing and 100% of the Net Equity Proceeds therefrom in excess of $250,000,000 are applied to reduce the Total Term Loan Commitment and/or repay outstanding Term Loans in accordance with the requirements of Sections 3.02(b)(i) and/or 4.02(d), the Applicable Margin for Tranche A Term Loans, Revolving Loans and Swingline Loans set forth in clauses (i) and (ii) above shall be permanently decreased by 0.125% and (y) in the event that the Borrower issues any New Senior Subordinated Notes, the Applicable Margin for Tranche A Term Loans, Tranche B Term Loans, Revolving Loans and Swingline Loans set forth above shall be permanently increased by 0.125% (after giving effect to any decrease thereof as provided in preceding clause (x)). "Applicable Recapture Percentage" shall mean 100%, provided that if on the date of any Asset Sale (other than an Asset Sale under Section 9.02(xiv)) or on the date of -98- 106 any Specified Red Lion Event, (x) no Default under Section 10.01 or 10.05 then exists, or no Event of Default then exists, and (y) the Leverage Ratio for the Test Period then most recently ended calculated on a Pro Forma Basis shall be less than 3.00:1.00 (as evidenced (in reasonable detail) by a certificate of the Chief Financial Officer of the Borrower submitted to the Agents on such date), the Borrower shall be entitled to retain 50% of the Net Sale Proceeds from such Asset Sale and 50% of the Specified Existing Red Lion Investment Proceeds from such Specified Red Lion Event up to an aggregate (for all such Asset Sales and Specified Red Lion Events) of $250,000,000. "Asset Sale" shall mean any sale, transfer or other disposition by the Borrower or any of its Wholly-Owned Subsidiaries or Joint Ventures to any Person (including by-way-of redemption by such Person) other than to the Borrower or a Wholly-Owned Subsidiary of the Borrower of any asset (including, without limitation, any capital stock or other securities of, or equity interests in, another Person) of the Borrower or any of its Wholly-Owned Subsidiaries or Joint Ventures other than any sale, transfer or disposition permitted by Sections 9.02(ii), (v), (vii), (viii), (xi), (xvi), (xvii) and (xviii), provided that in no event shall a Designated Event constitute an Asset Sale. "Assignment and Assumption Agreement" shall mean an Assignment and Assumption Agreement substantially in the form of Exhibit K (appropriately completed). "Austin Obligations" shall mean the Indebtedness outstanding on the Initial Borrowing Date relating to, and only secured by, the Borrower's Hotel Property in Austin, Texas, but only so long as recourse in respect of such Indebtedness is limited solely to such Hotel Property and not to the Borrower or any of its Subsidiaries or any of the other assets of the Borrower or any of its Subsidiaries. "Bank" shall mean each financial institution listed on Schedule I, as well as any Person which becomes a "Bank" hereunder pursuant to Section 1.13 or 13.04(b). "Bank Default" shall mean (i) the refusal (which has not been retracted) or the failure of a Bank to make available its portion of any Borrowing (including any Mandatory Borrowing) or to fund its portion of any unreimbursed payment under Section 2.04(c) or (ii) a Bank having notified in writing the Borrower and/or the Administrative Agent that such Bank does not intend to comply with its obligations under Section 1.01(a), 1.01(b), 1.01(c), 1.01(e) or 2, in the case of either clause (i) or (ii) as a result of any takeover or control (including, without limitation, as a result of the occurrence of any event of the type described in Section 10.05 with respect to such Bank) of such Bank by any regulatory authority or agency. "Bankruptcy Code" shall have the meaning provided in Section 10.05. -99- 107 "Base Case EBITDA" shall mean, with respect to any Test Period set forth on Schedule XII, the number set forth opposite such Test Period on such Schedule XII. "Base Rate" at any time shall mean the higher of (i) 1/2 of 1% in excess of the Federal Funds Rate and (ii) the Prime Lending Rate. "Base Rate Loan" shall mean (i) each Swingline Loan and (ii) each other Loan designated or deemed designated as such by the Borrower at the time of the incurrence thereof or conversion thereto. "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrowing" shall mean the borrowing of one Type of Loan of a single Tranche from all the Banks having Commitments of the respective Tranche (or from Scotiabank in the case of Swingline Loans) on a given date (or resulting from a conversion or conversions on such date) having in the case of Eurodollar Loans the same Interest Period, provided that Base Rate Loans incurred pursuant to Section 1.10(b) shall be considered part of the related Borrowing of Eurodollar Loans. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day except Saturday, Sunday and any day which shall be in New York City, New York and Atlanta, Georgia a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) above and which is also a day for trading by and between banks in the New York interbank Eurodollar market. "Calculation Period" shall mean the period of four consecutive fiscal quarters of the Borrower last ended before the date of the respective Hotel Acquisition, Hotel Investment, Asset Sale, Redesignation Event and/or incurrence of New Senior Subordinated Notes or Non- Recourse Indebtedness which requires calculations to be made on a Pro Forma Basis. "Candlewood" shall mean Candlewood Hotel Company, L.L.C. "Capital Expenditures" shall mean, with respect to any Person, all expenditures by such Person which should be capitalized in accordance with generally accepted accounting principles and, without duplication, the amount of Capitalized Lease Obligations incurred by such Person. -100- 108 "Capitalized Lease Obligations" of any Person shall mean all rental obligations which, under generally accepted accounting principles, are or will be required to be capitalized on the books of such Person, in each case taken at the amount thereof accounted for as indebtedness in accordance with such principles. "Cash Equivalents" shall mean, as to any Person, (i) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (ii) Dollar denominated time deposits and certificates of deposit of any commercial bank having, or which is the principal banking subsidiary of a bank holding company having, a long-term unsecured debt rating of at least "A" or the equivalent thereof from Standard & Poor's Ratings Services or "A2" or the equivalent thereof from Moody's Investors Service, Inc. with maturities of not more than one year from the date of acquisition by such Person, (iii) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (ii) above, (iv) commercial paper issued by any Person incorporated in the United States rated at least A-1 or the equivalent thereof by Standard & Poor's Ratings Services or at least P-1 or the equivalent thereof by Moody's Investors Service, Inc. and in each case maturing not more than 270 days after the date of acquisition by such Person and (v) investments in money market funds substantially all of whose assets are comprised of securities of the types described in clauses (i) through (iv) above. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as the same may be amended from time to time, 42 U.S.C. Section 9601 et seq. "Change of Control" shall mean (i) any Person or "group" (within the meaning of Rules 13d-3 or 13d-5 under the Securities Exchange Act (as in effect on the Effective Date)), other than the Permitted Holders, shall (A) have acquired beneficial ownership of 25% or more on a fully diluted basis of the voting and/or economic interest in the Borrower's capital stock or (B) have obtained the power (whether or not exercised) to elect a majority of the Borrowers' directors or (ii) the Board of Directors of the Borrower shall cease to consist of a majority of Continuing Directors. "Clean-Down Period" shall mean a period of 30 consecutive days during which no more than $50,000,000 in aggregate principal amount of the sum of Revolving Loans and Swingline Loans is outstanding at any time during such period. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any -101- 109 subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property (whether real or personal) with respect to which any security interests have been granted (or purport to be granted) pursuant to any Security Document, including, without limitation, all Pledge Agreement Collateral, all Security Agreement Collateral, the Mortgaged Properties, all Collateral Assignment Collateral and all cash and Cash Equivalents delivered as collateral pursuant to Section 4.02 or 10. "Collateral Administrative Agent" shall mean the Administrative Agent acting as collateral administrative agent for the Secured Creditors pursuant to the Security Documents. "Collateral Assignment" shall mean each Collateral Assignment of Mortgage and other Loan Documents pursuant to which any Credit Party shall have granted to the Collateral Administrative Agent a security interest in the Collateral Assignment Collateral described therein. "Collateral Assignment Collateral" shall mean all of the applicable Credit Party's right, title and interest in and to the "Pledged Loan Documents" as defined in the respective Collateral Assignment. "Collective Bargaining Agreements" shall have the meaning provided in Section 5.05. "Commitment" shall mean any of the commitments of any Bank, i.e., whether the Tranche A Term Loan Commitment, the Tranche B Term Loan Commitment or the Revolving Loan Commitment. "Commitment Commission" shall mean the Revolving Loan Commitment Commission and the Term Loan Commitment Commission. "Confidential Information Memorandum" shall mean the Confidential Information Memorandum, dated October 1996, prepared by the Agents and distributed to the Banks prior to the Initial Borrowing Date. "Consolidated Current Assets" shall mean, at any time, the consolidated current assets of the Borrower and its Subsidiaries at such time. "Consolidated Current Liabilities" shall mean, at any time, the consolidated current liabilities of the Borrower and its Subsidiaries at such time, but excluding the cur- -102- 110 rent portion of and accrued but unpaid interest on any Indebtedness under this Agreement and any other long-term Indebtedness which would otherwise be included therein. "Consolidated EBIT" shall mean, for any period, Consolidated Net Income before Consolidated Interest Expense and before provision for taxes for such period and without giving effect (x) to any extraordinary gains or losses, (y) to any gains or losses from sales of assets other than from (i) sales of inventory sold in the ordinary course of business and (ii) sales or liquidations of equity interests in Joint Ventures in the ordinary course of business (provided that no more than $5,000,000 shall be included in Consolidated EBIT for any Test Period in connection with such sales or liquidations referred to in this clause (ii)) and (z) to any expenses related to or incurred by the Borrower in connection with the Transaction. "Consolidated EBITDA" shall mean, for any period, Consolidated EBIT for such period, adjusted by adding thereto the amount of all amortization and depreciation expense of the Borrower and its Subsidiaries that were deducted in arriving at Consolidated EBIT for such period, it being understood and agreed, however, that for purposes of determining compliance with Sections 9.09 and 9.10 and for purposes of calculating the Interest Reduction Discount, Consolidated EBITDA for the Borrower's fiscal quarter ended on (i) March 31, 1996 shall be $28,163,000, (ii) June 30, 1996 shall be $42,687,000, (iii) September 30, 1996 shall be $__________ and (iv) December 31, 1996 shall be based on the financial statements delivered pursuant to Section 8.01(i). "Consolidated Fixed Charge Coverage Ratio" shall mean, for any period the ratio of (x) Consolidated EBITDA for such period less the amount of all Capital Expenditures, Hotel Acquisitions and Hotel Investments made by the Borrower and its Subsidiaries during such period pursuant to Sections 9.07(a), (b) and (g) to (y) Consolidated Fixed Charges for such period. "Consolidated Fixed Charges" for any period shall mean the sum, without duplication, of (i) Consolidated Interest Expense for such period, (ii) the amount of all cash payments made by the Borrower and its Subsidiaries in respect of taxes or tax liabilities during such period (net of any cash refunds actually received during such period), and (iii) the scheduled principal amount of all amortization payments made (or required to be made and not made) on all Indebtedness (including, without limitation, the principal component of all Capitalized Lease Obligations) of the Borrower and its Subsidiaries for such period plus the amount of all voluntary repayments of such Indebtedness during such period to the extent that any such repayment reduced the amount of such scheduled amortization payment. "Consolidated Indebtedness" shall mean, at any time, the principal amount of all Indebtedness of the Borrower and its Subsidiaries at such time determined on a con- -103- 111 solidated basis to the extent that such Indebtedness would be accounted for as debt in accordance with generally accepted accounting principles plus, without duplication, (i) the maximum amount available to be drawn under all letters of credit (including any Letters of Credit) issued for the account of the Borrower and its Subsidiaries and all unpaid drawings (including any Unpaid Drawings) in respect of such letters of credit, (ii) the principal amount of all bonds issued by the Borrower and its Subsidiaries in connection with workers' compensation obligations, lease obligations and similar obligations, (iii) all Indebtedness set forth on Schedule VII designated as being part of Consolidated Indebtedness and (iv) the amount of all Contingent Obligations of the Borrower and its Subsidiaries determined on a consolidated basis in respect of Indebtedness of other Persons of the type described above in this definition. "Consolidated Interest Coverage Ratio" shall mean, for any period the ratio of (x) Consolidated EBITDA for such period to (y) (i) in the case of the Test Period ending on March 31, 1997, Consolidated Interest Expense for such Test Period multiplied by 4, (ii) in the case of the Test Period ending on June 30, 1997, Consolidated Interest Expense for such Test Period multiplied by 2, (iii) in the case of the Test Period ending September 30, 1997, Consolidated Interest Expense for such Test Period multiplied by a fraction the numerator of which is 4 and the denominator of which is 3 and (iv) in the case of each Test Period ending thereafter, Consolidated Interest Expense for the Test Period then most recently ended (in each case taken as one accounting period). "Consolidated Interest Expense" shall mean, for any period, the total consolidated interest expense of the Borrower and its Subsidiaries for such period (calculated without regard to any limitations on the payment thereof) plus, without duplication, that portion of Capitalized Lease Obligations of the Borrower and its Subsidiaries representing the interest factor for such period; provided that the amortization of deferred financing costs with respect to this Agreement or the Indebtedness incurred hereunder shall be excluded from Consolidated Interest Expense to the extent same would otherwise have been included therein. "Consolidated Joint Venture" shall mean any Joint Venture in which the Borrower, either directly or through one or more Wholly-Owned Subsidiaries has a 50% equity interest and whose debt is included, in accordance with generally accepted accounting principles, on the consolidated balance sheet of the Borrower (whether or not directly assumed or guaranteed by the Borrower of any of its other Subsidiaries). "Consolidated Net Income" shall mean, for any Person and period, the net income (or loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis (after deduction for minority interests), provided that (i) in determining Consolidated Net Income of the Borrower, the net income (or loss) of any other Person which is not a Subsidiary of the Borrower (including any Unrestricted Subsidiary) or is -104- 112 accounted for by the Borrower by the equity method of accounting shall be included only to the extent of the payment of dividends or distributions by such other Person to the Borrower or a Subsidiary thereof during such period and (ii) the net income (or loss) of any other Person acquired by such specified Person or a Subsidiary of such Person in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded. "Consolidated Net Worth" shall mean on any date of determination thereof the consolidated net worth of the Borrower and its Subsidiaries determined as of such date of determination. "Contingent Obligation" shall mean, as to any Person, any obligation of such Person as a result of such Person being a general partner of the other Person, unless the underlying obligation is expressly made non-recourse as to such general partner, and any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Continuing Directors" shall mean the directors of the Borrower on the Initial Borrowing Date, the two directors of the Borrower selected by KKR within sixty days following the Initial Borrowing Date and each other director, if such other director's nomination for election to the Board of Directors of the Borrower is recommended by a majority of the then Continuing Directors or is recommended by a committee of the Board of Directors a majority of which is composed of the then Continuing Directors. -105- 113 "Credit Documents" shall mean this Agreement and, after the execution and delivery thereof pursuant to the terms of this Agreement, each Note, the Subsidiaries Guaranty and each Security Document. "Credit Event" shall mean the making of any Loan or the issuance of any Letter of Credit. "Credit Party" shall mean the Borrower and each Subsidiary Guarantor. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Bank" shall mean any Bank with respect to which a Bank Default is in effect. "Designated Event" shall mean the receipt of cash proceeds by the Borrower or any of its Wholly-Owned Subsidiaries from (i) any termination payment or liquidated damages under, or in connection with, the termination of any lease, management contract or franchise agreement, (ii) any sale or liquidation by the Borrower or a Wholly-Owned Subsidiary thereof of any Existing Doubletree Investment, (iii) any sale or liquidation by the Borrower or a Wholly-Owned Subsidiary thereof of any Hotel Investment made after the Initial Borrowing Date, (iv) any principal repayment of any loan or advance made to the Borrower or a Wholly-Owned Subsidiary thereof by any Joint Venture or other Person (other than the Borrower or a Subsidiary Guarantor) (except for regularly occurring repayments made in the ordinary course of business and except to the extent that same constitutes a Specified Red Lion Event), or (v) any redemptions, distributions or dividends made by a Joint Venture to the Borrower or a Wholly-Owned Subsidiary thereof (other than regularly occurring distributions or dividends made in the ordinary course of business); "Designated Hotel Properties" shall mean the Hotel Properties owned by the Borrower and its Wholly-Owned Subsidiaries as set forth on Schedule XII, and any replacement Hotel Properties purchased by the Borrower and its Wholly-Owned Subsidiaries with the Net Sale Proceeds from any sale of one or more of the Hotel Properties set forth on such Schedule XIII and/or from the sale of one or more of such replacement Hotel Properties. "Determination Date" shall have the meaning provided in the definition of "Pro Forma Basis." "Dividend" with respect to any Person shall mean that such Person has declared or paid a dividend or returned any equity capital to its stockholders or partners or authorized or made any other distribution, payment or delivery of property (other than com- -106- 114 mon stock of such Person) or cash to its stockholders or partners as such, or redeemed, retired, purchased or otherwise acquired, directly or indirectly, for a consideration any shares of any class of its capital stock or any partnership interests outstanding on or after the Initial Borrowing Date (or any options or warrants issued by such Person with respect to its capital stock), or set aside any funds for any of the foregoing purposes, or shall have permitted any of its Subsidiaries to purchase or otherwise acquire for a consideration any shares of any class of the capital stock or any partnership interests of such Person outstanding on or after the Initial Borrowing Date (or any options or warrants issued by such Person with respect to its capital stock). Without limiting the foregoing, "Dividends" with respect to any Person shall also include all payments made or required to be made by such Person with respect to any stock appreciation rights, plans, equity incentive or achievement plans or any similar plans or setting aside of any funds for the foregoing purposes. "Documents" shall mean the Credit Documents, the Equity Financing Documents, the Acquisition Documents and the Refinancing Documents. "Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States. "Domestic Subsidiary" shall mean each Subsidiary of the Borrower incorporated or organized in the United States or any State or territory thereof. "Doubletree Master REIT Lease" shall mean the Consolidated Lease Amendment, dated as of February 27, 1996, between RFS Partnership, L.P., as lessor, and RFS, Inc., as lessee. "Drawing" shall have the meaning provided in Section 2.05(b). "Effective Date" shall have the meaning provided in Section 13.10. "Eligible Transferee" shall mean and include a commercial bank, financial institution or other "accredited investor" (as defined in Regulation D of the Securities Act). "Employee Benefit Plans" shall have the meaning provided in Section 5.05. "End Date" shall mean, for any Margin Reduction Period, the last day of such Margin Reduction Period. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law or any permit issued, or any approval given, under any such Environ- -107- 115 mental Law (hereafter, "Claims"), including, without limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief in connection with alleged injury or threat of injury to health, safety or the environment due to the presence of Hazardous Materials. "Environmental Law" shall mean any Federal, state, foreign or local statute, law, rule, regulation, ordinance, code, guideline, written policy and rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, employee health and safety or Hazardous Materials, including, without limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; the Clean Air Act, 42 U.S.C. Section 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 3803 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. Section 2701 et seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 U.S.C. Section 11001 et seq.; the Hazardous Material Transportation Act, 49 U.S.C. Section 1801 et seq. and the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq.; and any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "Equity Financing" shall mean, collectively, (i) the Public Equity Offering and (ii) the Private Equity Offering. "Equity Financing Documents" shall mean each of the documents and other agreements entered into in connection with the Equity Financing. "Equity Rollover" shall mean the issuance by the Borrower of shares of its common stock for the account of the selling shareholders of Red Lion as part of the Acquisition. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Borrower or a Subsidiary of the Borrower would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. -108- 116 "Eurodollar Loan" shall mean each Loan designated as such by the Borrower at the time of the incurrence thereof or conversion thereto. "Eurodollar Rate" shall mean (a) the arithmetic average (rounded upward to the nearest 1/100th of 1%) of the offered quotation to first-class banks in the New York interbank Eurodollar market determined by each Reference Bank for Dollar deposits of amounts in immediately available funds comparable to the outstanding principal amount of the Eurodollar Loan of such Reference Bank with maturities comparable to the Interest Period applicable to such Eurodollar Loan commencing two Business Days thereafter as of 11:00 A.M. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period, divided (and rounded upward to the nearest 1/16 of 1%) by (b) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves required by applicable law) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D); provided that if one or more of the Reference Banks fail to provide the Administrative Agent with its aforesaid rate, then the Eurodollar Rate shall be determined based on the rate or rates provided to the Administrative Agent by the other Reference Bank or Reference Banks. "Event of Default" shall have the meaning provided in Section 10. "Excess Cash Flow" shall mean, for any period, the remainder of (i) Adjusted Consolidated Cash Income for such period minus (ii) the sum of (a) the amount of all Capital Expenditures, Hotel Acquisitions and Hotel Investments made by the Borrower and its Subsidiaries pursuant to Sections 9.07(a), (b), (e) and (g) during such period, (b) the aggregate principal amount of permanent principal payments of Indebtedness for borrowed money of the Borrower and its Subsidiaries (other than repayments pursuant to which any other Indebtedness is being refinanced with proceeds of Indebtedness, equity or asset sales, and repayments of Loans, provided that repayments of Loans shall be deducted in determining Excess Cash Flow if such repayments were (x) required as a result of a Scheduled Repayment under Section 4.02(b) or (c) or (y) made as a voluntary prepayment (other than a voluntary prepayment made pursuant to the proviso in Section 4.01(a)(v)) (but in the case of a voluntary prepayment of Revolving Loans or Swingline Loans, only to the extent accompanied by a voluntary reduction to the Total Revolving Loan Commitment)) during such period and (c) any amount by which Adjusted Consolidated Cash Income was increased during such period as a result of the portion of any Designated Event that required a repayment pursuant to Section 4.02(i). "Excess Cash Payment Date" shall mean the date occurring 100 days after the last day of each fiscal year of the Borrower (beginning with its fiscal year ending December 31, 1997). -109- 117 "Excess Cash Payment Period" shall mean, with respect to the repayment required on each Excess Cash Payment Date, the immediately preceding fiscal year of the Borrower. "Existing Doubletree Investments" shall mean those Investments of the Borrower and its Subsidiaries (other than Red Lion and its Subsidiaries) existing on the Initial Borrowing Date and set forth on Schedule XVI. "Existing Glendale Debt" shall mean the $40,000,000 in aggregate principal amount of loans that remain outstanding to the Borrower's Joint Venture in Glendale, California on the Initial Borrowing Date. "Existing Indebtedness" shall have the meaning provided in Section 7.22. "Existing Indebtedness Agreements" shall have the meaning provided in Section 5.05. "Existing Red Lion Investments" shall mean those Investments of Red Lion and its Subsidiaries existing on the Initial Borrowing Date and set forth on Schedule XVII. "Existing Red Lion Joint Ventures" shall mean the eight Red Lion Joint Ventures designated as such on Schedule VI. "Facing Fee" shall have the meaning provided in Section 3.01(d). "Federal Funds Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "Fees" shall mean all amounts payable pursuant to or referred to in Section 3.01. "Foreign Pension Plan" shall mean any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by the Borrower or any one or more of its Subsidiaries primarily for the benefit of employees of the Borrower or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of -110- 118 retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Foreign Subsidiary" shall mean each Subsidiary of the Borrower other than a Domestic Subsidiary. "Hazardous Materials" shall mean (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous waste," "hazardous materials," "extremely hazardous substances," "restricted hazardous waste," "toxic substances," "toxic pollutants," "contaminants," or "pollutants," or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, the Release of which is prohibited, limited or regulated by any governmental authority. "Hotel Acquisition" shall mean an acquisition of a fee or leasehold interest in a Hotel Property. "Hotel Investment" shall mean an Investment by means of (i) the acquisition of all or portion of the equity interest of a Person that directly or indirectly owns, leases, manages or franchises one or more hotel or motel properties or is otherwise engaged in the hotel or hospitality business, (ii) the making of a loan, capital contribution or other advance or investment in, to or for the benefit of a Subsidiary, an Unrestricted Subsidiary or a Joint Venture of the Borrower that owns, leases, manages or franchises one or more Hotel Properties, (iii) the making of an Investment in any Person in consideration for the obtaining or retaining by Borrower or a Subsidiary of the Borrower of the right to manage, lease or franchise one or more hotel or motel properties, or in the reasonable expectation that such Investment will materially enhance the ability of the Borrower or a Subsidiary of the Borrower to obtain or to retain the right to manage, lease or franchise one or more hotel or motel properties, (iv) the acquisition by the Borrower or a Subsidiary of the Borrower of one or more existing management agreements, leases or licensing or franchise rights with respect to a hotel or motel property or properties, (v) any cash consideration paid by the Borrower or a Subsidiary thereof to any Person (other than to the Borrower or a Wholly-Owned Subsidiary thereof) in connection with any transaction permitted under Section 9.02(xv), (vi) any drawing under a letter of credit (including any Letter of Credit) issued for the account of the Borrower or any Subsidiary thereof and for the benefit of any Person other than the Borrower or a Wholly-Owned Subsidiary thereof or (vii) the payment by the Borrower or a Subsidiary thereof in respect of any Contingent Obligation incurred by the Borrower or such Subsidiary for the benefit of any Person not a Subsidiary Guarantor. -111- 119 "Hotel Property" shall mean each hotel or motel owned or leased by the Borrower or any of its Subsidiaries or Joint Ventures (including the furniture, fixtures and equipment thereon). "Hotel Property Management Agreements" shall have the meaning provided in Section 5.05. "Immaterial Subsidiary" shall mean any Subsidiary of the Borrower which (x) accounted for less than $2,500,000 of Consolidated EBITDA of the Borrower for the Test Period then last ended and which, if aggregated with all other Subsidiaries of the Borrower with respect to which an event described under Section 10.05 or 10.09 has occurred and is continuing, would have accounted for less than $2,500,000 of Consolidated EBITDA of the Borrower for the Test Period then last ended and (y) would not constitute a "significant subsidiary" as defined in Regulation S-X under the Securities Act and the Securities Exchange Act and which, if aggregated with all other Subsidiaries of the Borrower with respect to which an event described under Section 10.05 or 10.09 has occurred and is continuing, would not constitute a "significant subsidiary" as defined in the Securities Act and the Securities Exchange Act. "Inactive Subsidiary" shall mean any Wholly-Owned Subsidiary of the Borrower that does not conduct any business activities. "Indebtedness" shall mean, as to any Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person for borrowed money or for the deferred purchase price of property or services, (ii) the maximum amount available to be drawn under all letters of credit issued for the account of such Person and all unpaid drawings in respect of such letters of credit, (iii) all Indebtedness of the types described in clause (i), (ii), (iv), (v), (vi) or (vii) of this definition secured by any Lien on any property owned by such Person, whether or not such Indebtedness has been assumed by such Person (provided, that, if the Person has not assumed or otherwise become liable in respect of such Indebtedness, such Indebtedness shall be deemed to be in an amount equal to the fair market value of the property to which such Lien relates as determined in good faith by such Person), (iv) the aggregate amount required to be capitalized under leases under which such Person is the lessee, (v) all obligations of such person to pay a specified purchase price for goods or services, whether or not delivered or accepted, i.e., take-or-pay and similar obligations, (vi) all Contingent Obligations of such Person and (vii) all obligations under any Interest Rate Protection Agreement, any Other Hedging Agreement or under any similar type of agreement. Notwithstanding the foregoing, Indebtedness shall not include trade payables and accrued expenses incurred by any Person in accordance with customary practices and in the ordinary course of business of such Person. -112- 120 "Indebtedness to be Refinanced" shall mean all Indebtedness set forth on Schedule IV which is to be repaid in full as part of the Refinancing. "Initial Borrowing Date" shall mean the date occurring on or after the Effective Date on which the initial Borrowing of Loans occurs. "Intercompany Loan" shall have the meaning provided in Section 9.05(viii). "Intercompany Note" shall mean a promissory note, in the form of Exhibit L, evidencing Intercompany Loans. "Interest Determination Date" shall mean, with respect to any Eurodollar Loan, the second Business Day prior to the commencement of any Interest Period relating to such Eurodollar Loan. "Interest Period" shall have the meaning provided in Section 1.09. "Interest Rate Protection Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, interest collar agreement, interest rate hedging agreement or other similar agreement or arrangement. "Interest Reduction Discount" shall mean (i) in the case of Tranche A Term Loan, Revolving Loans and Swingline Loans, initially zero, and from and after any Start Date occurring after the last day of the first fiscal quarter of the Borrower ended after the Initial Borrowing Date to and including the corresponding End Date: (A) 1/4 of 1% if, but only if, as of the Test Date for such Start Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 4.50:1.00 and none of the conditions set forth in clauses (B), (C), (D), (E) and (F) below are satisfied; (B) 3/8 of 1% if, but only if, as of the Test Date for such Start Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 4.25:1.00 and none of the conditions set forth in clauses (C), (D), (E) and (F) below are satisfied; (C) 1/2 of 1% if, but only if, as of the Test Date for such Start Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 4.00:1.00 and none of the conditions set forth in clauses (D), (E) and (F) below are satisfied; -113- 121 (D) 5/8 of 1% if, but only if, as of the Test Date for such Start Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.75:1.00 and none of the conditions set forth in clauses (E) and (F) below are satisfied; (E) 3/4 of 1% if, but only if, as of the Test Date for such Start Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.50:1.00 and the condition set forth in clause (F) below is not satisfied; or (F) 7/8 of 1% if, but only if, as of the Test Date for such Start Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 3.25:1.00; and (ii) in the case of Tranche B Term Loans, initially zero, and from and after any Start Date occurring after the last day of the first fiscal quarter of the Borrower ended after the Initial Borrowing Date to and including the corresponding End Date: (A) 1/4 of 1% if, but only if, as of the Test Date for such Start Date the Leverage Ratio for the Test Period ended on such Test Date shall be less than 4.50:1.00. Notwithstanding anything to the contrary above in this definition, (i) for the period from the Initial Borrowing Date to but not including the first Start Date after the Initial Borrowing Date, the Interest Reduction Discount shall be ____ of 1% and (ii) the Interest Reduction Discount for all Loans shall be reduced to zero at all times when a Default of the type described in Section 10.01 or 10.05 shall exist, or any Event of Default shall exist. "Investments" shall have the meaning provided in Section 9.05. "Issuing Bank" shall mean Scotiabank and any other Bank which at the request of the Borrower and with the consent of the Agents (which consent shall not be unreasonably withheld) agrees, in such Bank's sole discretion, to become an Issuing Bank for the purpose of issuing Letters of Credit pursuant to Section 2. The sole Issuing Bank on the Initial Borrowing Date is Scotiabank. "Joint Venture" shall mean any Person in which the Borrower or any Subsidiary of the Borrower owns, directly or indirectly, more than .1% but less than 100% of the voting or equity interests or in which the Borrower or a Subsidiary of the Borrower has general partnership liability. "Joint Venture Agreements" shall have the meaning provided in Section 5.05. -114- 122 "KKR" shall mean Kohlberg Kravis Roberts & Co., L.P., a Delaware limited partnership. "Leaseholds" of any Person shall mean all the right, title and interest of such Person as lessee or licensee in, to and under leases or licenses of land, improvements and/or fixtures. "L/C Supportable Obligations" shall mean (i) obligations of the Borrower or any of its Subsidiaries or Joint Ventures with respect to workers compensation, surety bonds and other similar statutory obligations and (ii) such other obligations of the Borrower or any of its Subsidiaries or Joint Ventures as are otherwise permitted to exist pursuant to (or otherwise not restricted by) the terms of this Agreement. "Letter of Credit" shall have the meaning provided in Section 2.01(a). "Letter of Credit Fee" shall have the meaning provided in Section 3.01(c). "Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the amount of all Unpaid Drawings. "Letter of Credit Request" shall have the meaning provided in Section 2.03(a). "Leverage Ratio" shall mean, at any time, the ratio of (x) Consolidated Indebtedness at such time to (y) Consolidated EBITDA for the then most recently ended Test Period. "Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any other similar recording or notice statute, and any lease having substantially the same effect as any of the foregoing). "Liquor License Subsidiary" shall mean any Wholly-Owned Subsidiary of the Borrower the only business of which is to hold one or more liquor licenses for hotels owned or leased by the Borrower and/or any of its Subsidiaries. "Loan" shall mean each Tranche A Term Loan, each Tranche B Term Loan, each Revolving Loan and each Swingline Loan. -115- 123 "Majority Banks" of any Tranche shall mean those Non-Defaulting Banks which would constitute the Required Banks under, and as defined in, this Agreement if all outstanding Obligations of the other Tranches under this Agreement were repaid in full and all Commitments with respect thereto were terminated. "Management Agreements" shall have the meaning provided in Section 5.05. "Mandatory Borrowing" shall have the meaning provided in Section 1.01(e). "Margin Reduction Period" shall mean each period which shall commence on a date on which the financial statements are delivered pursuant to Section 8.01(a) or (b), as the case may be, and which shall end on the earlier of (i) the date of actual delivery of the next financial statements pursuant to Section 8.01(a) or (b), as the case may be, and (ii) the latest date on which the next financial statements are required to be delivered to Section 8.01(a) or (b), as the case may be, provided that the first Margin Reduction Period shall commence no earlier than the date of delivery of the first set of financial statements pursuant to Section 8.01(b) after the Initial Borrowing Date. "Margin Stock" shall have the meaning provided in Regulation U. "Material Leases" shall have the meaning provided in Section 5.05. "Maturity Date" shall mean, with respect to any Tranche of Loans, the Tranche A Term Loan Maturity Date, the Tranche B Term Loan Maturity Date, the Revolving Loan Maturity Date or the Swingline Expiry Date, as the case may be. "Maximum Swingline Amount" shall mean $10,000,000. "Merger Sub" shall mean RLH Acquisition Corp., a Delaware corporation and a Wholly-Owned Subsidiary of the Borrower. "Minimum Borrowing Amount" shall mean (i) for Term Loans, $5,000,000, (ii) for Revolving Loans, $2,500,000 and (iii) for Swingline Loans, $250,000. "Minimum Consolidated Net Worth" shall mean, at any time, the sum of (i) $680,000,000 plus (ii) 50% of Consolidated Net Income of the Borrower, if positive, for each fiscal year of the Borrower (commencing with the fiscal year ending December 31, 1997), it being understood that any increase to Minimum Consolidated Net Worth shall be effective as of the last day of each fiscal year of the Borrower. -116- 124 "Mortgage" shall mean each mortgage, deed to secure debt or deed of trust pursuant to which any Credit Party shall have granted to the Collateral Agent a mortgage lien on such Credit Party's Mortgaged Property. "Mortgage Policy" shall have the meaning provided in Section 5.14. "Mortgaged Property" shall mean each Real Property owned or leased by any Credit Party and designated as a Mortgaged Property on Schedule III or pursuant to Section 8.12. "MSSF" shall mean Morgan Stanley Senior Funding, Inc., in its individual capacity. "Multiemployer Plan" shall mean a plan as defined in Section 4001(a)(3) of ERISA with respect to which the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate has an obligation to contribute to or any liability. "Net Debt Proceeds" shall mean, with respect to any incurrence of Indebtedness for borrowed money, the cash proceeds (net of underwriting discounts and commissions and other reasonable costs associated therewith) received by the respective Person from the respective incurrence of such Indebtedness for borrowed money. "Net Equity Proceeds" shall mean, with respect to each issuance or sale of any equity by any Person or any capital contribution to such Person, the cash proceeds (net of underwriting discounts and commissions and other reasonable costs associated therewith) received by such Person from the respective sale of issuance of its equity or from the respective capital contribution. "Net Insurance Proceeds" shall mean, with respect to any Recovery Event, the cash proceeds (net of reasonable costs and taxes incurred in connection with such Recovery Event) received by the respective Person in connection with the respective Recovery Event. "Net Sale Proceeds" shall mean, for any Asset Sale, the gross cash proceeds (including any cash received by way of deferred payment pursuant to a promissory note, receivable or otherwise, but only as and when received) received from such sale of assets, net of the reasonable costs of such sale (including fees and commissions, payments of unassumed liabilities relating to the assets sold and required payments of any Indebtedness (other than Indebtedness secured pursuant to the Security Documents or any Indebtedness owed to the Borrower or a Subsidiary thereof) which is secured by the respective assets which were sold), and the incremental taxes paid or payable as a result of such Asset Sale. -117- 125 "New Subordinated Note Documents" shall mean the New Subordinated Notes, any indenture or purchase agreement related thereto and each of the other documents entered into in connection therewith. "New Subordinated Notes" shall have the meaning provided in Section 9.04(x). "Non-Defaulting Bank" shall mean and include each Bank other than a Defaulting Bank. "Non-Recourse Indebtedness" shall mean, with respect to any Specified Subsidiary, Indebtedness incurred by such Specified Subsidiary which is (i) secured only by the Hotel Property being developed or acquired by such Specified Subsidiary, including any fixtures, furniture and equipment related thereto and (ii) is non-recourse to the Borrower and its other Subsidiaries and in which neither the Borrower nor any of its other Subsidiaries have provided any credit support. "Non-Subsidiary Joint Venture" shall mean any Joint Venture of the Borrower that is not also a Subsidiary of the Borrower. "Note" shall mean each Tranche A Term Note, each Tranche B Term Note, each Revolving Note and the Swingline Note. "Notice of Borrowing" shall have the meaning provided in Section 1.03(a). "Notice of Conversion" shall have the meaning provided in Section 1.06. "Notice Office" shall mean the office of the Administrative Agent located at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308, Attention: ____________, or such other office as the Administrative Agent may hereafter designate in writing as such to the other parties hereto. "Obligations" shall mean all amounts owing to any Agent, the Collateral Administrative Agent or any Bank pursuant to the terms of this Agreement or any other Credit Document. "Other Creditor" shall have the meaning provided in the Security Documents. "Other Hedging Agreement" shall mean any foreign exchange contracts, currency swap agreements, commodity agreements or other similar agreements or arrangements designed to protect against the fluctuations in currency values. "Participant" shall have the meaning provided in Section 2.04(a). -118- 126 "Payment Office" shall mean the office of the Administrative Agent located at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308, or such other office as the Administrative Agent may hereafter designate in writing as such to the other parties hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permitted Encumbrance" shall mean, with respect to any Mortgaged Property, such exceptions to title as are set forth in the title insurance policy or title commitment delivered with respect thereto, all of which exceptions must be reasonably acceptable to the Agents in their reasonable discretion. "Permitted Holders" shall mean GE Investment Management Incorporated and its Affiliates and KKR, its general partners and/or its Affiliates. "Permitted Liens" shall have the meaning provided in Section 9.01. "Person" shall mean any individual, partnership, joint venture, firm, corporation, association, limited liability company, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA, other than a multiemployer plan as defined in Section 4001(a)(3) of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) the Borrower or a Subsidiary of the Borrower or an ERISA Affiliate or with respect to which any such entity has liability. "Pledge Agreement" shall have the meaning provided in Section 5.11. "Pledge Agreement Collateral" shall mean all "Collateral" as defined in the Pledge Agreement. "Pledged Notes" shall have the meaning provided in the Pledge Agreement. "Pledged Securities" shall mean all "Pledged Securities" as defined in the Pledge Agreement. "Prime Lending Rate" shall mean the rate which the Administrative Agent announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. -119- 127 The Administrative Agent may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Private Equity Offering" shall mean the issuance by the Borrower of shares of its common stock to General Electric Pension Trust or an affiliate thereof pursuant to the respective Equity Financing Documents. "Pro Forma Basis" shall mean, with respect to any Hotel Acquisition, Hotel Investment, Asset Sale, Redesignation Event or incurrence of Indebtedness, the calculation of the consolidated results of the Borrower and its Subsidiaries otherwise determined in accordance with this Agreement as if the respective Hotel Acquisition, Hotel Investment, Asset Sale, Redesignation Event or Indebtedness (and all other Indebtedness incurred or Hotel Acquisitions, Hotel Investments, Redesignation Event and/or Asset Sales effected during the respective Calculation Period or thereafter and on or prior to the date of determination) (each such date, a "Determination Date") had been effected on the first day of the respective Calculation Period; provided that all such calculations shall be made on a basis consistent with the requirements of Regulation S-X under the Securities Act and the Exchange Act and shall take into account the following assumptions: (i) interest expense attributable to interest on any Indebtedness (whether existing or being incurred) bearing a floating interest rate shall be computed as if the rate in effect on the date of computation (taking into account any Interest Rate Protection Agreement applicable to such Indebtedness if such Interest Rate Protection Agreement has a remaining term in excess of 12 months) had been the applicable rate for the entire period; and (ii) pro forma effect shall be given to all Asset Sales, Redesignation Events, Hotel Acquisitions and Hotel Investments (by excluding or including, as the case may be, the historical financial results for the respective Hotel Properties) that occur during such Calculation Period or thereafter and on or prior to the Determination Date (including any Indebtedness assumed or acquired in connection therewith) as if they had occurred on the first day of such Calculation Period. "Projections" shall mean the projections prepared by the Borrower and set forth in the Confidential Information Memorandum. "Public Equity Offering" shall mean the issuance by the Borrower of shares of its common stock through a registered public offering pursuant to the respective Equity Financing Documents (including as a result of the exercise by the respective underwriters of their over-allotment option). -120- 128 "Qualified Preferred Stock" shall mean any preferred stock of the Borrower, the express terms of which shall provide that Dividends thereon shall not be required to be paid in cash at any time that such cash payment would be prohibited by the terms of this Agreement (and any refinancings, replacements or extensions hereof) and in either case which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event (including an event which would constitute a Change of Control), cannot mature (excluding any maturity as the result of an optional redemption by the issuer thereof) and is not mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, and is not redeemable, or required to be repurchased (including, without limitation, upon the occurrence of an event which would constitute a Change of Control), in whole or in part, on or prior to the first anniversary of the Tranche B Term Loan Maturity Date. "Quarterly Payment Date" shall mean each March 31, June 30, September 30 and December 31 occurring after the Initial Borrowing Date. "RCRA" shall mean the Resource Conservation and Recovery Act, as the same may be amended from time to time, 42 U.S.C. Section 6901 et seq. "Real Property" of any Person shall mean all the right, title and interest of such Person in and to land, improvements and fixtures, including Leaseholds. "Recovery Event" shall mean the receipt by the Borrower or any of its Subsidiaries or Joint Ventures of any cash insurance proceeds or condemnation awards payable (i) by reason of theft, loss, physical destruction, damage, taking or any other similar event with respect to any property or assets of the Borrower or any of its Subsidiaries or Joint Ventures and (ii) under any policy of insurance required to be maintained under Section 8.03. "Redesignation Event" shall mean the designation by the Borrower of a Specified Subsidiary as an Unrestricted Subsidiary in accordance with the definition of Unrestricted Subsidiary and so long as (i) the Borrower gives the Agents prior written notice thereof, (ii) no Default or Event of Default then exists or would result therefrom, (iii) all transactions between the Specified Subsidiary to be so designated and its Affiliates remaining in effect are permitted pursuant to Section 9.06, (iv) any Investment made by the Borrower or any Subsidiary thereof to such Specified Subsidiary shall thereafter be considered as having been a Hotel Investment (to the extent not previously included as a Hotel Investment) made on the day such Specified Subsidiary is designated an Unrestricted Subsidiary in the amount of the greater of (x) the fair market value (as determined by the Board of Directors of the Borrower in good faith) of the equity interests of such Specified Subsidiary held by the Borrower and its Subsidiaries on such date, and (y) the amount of the Investments made by the Borrower and any of its Subsidiaries in such Specified Subsidi- -121- 129 ary and (v) (I) based on calculations made by the Borrower on a Pro Forma Basis after giving effect to the respective designation, no Default or Event of Default will exist under, or would have existed during the Test Period last reported (or required to be reported pursuant to Section 8.01(a) or (b), as the case may be) prior to the date of the respective designation pursuant to, the financial covenants contained in Sections 9.08 through 9.11, inclusive, and (II) the Borrower shall have delivered to the Agents an officer's certificate executed by the Chief Financial Officer of the Borrower, certifying to the best of such officer's knowledge, compliance with the requirements of this clause (v) and containing the calculations (in reasonable detail) required by this clause (v). "Red Lion" shall mean Red Lion Hotels, Inc., a Delaware corporation. "Red Lion Master Lease" shall mean the Lease, dated as of August 1, 1995, between RLH Partnership, L.P., as landlord, and Red Lion, as tenant. "Red Lion Master Property Management Agreement" shall mean the Management Agreement, dated April 6, 1987, between Red Lion Inns Operating L.P. and RL Acquisition Company. "Red Lion Properties" shall mean Red Lion Properties, Inc., a Delaware corporation. "Reference Banks" shall mean Scotiabank, Bankers Trust Company and Societe Generale. "Refinancing" shall mean the repayment in full of, and the termination of all commitments in respect of, the Indebtedness to be Refinanced. "Refinancing Documents" shall mean all of the documents and agreements entered into in connection with the Refinancing. "Register" shall have the meaning provided in Section 13.15. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation G" shall mean Regulation G of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. -122- 130 "Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Release" shall mean the disposing, discharging, injecting, spilling, pumping, leaking, leaching, dumping, emitting, escaping, emptying, pouring or migrating, into or upon any land or water or air, or otherwise entering into the environment. "Replaced Bank" shall have the meaning provided in Section 1.13. "Replacement Bank" shall have the meaning provided in Section 1.13. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC Regulation Section 4043. "Required Banks" shall mean Non-Defaulting Banks the sum of whose outstanding Term Loans (and, if prior to the termination thereof, Term Loan Commitments) and Revolving Loan Commitments (or after the termination thereof, outstanding Revolving Loans and Adjusted RL Percentage of Swingline Loans and Letter of Credit Outstandings) represent an amount greater than 50% of the sum of all outstanding Term Loans (and, if prior to the termination thereof, the Term Loan Commitments) of Non-Defaulting Banks and the Adjusted Total Revolving Loan Commitment (or after the termination thereof, the sum of the then total outstanding Revolving Loans of Non-Defaulting Banks, and the aggregate Adjusted RL Percentages of all Non-Defaulting Banks of the total outstanding Swingline Loans and Letter of Credit Outstandings at such time). "Retained Excess Cash Flow Amount" shall mean, for each Excess Cash Payment Period, an amount equal to 50% of Excess Cash Flow for such Excess Cash Payment Period less the amount of all Capital Expenditures, Hotel Acquisitions and Hotel Investments previously made pursuant to Section 9.07(f). -123- 131 "Retained Net Equity Proceeds" shall mean the 50% of all Net Equity Proceeds not required to be applied pursuant to Section 4.02(d). "Retained Net Equity Proceeds Amount" shall mean, at any time, an amount equal to 50% of all Net Equity Proceeds theretofore received (other than the first $250,000,000 of Net Equity Proceeds received from the Equity Fiancning) less (i) the amount of all voluntary prepayments previously made pursuant to the proviso of Section 4.01(a)(v) utilizing the Retained Net Equity Proceeds Amount, (ii) the amount of all Retained Net Equity Proceeds from the Equity Financing used to make payments owing in connection with the Transaction and (iii) the amount of all Capital Expenditures, Hotel Acquisitions and Hotel Investments previously made pursuant to Section 9.07(d). "Returns" shall have the meaning provided in Section 7.09. "Revolving Loan" shall have the meaning provided in Section 1.01(c). "Revolving Loan Commitment" shall mean, for each Bank, the amount set forth opposite such Bank's name in Schedule I directly below the column entitled "Revolving Loan Commitment," as same may be (x) reduced from time to time pursuant to Sections 3.02, 3.03 and/or 10 or (y) adjusted from time to time as a result of assignments to or from such Bank pursuant to Section 1.13 or 13.04(b). "Revolving Loan Commitment Commission" shall have the meaning provided in Section 3.01(b). "Revolving Loan Maturity Date" shall mean November 15, 2002. "Revolving Note" shall have the meaning provided in Section 1.05(a). "RFS" shall mean RFS, Inc., a Tennessee corporation. "RFS REIT" shall mean RFS Hotel Investors, Inc., a Tennessee corporation. "RFS REIT Equity" shall mean the 973,684 shares of convertible preferred stock in the RFS REIT and the limited partnereship (less than 1%) in RFS Partnership, L.P., in each case owned by RFS on the Initial Borrowing Date. "RFS REIT Leases" shall mean the master lease arrangement pursuant to which RFS leases, as tenant, 49 hotels for RFS REIT, as landlord. "RFS Sub" shall have the meaning provided in Section 9.05(xi). -124- 132 "RL Percentage" of any Bank at any time shall mean a fraction (expressed as a percentage) the numerator of which is the Revolving Loan Commitment of such Bank at such time and the denominator of which is the Total Revolving Loan Commitment at such time, provided that if the RL Percentage of any Bank is to be determined after the Total Revolving Loan Commitment has been terminated, then the RL Percentages of the Banks shall be determined immediately prior (and without giving effect) to such termination. "Scheduled Repayments" shall have the meaning provided in Section 4.02(c). "Scotiabank" shall mean The Bank of Nova Scotia, in its individual capacity. "SEC" shall have the meaning provided in Section 8.01(g). "Second Term Loan Borrowing Date" shall mean a single date occurring after the Initial Borrowing Date and on or prior to the Tranche A Term Loan Commitment Termination Date on which Tranche A Term Loans are incurred to refinance the outstanding Existing Glendale Debt to the extent that same constitutes Indebtedness to be Refinanced. "Section 4.04(b)(ii) Certificate" shall have the meaning provided in Section 4.04(b)(ii). "Secured Creditors" shall have the meaning assigned that term in the respective Security Documents. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Security Agreement" shall have the meaning provided in Section 5.12. "Security Agreement Collateral" shall mean all "Collateral" as defined in the Security Agreement. "Security Document" shall mean and include each of the Security Agreement, the Pledge Agreement and each Mortgage and, after the execution and delivery thereof, each Additional Security Document. -125- 133 "Shareholders' Agreements" shall have the meaning provided in Section 5.05. "Specified Existing Red Lion Investment Proceeds" shall mean cash proceeds received by the Borrower or a Subsidiary thereof from a Specified Red Lion Event. "Specified Red Lion Event" shall mean (i) any sale or liquidation of an Existing Red Lion Investment, (ii) any principal repayment of any loan or advance in respect of an Existing Red Lion Investment (except for regularly occurring repayments made in the ordinary course of business), (iii) any redemption, distribution or dividend made in respect of an Existing Red Lion Investment (other than any regularly occurring distribution or dividend made in the ordinary course of business) or (iv) any repayment of principal of any loan or advance made to the Borrower or a Subsidiary thereof by the Joint Venture holding the Existing Glendale Debt to the extent that the proceeds in the original loan or advance were used to refinance the Existing Glendale Debt and were made with proceeds of Loans. "Specified Subsidiary" shall mean any Subsidiary of the Borrower created after the Initial Borrowing Date, so long as such Subsidiary has no assets other than the Hotel Property to be developed and/or acquired by such Subsidiary with Non-Recourse Indebtedness incurred pursuant to Section 9.04(xi). "Standby Letter of Credit" shall have the meaning provided in Section 2.01(a). "Start Date" shall mean, with respect to any Margin Reduction Period, the first day of such Margin Reduction Period. "Stated Amount" of each Letter of Credit shall, at any time, mean the maximum amount available to be drawn thereunder (in each case determined without regard to whether any conditions to drawing could then be met). "Subsidiary" shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person, (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time and (iii) any Consolidated Joint Venture. Notwithstanding the foregoing (x) (and except for purposes of the definition of Unrestricted Subsidiary contained herein), an Unrestricted Subsidiary shall be deemed not to be a Subsidiary of the Borrower or any of its other Subsidiaries for purposes of this -126- 134 Agreement and (y) Arlington Hotel Corp. shall not be considered a Subsidiary of the Borrower for purposes of this Agreement so long as neither the Borrower nor any of its Subsidiaries own directly (and not by pledge), in the aggregate, more than 30% of the total equity interest in Arlington Hotel Corp. and at least 70% of the voting rights in Arlington Hotel Corp. reside with the existing lender to Arlington Hotel Corp. or an assignee of such lender. "Subsidiary Guarantor" shall mean each Wholly-Owned Domestic Subsidiary of the Borrower and, to the extent required by Section 8.13, each Wholly-Owned Foreign Subsidiary of the Borrower, in either case other than (i) any Liquor License Subsidiary, (ii) any Inactive Subsidiary, (iii) any Specified Subsidiary that has incurred Non-Recourse Indebtedness, (iv) any Wholly-Owned Subsidiary designated as not being a Subsidiary Guarantor on Schedule VI so long as such Wholly-Owned Subsidiary does not have any additional material assets other than those assets held by it on the Initial Borrowing Date, (v) any Wholly-Owned Subsidiary of the Borrower established after the Initial Borrowing Date for the sole purpose of holding a joint venture interest in a Joint Venture to the extent that (and for so long as) such Wholly-Owned Subsidiary is contractually required to maintain a minimum net worth and (vi) Red Lion Properties, RFS and RFS Sub. "Subsidiaries Guaranty" shall have the meaning provided in Section 5.13. "Supermajority Banks" of any Tranche shall mean those Non-Defaulting Banks which would constitute the Required Banks under, and as defined in, this Agreement if (x) all outstanding Obligations of the other Tranches under this Agreement were repaid in full and all Commitments with respect thereto were terminated and (y) the percentage "50%" contained therein were changed to "66-2/3%." "Swingline Bank" shall mean Scotiabank. "Swingline Expiry Date" shall mean the date which is five Business Days prior to the Revolving Loan Maturity Date. "Swingline Loan" shall have the meaning provided in Section 1.01(d). "Swingline Note" shall have the meaning provided in Section 1.05(a). "Syndication Agent" shall mean MSSF, in its capacity as Syndication Agent and Arranger for the Banks hereunder. "Syndication Date" shall have the meaning provided in Section 1.01(a). "Tax Sharing Agreements" shall have the meaning provided in Section 5.05. -127- 135 "Taxes" shall have the meaning provided in Section 4.04(a). "Temporary Hotel Acquisition Transaction" shall mean the acquisition by the Borrower or a Wholly-Owned Subsidiary thereof of a Hotel Property with the intention of selling such Hotel Property to a third Person (other than to the Borrower or a Subsidiary thereof) within 120 days following the date of such acquisition, so long as (i) at the time of such acquisition, the Borrower delivers a certificate to the Agents stating that the Borrower or such Wholly-Owned Subsidiary is entering into a Temporary Hotel Acquisition Transaction and setting forth in such certificate all material information relating thereto (including the purchase price of such Hotel Property) and (ii) the sale to such third Person occurs within 120 days of the initial acquisition of such Hotel Property and for a purchase price at least equal to the original purchase price paid by the Borrower or the respective Wholly-Owned Subsidiary for such Hotel Property. "Term Loan" shall mean each Tranche A Term Loan and each Tranche B Term Loan. "Term Loan Borrowing Date" shall mean the Initial Borrowing Date and the Second Term Loan Borrowing Date. "Term Loan Commitment" shall mean each Tranche A Term Loan Commitment and each Tranche B Term Loan Commitment, with the Term Loan Commitment of any Bank at any time to equal the sum of its Tranche A Term Loan Commitment and Tranche B Term Loan Commitment as then in effect. "Term Loan Commitment Commission" shall have the meaning provided in Section 3.01(a). "Term Loan Percentage" shall mean the Tranche A Term Loan Percentage or the Tranche B Term Loan Percentage, as applicable. "Test Date" shall mean, with respect to any Start Date, the last day of the most recent fiscal quarter or year, as the case may be, of the Borrower ended immediately prior to such Start Date. "Test Period" shall mean (i) for purposes of calculating Consolidated EBITDA under Sections 9.09 and 9.10 and under the definition of Interest Reduction Discount, the period of four consecutive fiscal quarters of the Borrower then last ended (in each case taken as one accounting period, and (ii) for all other purposes of this Agreement, (x) for any determination made on and prior to December 30, 1997, the period from January 1, 1997 to the last day of the fiscal quarter of the Borrower the last ended (in each case taken as one accounting period) and (y) for any determination made thereafter, the -128- 136 period of four consecutive fiscal quarters of the Borrower then last ended (in each case taken as one accounting period). "Total Commitments" shall mean, at any time, the sum of the Commitments of each of the Banks. "Total Revolving Loan Commitment" shall mean, at any time, the sum of the Revolving Loan Commitments of each of the Banks. "Total Term Loan Commitment" shall mean, at any time, the sum of the Total Tranche A Term Loan Commitment and the Total Tranche B Term Loan Commitment. "Total Tranche A Term Loan Commitment" shall mean, at any time, the sum of the Tranche A Term Loan Commitments of each of the Banks. "Total Tranche B Term Loan Commitment" shall mean, at any time, the sum of the Tranche B Term Loan Commitments of each of the Banks. "Total Unutilized Revolving Loan Commitment" shall mean, at any time, an amount equal to the remainder of (x) the Total Revolving Loan Commitment then in effect, less (y) the sum of the aggregate principal amount of Revolving Loans and Swingline Loans then outstanding plus the then aggregate amount of Letter of Credit Outstandings. "Trade Letter of Credit" shall have the meaning provided in Section 2.01(a). "Tranche" shall mean the respective facility and commitments utilized in making Loans hereunder, with there being four separate Tranches, i.e., Tranche A Term Loans, Tranche B Term Loans, Revolving Loans and Swingline Loans. "Tranche A Term Loan" shall have the meaning provided in Section 1.01(a). "Tranche A Term Loan Commitment" shall mean, for each Bank, the amount set forth opposite such Bank's name in Schedule I directly below the column entitled "Tranche A Term Loan Commitment," as same may be (x) reduced from time to time pursuant to Sections 3.02, 3.03, 4.02 and/or 10 or (y) adjusted from time to time as a result of assignments to or from such Bank pursuant to Section 1.13 or 13.04(b). "Tranche A Term Loan Commitment Termination Date" shall mean the earlier of (x) March 17, 1997 and (y) the Second Term Loan Borrowing Date. "Tranche A Term Loan Maturity Date" shall mean November 15, 2002. -129- 137 "Tranche A Term Loan Percentage" shall mean, at any time, a fraction (expressed as a percentage) the numerator of which is equal to the sum of the aggregate principal amount of all Tranche A Term Loans outstanding at such time plus the Total Tranche A Term Loan Commitment at such time and the denominator of which is equal to the sum of the aggregate principal amount of all Term Loans outstanding at such time plus the Total Term Loan Commitment at such time. "Tranche A Term Loan Scheduled Repayment" shall have the meaning provided in Section 4.02(b). "Tranche A Term Loan Scheduled Repayment Date" shall have the meaning provided in Section 4.02(b). "Tranche A Term Note" shall have the meaning provided in Section 1.05(a). "Tranche B Term Loan" shall have the meaning provided in Section 1.01(b). "Tranche B Term Loan Commitment" shall mean, for each Bank, the amount set forth opposite such Bank's name in Schedule I directly below the column entitled "Tranche B Term Loan Commitment," as same may be (x) reduced from time to time pursuant to Sections 3.03, 4.02 and/or 10 or (y) adjusted from time to time as a result of assignments to or from such Bank pursuant to Section 1.13 or 13.04(b). "Tranche B Term Loan Maturity Date" shall mean May 15, 2004. "Tranche B Term Loan Percentage" shall mean, at any time, a fraction (expressed as a percentage) the numerator of which is equal to the aggregate principal amount of all B Term Loans outstanding at such time (or prior to the Initial Borrowing Date, the Total Tranche B Term Loan Commitment at such time) and the denominator of which is equal to the sum of the aggregate principal amount of all Term Loans outstanding at such time plus the Total Term Loan Commitment at such time. "Tranche B Term Loan Scheduled Repayment" shall have the meaning provided in Section 4.02(c). "Tranche B Term Loan Scheduled Repayment Date" shall have the meaning provided in Section 4.02(c). "Tranche B Term Note" shall have the meaning provided in Section 1.05(a). "Transaction" shall mean, collectively, (i) the Acquisition, (ii) the Equity Financing, (iii) the Equity Rollover, (iv) the incurrence of Loans on the Initial Borrowing -130- 138 Date, (v) the Refinancing and (vi) the payment of fees and expenses owing in connection with the foregoing. "Type" shall mean the type of Loan determined with regard to the interest option applicable thereto, i.e., whether a Base Rate Loan or a Eurodollar Loan. "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, $5,000,000 or greater, by which the actuarial present value of the accumulated plan benefits under the Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, each determined in accordance with Statement of Financial Accounting Standards No. 87, based upon the actuarial assumptions used by the Plan's actuary in the most recent annual valuation of the Plan. "United States" and "U.S." shall each mean the United States of America. "Unpaid Drawing" shall have the meaning provided for in Section 2.05(a). "Unutilized Revolving Loan Commitment" with respect to any Bank, at any time, shall mean such Bank's Revolving Loan Commitment at such time less the sum of (i) the aggregate outstanding principal amount of Revolving Loans made by such Bank and (ii) such Bank's Adjusted RL Percentage of the Letter of Credit Outstandings. "Unrestricted Subsidiary" shall mean any Subsidiary of the Borrower that is acquired or created after the Initial Borrowing Date and is designated by the Borrower at the time of the acquisition or creation thereof as an Unrestricted Subsidiary hereunder by written notice to the Agents and shall include any Subsidiary of such Unrestricted Subsidiary; provided that the Borrower shall only be permitted to designate a Subsidiary as an Unrestricted Subsidiary so long as (i) no Default or Event of Default then exists or would result therefrom, (ii) such Unrestricted Subsidiary shall be capitalized (to the extent capitalized by the Borrower or any of its Subsidiaries) through cash Hotel Investments as permitted by, and in compliance with, Section 9.07, (iii) such Unrestricted Subsidiary does not own any capital stock of or other equity interests in, or have any Lien on any property of, the Borrower or any Subsidiary of the Borrower other than a Subsidiary of the Unrestricted Subsidiary and (iv) any Indebtedness of such Unrestricted Subsidiary is expressly made non-recourse to the Borrower or any of its other Subsidiaries. Notwithstanding the foregoing, the Borrower may designate any Specified Subsidiary that has incurred Non-Recourse Indebtedness as an Unrestricted Subsidiary so long as (x) clauses (iii) and (iv) of the proviso in the preceding sentence are satisfied with respect to -131- 139 such Specified Subsidiary and (y) the conditions in the definition of Redesignation Event are satisfied. "U.S. Internal Revenue Service Forms" shall have the meaning provided in Section 4.04(b). "Waivable Mandatory Repayment" shall have the meaning provided in Section 4.02(m). "Wholly-Owned Domestic Subsidiary" shall mean, as to any Person, any Wholly-Owned Subsidiary of such Person which is a Domestic Subsidiary. "Wholly-Owned Foreign Subsidiary" shall mean, as to any Person, any Wholly-Owned Subsidiary of such Person which is a Foreign Subsidiary. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock (other than director's qualifying shares) is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. SECTION 12. The Administrative Agent and the Syndication Agent. 12.01 Appointment. The Banks hereby designate Scotiabank as Administrative Agent (for purposes of this Section 12, the term "Administrative Agent" also shall include Scotiabank in its capacity as Collateral Administrative Agent pursuant to the Security Documents) to act as specified herein and in the other Credit Documents. The Banks hereby designate MSSF as Syndication Agent (for purposes of this Section 12, the term "Syndication Agent" also shall include MSSF in its capacity as Arranger) to act as specified herein and in the other Credit Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Administrative Agent and the Syndication Agent to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Administrative Agent and the Syndication Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Administrative Agent and the Syndication Agent may perform any of their duties hereunder by or through its respective officers, directors, agents, employees or affiliates. -132- 140 12.02 Nature of Duties. Neither the Administrative Agent nor the Syndication Agent in their capacity as such shall have any duties or responsibilities except those expressly set forth in this Agreement and in the other Credit Documents. Neither the Administrative Agent, the Syndication Agent in their capacity as such nor any of their respective officers, directors, agents, employees or affiliates shall be liable for any action taken or omitted by it or them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Administrative Agent and the Syndication Agent shall be mechanical and administrative in nature; neither the Administrative Agent nor the Syndication Agent shall have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Bank or the holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon the Administrative Agent or the Syndication Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein. 12.03 Lack of Reliance on the Administrative Agent and the Syndication Agent. Independently and without reliance upon the Administrative Agent or the Syndication Agent, each Bank and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Borrower and its Subsidiaries and Joint Ventures in connection with the making and the continuance of the Loans and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Borrower and its Subsidiaries and Joint Ventures and, except as expressly provided in this Agreement, neither the Administrative Agent nor the Syndication Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Bank or the holder of any Note with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. Neither the Administrative Agent nor the Syndication Agent shall be responsible to any Bank or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of the Borrower or any of its Subsidiaries or Joint Ventures or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of the Borrower or any of its Subsidiaries or Joint Ventures or the existence or possible existence of any Default or Event of Default. 12.04 Certain Rights of the Agents. If any Agent shall request instructions from the Required Banks with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, such Agent shall be entitled -133- 141 to refrain from such act or taking such action unless and until such Agent shall have received instructions from the Required Banks; and such Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Bank or the holder of any Note shall have any right of action whatsoever against any Agent as a result of such Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Required Banks. 12.05 Reliance. The Administrative Agent and the Syndication Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any Person that the Administrative Agent or the Syndication Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by the Administrative Agent or the Syndication Agent, as the case may be. 12.06 Indemnification. To the extent the Administrative Agent or the Syndication Agent is not reimbursed and indemnified by the Borrower or any of its Subsidiaries, the Banks will reimburse and indemnify the Administrative Agent and the Syndication Agent, in proportion to their respective "percentages" as used in determining the Required Banks, for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Administrative Agent or the Syndication Agent in performing its respective duties hereunder or under any other Credit Document, in any way relating to or arising out of this Agreement or any other Credit Document; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's or the Syndication Agent's gross negligence or willful misconduct. 12.07 The Administrative Agent and the Syndication Agent in their Individual Capacity. With respect to its obligation to make Loans, or issue or participate in Letters of Credit, under this Agreement, the Administrative Agent and the Syndication Agent shall have the rights and powers specified herein for a "Bank" and may exercise the same rights and powers as though it were not performing the duties specified herein; and the term "Banks," "Required Banks," "Majority Banks," "Supermajority Banks," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include the Administrative Agent and the Syndication Agent in their individual capacity. The Administrative Agent and the Syndication Agent and their affiliates may accept deposits from, lend money to, and generally engage in any kind of banking, investment banking, trust or other business with, or provide debt financing, equity capital or other services (including financial advisory services) to, any Credit Party or any Affiliate of any Credit -134- 142 Party (or any Person engaged in a similar business with any Credit Party or any Affiliate thereof) as if they were not performing the duties specified herein, and may accept fees and other consideration from any Credit Party or any Affiliate of any Credit Party for services in connection with this Agreement and otherwise without having to account for the same to the Banks. 12.08 Holders. Any Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment, transfer or endorsement thereof, as the case may be, shall have been filed with the Administrative Agent. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. 12.09 Resignation by the Administrative Agent and the Syndication Agent. (a) The Administrative Agent and/or the Syndication Agent may resign from the performance of all their respective functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days' prior written notice to the Banks and the Borrower (provided that no such notice shall be required to be given to the Borrower if a Default or an Event of Default of the type described in Section 10.05 exists with respect to the Borrower). Such resignation, in the case of the Administrative Agent, shall take effect upon the appointment of a successor Administrative Agent pursuant to clauses (b) and (c) below or as otherwise provided below, and such resignation, in the case of the Syndication Agent, shall take effect immediately. (b) Upon any such notice of resignation by the Administrative Agent, the Required Banks shall appoint a successor Administrative Agent hereunder or thereunder who shall be a commercial bank or trust company reasonably acceptable to the Borrower (it being understood and agreed that any Non-Defaulting Bank is deemed to be acceptable to the Borrower). (c) If a successor Administrative Agent shall not have been so appointed within such 15 Business Day period, the Administrative Agent with the consent of the Borrower (which consent shall not be unreasonably withheld or delayed), shall then appoint a successor Administrative Agent who shall serve as Administrative Agent hereunder or thereunder until such time, if any, as the Required Banks appoint a successor Administrative Agent as provided above. (d) If no successor Administrative Agent has been appointed pursuant to clause (b) or (c) above by the 60th day after the date such notice of resignation was given by the Administrative Agent, Administrative Agent's resignation shall become effective and the Required Banks shall thereafter perform all the duties of the Administrative Agent -135- 143 hereunder and/or under any other Credit Document until such time, if any, as the Required Banks appoint a successor Administrative Agent as provided above. SECTION 13. Miscellaneous. 13.01 Payment of Expenses, etc. The Borrower shall: (i) whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Agents (including, without limitation, the reasonable fees and disbursements of White & Case and of the Agents's local counsel and consultants) in connection with the preparation, execution and delivery of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein and any amendment, waiver or consent relating hereto or thereto, of the Agents in connection with its syndication efforts with respect to this Agreement and of the Agents and, after the occurrence of an Event of Default, each of the Banks in connection with the enforcement of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein (including, without limitation, the reasonable fees and disbursements of counsel for the Agents and, after the occurrence of an Event of Default, for each of the Banks); (ii) pay and hold each of the Banks harmless from and against any and all present and future stamp, excise and other similar documentary taxes with respect to the foregoing matters and save each of the Banks harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iii) indemnify each Agent and each Bank, and each of their respective officers, directors, employees, representatives and agents from and hold each of them harmless against any and all liabilities, obligations (including removal or remedial actions), losses, damages, penalties, claims, actions, judgments, suits, costs, expenses and disbursements (including reasonable attorneys' and consultants' fees and disbursements) incurred by, imposed on or assessed against any of them as a result of, or arising out of, or in any way related to, or by reason of, (a) any investigation, litigation or other proceeding (whether or not any Agent or any Bank is a party thereto) related to the entering into and/or performance of this Agreement or any other Credit Document or the use of any Letter of Credit or the proceeds of any Loans hereunder or the consummation of the Transaction or any other transactions contemplated herein or in any other Credit Document or the exercise of any of their rights or remedies provided herein or in the other Credit Documents, or (b) the actual or alleged presence of Hazardous Materials in the air, surface water or groundwater or on the surface or subsurface of any Real Property owned or at any time operated by the Borrower or any of its Subsidiaries or Joint Ventures, the generation, storage, transportation, handling or disposal of Hazardous Materials at any location, whether or not owned or operated by the Borrower or any of its Subsidiaries or Joint Ventures, the non-compliance of any Real Property with foreign, federal, state and local laws, regulations, and ordinances (including applicable permits thereunder) applicable to any Real Property, or any Environmental Claim asserted against the Borrower, any of its Subsidiaries or Joint Ventures or any Real Property owned or at any time operated by the -136- 144 Borrower or any of its Subsidiaries or Joint Ventures, including, in each case, without limitation, the reasonable fees and disbursements of counsel and other consultants incurred in connection with any such investigation, litigation or other proceeding (but excluding any losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). To the extent that the undertaking to indemnify, pay or hold harmless any Agent or any Bank set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall make the maximum contribution to the payment and satisfaction of each of the indemnified liabilities which is permissible under applicable law. 13.02 Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, each Bank is hereby authorized (to the extent not prohibited by applicable law) at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Bank (including, without limitation, by branches and agencies of such Bank wherever located) to or for the credit or the account of any Credit Party against and on account of the Obligations and liabilities of the Credit Parties to such Bank under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations purchased by such Bank pursuant to Section 13.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Bank shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured. Notwithstanding anything to the contrary contained in this Section 13.02, no Bank shall exercise any such right of set-off without the prior consent of the Agents or the Required Banks so long as the Obligations shall be secured by any Real Property located in the State of California, it being understood and agreed, however, that this sentence is for the sole benefit of the Banks and (notwithstanding anything to the contrary contained in Section 13.12) may be amended, modified or waived in any respect by the Required Banks without the requirement of prior notice to or consent by any Credit Party and does not constitute a waiver of any right against any Credit Party or against any Collateral. 13.03 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered: if to any Credit Party, at the address specified opposite its signature below or in the other relevant Credit Documents; if to any Bank, at its address specified on Schedule II; if to the Syndication Agent, at the address specified on Schedule II; and if to the Administrative Agent, at its Notice Office; or, as to any Credit Party or any Agent, at such other address as shall be designated by such party in a written notice to the other -137- 145 parties hereto and, as to each Bank, at such other address as shall be designated by such Bank in a written notice to the Borrower and the Administrative Agent. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight courier, be effective when deposited in the mails, delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier, except that notices and communications to any Agent or any Credit Party shall not be effective until received by such Agent or such Credit Party. 13.04 Benefit of Agreement; Assignments; Participations. (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, the Borrower may not assign or transfer any of its rights, obligations or interest hereunder without the prior written consent of the Banks and, provided further, that, although any Bank may transfer, assign or grant participations in its rights hereunder, such Bank shall remain a "Bank" for all purposes hereunder (and may not transfer or assign all or any portion of its Commitments hereunder except as provided in Sections 1.13 and 13.04(b)) and the transferee, assignee or participant, as the case may be, shall not constitute a "Bank" hereunder and, provided further, that no Bank shall transfer or grant any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Revolving Loan Maturity Date) in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment, shall not constitute a change in the terms of such participation, and that an increase in any Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased as a result thereof), (ii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or (iii) release all or substantially all of the Collateral under all of the Security Documents (except as expressly provided in the Credit Documents) supporting the Loans hereunder in which such participant is participating. In the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation. (b) Notwithstanding the foregoing, any Bank (or any Bank together with one or more other Banks) may (x) assign all or a portion of its Commitments and related -138- 146 outstanding Obligations hereunder to its parent company and/or any affiliate of such Bank which is at least 50% owned by such Bank or its parent company or to one or more Banks or (y) assign all, or if less than all, a portion equal to at least $5,000,000 in the aggregate for the assigning Bank or assigning Banks, of such Commitments and related outstanding Obligations hereunder to one or more Eligible Transferees, each of which assignees shall become a party to this Agreement as a Bank by execution of an Assignment and Assumption Agreement, provided that, (i) at such time Schedule I shall be deemed modified to reflect the Commitments (or outstanding Term Loans, as the case may be) of such new Bank and of the existing Banks, (ii) upon the surrender of the relevant Notes by the assigning Bank (or, upon such assigning Bank's indemnifying the Borrower for any lost Note pursuant to a customary indemnification agreement) new Notes will be issued, at the Borrower's expense, to such new Bank and to the assigning Bank upon the request of such new Bank or assigning Bank, such new Notes to be in conformity with the requirements of Section 1.05 (with appropriate modifications) to the extent needed to reflect the revised Commitments (or outstanding Term Loans, as the case may be), (iii) the consent of each Agent shall be required in connection with any assignment to an Eligible Transferee pursuant to clause (y) above (which consent shall not be unreasonably withheld or delayed), (iv) so long as no Default or Event of Default exists, the consent of the Borrower shall be required in connection with any assignment to an Eligible Transferee pursuant to clause (y) above (which consent shall not be unreasonably withheld or delayed), (v) the Administrative Agent shall receive at the time of each such assignment, from the assigning or assignee Bank, the payment of a non-refundable assignment fee of $3,500 and (vi) no such transfer or assignment will be effective until recorded by the Administrative Agent on the Register pursuant to Section 13.15. To the extent of any assignment pursuant to this Section 13.04(b), the assigning Bank shall be relieved of its obligations hereunder with respect to its assigned Commitments. At the time of each assignment pursuant to this Section 13.04(b) to a Person which is not already a Bank hereunder and which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective assignee Bank shall, to the extent legally entitled to do so, provide to the Borrower the appropriate Internal Revenue Service Forms (and, if applicable, a Section 4.04(b) (ii) Certificate) described in Section 4.04(b). To the extent that an assignment of all or any portion of a Bank's Commitments and related outstanding Obligations pursuant to Section 1.13 or this Section 13.04(b) would, at the time of such assignment, result in increased costs under Section 1.10, 2.06 or 4.04 from those being charged by the respective assigning Bank prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower, in accordance with and pursuant to the other provisions of this Agreement, shall be obligated to pay any other increased costs of the type described above resulting from changes after the date of the respective assignment). -139- 147 (c) Nothing in this Agreement shall prevent or prohibit any Bank from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank. 13.05 No Waiver; Remedies Cumulative. No failure or delay on the part of the Administrative Agent, the Syndication Agent, the Collateral Agent or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower or any other Credit Party and the Administrative Agent, the Syndication Agent, the Collateral Agent or any Bank shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights, powers and remedies herein or in any other Credit Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which the Administrative Agent, the Syndication Agent, the Collateral Agent or any Bank would otherwise have. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent, the Syndication Agent, the Collateral Agent or any Bank to any other or further action in any circumstances without notice or demand. 13.06 Payments Pro Rata. (a) Except as otherwise provided in this Agreement, the Administrative Agent agrees that promptly after its receipt of each payment from or on behalf of the Borrower in respect of any Obligations hereunder, it shall distribute such payment to the Banks (other than any Bank that has consented in writing to waive its pro rata share of any such payment) pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise), which is applicable to the payment of the principal of, or interest on, the Loans, Unpaid Drawings, Commitment Commission or Letter of Credit Fees, of a sum which with respect to the related sum or sums received by other Banks is in a greater proportion than the total of such Obligation then owed and due to such Bank bears to the total of such Obligation then owed and due to all of the Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the Obligations of the respective Credit Party to such Banks in such amount as shall result in a proportional participation by all the Banks in such amount; provided that if all or any portion of such excess amount is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. -140- 148 (c) Notwithstanding anything to the contrary contained herein, the provisions of the preceding Sections 13.06(a) and (b) shall be subject to the express provisions of this Agreement which require, or permit, differing payments to be made to Non-Defaulting Banks as opposed to Defaulting Banks. 13.07 Calculations; Computations; Accounting Terms. (a) The financial statements to be furnished to the Banks pursuant hereto shall be made and prepared in accordance with generally accepted accounting principles in the United States consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks); provided that, (i) except as otherwise specifically provided herein, all computations of Excess Cash Flow and Interest Reduction Discount, and all computations and all definitions used in determining compliance with Sections 9.08 through 9.11, inclusive, shall utilize accounting principles and policies in conformity with those used to prepare the historical financial statements of the Borrower delivered to the Banks pursuant to Section 7.05(a), but adjusted for periods after the Initial Borrowing Date to give effect to purchase accounting adjustments required under generally accepted accounting principles in the United States as a result of the Acquisition (and the valuation of the assets being acquired pursuant to the Acquisition as a result thereof), (ii) notwithstanding anything to the contrary contained in preceding clause (i), for each Test Period which ends on or prior to September 30, 1997, the calculation of Consolidated EBITDA will be based on, and in accordance with, the relevant pro forma income statements delivered pursuant to Section 8.01(i) and (iii) so long as recourse in respect of the Austin Obligations is limited solely to the Borrower's Hotel Property in Austin, Texas, for purposes of the computations described in preceding clause (i),the Austin Obligations shall be treated as if same did not exist and as if there were no interest expense applicable thereto. (b) All computations of interest in respect of Eurodollar Loans, and all computation of Commitment Commission and other Fees hereunder, shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day (except that in the case of Letter of Credit Fees, the last day shall be included) occurring in the period for which such interest, Commitment Commission or Fees are payable. All computations of interest in respect of Base Rate Loans hereunder shall be made on the basis of a year of 365/366 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. 13.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY TRIAL. (A) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL, EXCEPT AS OTHERWISE PROVIDED IN THE MORTGAGES, BE CONSTRUED IN ACCORDANCE WITH -141- 149 AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, THE BORROWER HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK PERSONAL JURISDICTION OVER THE BORROWER, AND AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENTS BROUGHT IN ANY OF THE AFOREMENTIONED COURTS, THAT SUCH COURTS LACK PERSONAL JURISDICTION OVER THE BORROWER. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE BELOW, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER OR UNDER ANY OTHER CREDIT DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY AGENT, ANY BANK OR THE HOLDER OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION. (B) THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (A) ABOVE AND HEREBY FURTHER IRREVOCABLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. -142- 150 (C) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 13.09 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. 13.10 Effectiveness. This Agreement shall become effective on the date (the "Effective Date") on which the Borrower, the Administrative Agent, the Syndication Agent and each of the Banks shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered the same to the Administrative Agent at its Notice Office or, in the case of the Banks, shall have given to the Administrative Agent telephonic (confirmed in writing), written or telex notice (actually received) at such office that the same has been signed and mailed to it. The Administrative Agent will give the Borrower and each Bank prompt written notice of the occurrence of the Effective Date. 13.11 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 13.12 Amendment or Waiver; etc. (a) Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the respective Credit Parties party thereto and the Required Banks, provided that no such change, waiver, discharge or termination shall, without the consent of each Bank (other than a Defaulting Bank) (with Obligations being directly affected in the case of following clause (i)), (i) extend the final scheduled maturity of any Loan or Note or extend the stated expiration date of any Letter of Credit beyond the Revolving Loan Maturity Date, or reduce the rate or extend the time of payment of interest or Fees thereon, or reduce the principal amount thereof (except to the extent repaid in cash) (it being understood that any amendment or modification to the financial definitions in this Agreement or to Section 13.07(a) shall not constitute a reduction in the rate of interest or any Fees for purposes of this clause (i)), (ii) release all or substantially all of the Collateral (except as expressly provided in the Credit Documents) under all the Security Documents, (iii) amend, modify or waive any provision of this Section 13.12, (iv) reduce the percentage specified in the definition of Required Banks (it being understood that, with the consent of the Required Banks, additional extensions of credit pursuant to this Agreement may be included in the determina- -143- 151 tion of the Required Banks on substantially the same basis as the extensions of Term Loans and Revolving Loan Commitments are included on the Effective Date) or (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement; provided further, that no such change, waiver, discharge or termination shall (t) increase the Commitments of any Bank over the amount thereof then in effect without the consent of such Bank (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default or of a mandatory reduction in the Total Commitments shall not constitute an increase of the Commitment of any Bank, and that an increase in the available portion of any Commitment of any Bank shall not constitute an increase of the Commitment of such Bank), (u) without the consent of each Issuing Bank, amend, modify or waive any provision of Section 2 or alter its rights or obligations with respect to Letters of Credit, (v) without the consent of each Agent, amend, modify or waive any provision of Section 12 or any other provision as same relates to the rights or obligations of the Agents, (x) without the consent of the Collateral Agent, amend, modify or waive any provision relating to the rights or obligations of the Collateral Agent, (y) without the consent of the Majority Banks of each Tranche which is being allocated a lesser prepayment, repayment or commitment reduction as a result of the actions described below (or without the consent of the Majority Banks of each Tranche in the case of an amendment to the definition of Majority Banks), amend the definition of Majority Banks (it being understood that, with the consent of the Required Banks, additional extensions of credit pursuant to this Agreement may be included in the determination of the Majority Banks on substantially the same basis as the extensions of Term Loans and Revolving Loan Commitments are included on the Effective Date) or alter the required application of any prepayments or repayments (or commitment reductions), as between the various Tranches, pursuant to Section 4.01(a) or 4.02 (excluding Sections 4.02(b) and (c)) (although the Required Banks may waive, in whole or in part, any such prepayment, repayment or commitment reduction, so long as the application, as amongst the various Tranches, of any such prepayment, repayment or commitment reduction which is still required to be made is not altered) or (z) without the consent of the Supermajority Banks of the respective Tranche, reduce the amount of, or extend the date of, any Tranche A Term Loan Scheduled Repayment or Tranche B Term Loan Scheduled Repayment, as the case may be, or without the consent of the Supermajority Banks of each Tranche, amend the definition of Supermajority Banks (it being understood that, with the consent of the Required Banks, additional extensions of credit pursuant to this Agreement may be included in the determination of the Supermajority Banks on substantially the same basis as the extensions of Term Loans and Revolving Loan Commitments are included on the Effective Date). (b) If, in connection with any proposed change, waiver, discharge or termination to any of the provisions of this Agreement as contemplated by clauses (i) through (v), inclusive, of the first proviso to Section 13.12(a), the consent of the Required Banks is obtained but the consent of one or more of such other Banks whose consent is required is not obtained, then the Borrower shall have the right, so long as all non-consenting Banks -144- 152 whose individual consent is required are treated as described in either clauses (A) or (B) below, to either (A) replace each such non- consenting Bank or Banks (or, at the option of the Borrower if the respective Bank's consent is required with respect to less than all Tranches of Loans (or related Commitments), to replace only the respective Tranche or Tranches of Commitments and/or Loans of the respective non- consenting Bank which gave rise to the need to obtain such Bank's individual consent) with one or more Replacement Banks pursuant to Section 1.13 so long as at the time of such replacement, each such Replacement Bank consents to the proposed change, waiver, discharge or termination or (B) terminate such non-consenting Bank's Commitments (if such Bank's consent is required as a result of its Commitments) and/or repay each Tranche of outstanding Term Loans of such Bank which gave rise to the need to obtain such Bank's consent, in accordance with Sections 3.02(c) and/or 4.01(b), provided that, unless the Commitments that are terminated, and Loans repaid, pursuant to preceding clause (B) are immediately replaced in full at such time through the addition of new Banks or the increase of the Commitments and/or outstanding Loans of existing Banks (who in each case must specifically consent thereto), then in the case of any action pursuant to preceding clause (B) the Required Banks (determined after giving effect to the proposed action) shall specifically consent thereto, provided further, that in any event the Borrower shall not have the right to replace a Bank, terminate its Commitments or repay its Loans solely as a result of the exercise of such Bank's rights (and the withholding of any required consent by such Bank) pursuant to the second proviso to Section 13.12(a). 13.13 Survival. All indemnities set forth herein including, without limitation, in Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01 shall survive the execution, delivery and termination of this Agreement and the Notes and the making and repayment of the Obligations. 13.14 Domicile of Loans. Each Bank may transfer and carry its Loans at, to or for the account of any office, Subsidiary or Affiliate of such Bank. Notwithstanding anything to the contrary contained herein, to the extent that a transfer of Loans pursuant to this Section 13.14 would, at the time of such transfer, result in increased costs under Section 1.10, 1.11, 2.06 or 4.04 from those being charged by the respective Bank prior to such transfer, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes after the date of the respective transfer). 13.15 Register. The Borrower hereby designates the Administrative Agent to serve as the Borrower's agent, solely for purposes of this Section 13.15, to maintain a register (the "Register") on which it will record the Commitments from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation shall not affect the Borrower's obligations in respect of such -145- 153 Loans. With respect to any Bank, the transfer of the Commitments of such Bank and the rights to the principal of, and interest on, any Loan made pursuant to such Commitments shall not be effective until such transfer is recorded on the Register maintained by the Administrative Agent with respect to ownership of such Commitments and Loans and prior to such recordation all amounts owing to the transferor with respect to such Commitments and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitments and Loans shall be recorded by the Administrative Agent on the Register only upon the acceptance by the Administrative Agent of a properly executed and delivered Assignment and Assumption Agreement pursuant to Section 13.04(b). Coincident with the delivery of such an Assignment and Assumption Agreement to the Administrative Agent for acceptance and registration of assignment or transfer of all or part of a Loan, or as soon thereafter as practicable, the assigning or transferor Bank shall surrender the Note evidencing such Loan, and thereupon one or more new Notes in the same aggregate principal amount shall be issued to the assigning or transferor Bank and/or the new Bank. The Borrower agrees to indemnify the Administrative Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Agent in performing its duties under this Section 13.15. 13.16 Confidentiality. (a) Subject to the provisions of clause (b) of this Section 13.16, each Bank agrees that it will use its reasonable best efforts not to disclose without the prior consent of the Borrower (other than to its employees, auditors, advisors or counsel or to another Bank if the Bank or such Bank's holding or parent company in its sole discretion determines that any such party should have access to such information, provided such Persons shall be subject to the provisions of this Section 13.16 to the same extent as such Bank) any information with respect to the Borrower or any of its Subsidiaries or Joint Ventures which is now or in the future furnished pursuant to this Agreement or any other Credit Document and which is designated by the Borrower to the Banks in writing as confidential, provided that any Bank may disclose any such information (a) as has become generally available to the public other than by virtue of a breach of this Section 13.16(a) by the respective Bank, (b) as may be required or reasonably appropriate in any report, statement or testimony submitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over such Bank or to the Federal Reserve Board or the Federal Deposit Insurance Corporation or similar organizations (whether in the United States or elsewhere) or their successors, (c) as may be required or reasonably appropriate in respect to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to such Bank, (e) to the Agents or the Collateral Agent and (f) to any prospective or actual transferee or participant in connection with any contemplated transfer or participation of any of the Notes or Commitments or any interest therein by such Bank, provided that such prospective transferee agrees to be bound by the confidentiality provisions contained in this Section 13.16. -146- 154 (b) The Borrower hereby acknowledges and agrees that each Bank may share with any of its affiliates any information related to the Borrower or any of its Subsidiaries or Joint Ventures (including, without limitation, any nonpublic customer information regarding the creditworthiness of the Borrower and its Subsidiaries and Joint Ventures, provided such Persons shall be subject to the provisions of this Section 13.16 to the same extent as such Bank). 13.17 Limitation on Increased Costs. Notwithstanding anything to the contrary contained in Section 1.10, 1.11, 2.06 or 4.04, unless a Bank gives notice to the Borrower that it is obligated to pay an amount under any such Section within 180 days after the later of (x) the date such Bank incurs the respective increased costs, Taxes, loss, expense or liability, or reduction in amounts received or receivable or reduction in return on capital or (y) the date such Bank has actual knowledge of its incurrence of the respective increased costs, Taxes, loss, expense or liability, or reductions in amounts received or receivable or reduction in return on capital, then such Bank shall only be entitled to be compensated for such amount by the Borrower pursuant to said Section 1.10, 1.11, 2.06 or 4.04, as the case may be, to the extent the costs, Taxes, loss, expense or liability, or reduction in amounts received or receivable or reduction in return on capital are incurred or suffered on or after the date which occurs 180 days prior to such Bank giving notice to the Borrower that it is obligated to pay the respective amounts pursuant to said Section 1.10, 1.11, 2.06 or 4.04, as the case may be. This Section 13.17 shall have no applicability to any Section of this Agreement or any other Credit Document other than said Sections 1.10, 1.11, 2.06 and 4.04. -147- 155 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date first above written. Address: - ------- 410 North 44th Street DOUBLETREE CORPORATION Suite 700 Phoenix, Arizona 85008 Telephone No.: (602) 220-6666 Telecopier No.: (602) 220-6753 By --------------------------------- Attention: Chief Financial Officer Title: MORGAN STANLEY SENIOR FUNDING, INC., Individually and as Syndication Agent and Arranger By --------------------------------- Title: THE BANK OF NOVA SCOTIA, Individually and as Administrative Agent By --------------------------------- Title: CIBC, INC., Individually and as a Managing Agent By --------------------------------- Title: -148- 156 CREDIT LYONNAIS NEW YORK BRANCH, Individually and as a Managing Agent and as Collateral Agent By_________________________________ Title: FIRST UNION NATIONAL BANK OF NORTH CAROLINA, Individually and as a Managing Agent By_________________________________ Title: SOCIETE GENERALE, Individually and as a Managing Agent By_________________________________ Title: -149- 157 ALLIED IRISH By: -------------------------------- Title ALLSTATE By: -------------------------------- Title APPALOOSA MANAGEMENT By: -------------------------------- Title BANK OF BOSTON By: -------------------------------- Title BANKERS TRUST COMPANY By: -------------------------------- Title -150- 158 BANQUE NATIONALE DE PARIS By: -------------------------------- Title THE BANK OF HAWAII By: -------------------------------- Title THE BANK OF NEW YORK By: -------------------------------- Title CHANCELLOR CAPITAL MANAGEMENT, INC. By: -------------------------------- Title CHL HIGH YIELD By: -------------------------------- Title -151- 159 CHANG HWA COMMERCIAL BANK By: -------------------------------- Title CITIBANK, N.A. By: -------------------------------- Title DEAN WITTER By: -------------------------------- Title DONALDSON LUFKIN & JENRETTE By: -------------------------------- Title DRESDNER BANK AG, NEW YORK BRANCH By: -------------------------------- Title -152- 160 EATON VANCE By: -------------------------------- Title FIRST HAWAIIAN By: -------------------------------- Title THE FUJI BANK LIMITED By: -------------------------------- Title GIROCREDIT BANK AG DER SPARKASSEN By: -------------------------------- Title HARCH CAPITAL MANAGEMENT By: -------------------------------- Title -153- 161 HIBERNIA By: -------------------------------- Title INDUSTRIAL BANK OF JAPAN, LIMITED By: -------------------------------- Title IMPERIAL BANK By: -------------------------------- Title INDOSUEZ CAPITAL FUNDING II, LIMITED By: ------------------------------ Title ING CAPITAL ADVISERS By: ------------------------------ Title -154- 162 KEY BANK OF WASHINGTON By: ------------------------------ Title THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By: ------------------------------ Title MASSACHUSETTS MUTUAL LIFE INSRANCE COMPANY By: ------------------------------ Title MELLON BANK By: ------------------------------ Title MERRILL LYNCH By: ------------------------------ Title -155- 163 MIDLAND By: ------------------------------ Title THE MITSUBISHI TRUST AND BANKING CORPORATION By: ------------------------------ Title MITSUI LEASING (U.S.A.) INC. By: ------------------------------ Title NATIONSBANK, N.A. By: -------------------------------- Title THE NIPPON CREDIT BANK, LTD., LOS ANGELES AGENCY By: -------------------------------- Title -156- 164 NORTHERN LIFE INSURANCE By: -------------------------------- Title OAK HILL SECURITIES By: -------------------------------- Title ORIX USA CORPORATION By: -------------------------------- Title PILGRIM PRIME RATE TRUST By: -------------------------------- Title PPM AMERICA, INC. By: -------------------------------- Title -157- 165 PROTECTIVE ASSET MANAGEMENT, L.L.C. By: -------------------------------- Title THE ROYAL BANK OF SCOTLAND PLC By: -------------------------------- Title THE SAKURA BANK, LIMITED By: -------------------------------- Title SANWA BUSINESS CREDIT CORPORATION By: -------------------------------- Title SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION By: -------------------------------- Title -158- 166 THE SUMITOMO BANK, LIMITED By: -------------------------------- Title SUN AMERICA By: -------------------------------- Title TCW ASSET MANAGEMENT By: -------------------------------- Title TOYO TRUST & BANKING By: -------------------------------- Title THE TRAVELERS INSURANCE COMPANY By: -------------------------------- Title -159- 167 WELLS FARGO BANK, N.A. By: -------------------------------- Title -160- 168 SCHEDULE I COMMITMENTS
Tranche A Tranche B Term Loan Term Loan Revolving Loan Bank Commitment Commitment Commitment - ---- ---------- ---------- -------------- Morgan Stanley Senior Funding, Inc. The Bank of Nova Scotia Allied Irish AllState Appaloosa Management Bank of Boston Bankers Trust Company The Bank of Hawaii The Bank of New York
169 SCHEDULE I Page 162
Tranche A Tranche B Term Loan Term Loan Revolving Loan Bank Commitment Commitment Commitment - ---- ---------- ---------- -------------- Chancellor Capital Management, Inc. CHL High Yield Chang Hwa Commercial Bank CIBC Inc. Citibank, N.A. Credit Lyonnais New York Branch Dresdner Bank AG, New York Branch Eaton Vance First Union National Bank of North Carolina GiroCredit Bank Ag Der Sparkassen Harch Capital Management
170 SCHEDULE I Page 163
Tranche A Tranche B Term Loan Term Loan Revolving Loan Bank Commitment Commitment Commitment - ---- ---------- ---------- -------------- Industrial Bank of Japan, Limited Imperial Bank ING Capital Advisers Key Bank of Washington The Long-Term Credit Bank of Japan, LTD. Massachusetts Mutual Life Insrance Company Mellon Bank Merrill Lynch The Mitsubishi Trust and Banking Corporation Mitsui Leasing (U.S.A.) Inc. NationsBank, N.A.
171 SCHEDULE I Page 164
Tranche A Tranche B Term Loan Term Loan Revolving Loan Bank Commitment Commitment Commitment - ---- ---------- ---------- -------------- The Nippon Credit Bank, Ltd. Los Angeles Agency Northern Life Insurance Oak Hill Securities Orix USA Corporation Pilgrim Prime Rate Trust PPM America, Inc. Protective Asset Management, L.L.C. The Royal Bank of Scotland plc Societe Generale Southern Pacific Thrift & Loan Association The Sumitomo Bank, Limited
172 SCHEDULE I Page 165
Tranche A Tranche B Term Loan Term Loan Revolving Loan Bank Commitment Commitment Commitment - ---- ---------- ---------- -------------- The Travelers Insurance Company Wells Fargo Bank, N.A. Dean Witter Indosuez Capital Funding II, Limited TCW Asset Management Toyo Trust & Banking The Sakura Bank, Limited Banque Nationale de Paris Sun America The Fuji Bank Limited Sanwa Business Credit Corporation
173 SCHEDULE I Page 166
Tranche A Tranche B Term Loan Term Loan Revolving Loan Bank Commitment Commitment Commitment - ---- ---------- ---------- -------------- First Hawaiian Midland Hibernia Donaldson Lufkin & Jenrette ______________ ______________ ______________ TOTAL: $376,000,000 $215,000,000 $100,000,000
174 SCHEDULE II BANK ADDRESSES Allied Irish 405 Park Avenue New York, NY 10022 Attn: Bill Murray Tel: (212) 339-8021 AllState 3075 Sanders Road, Suite G3A Northbrook, IL 60062-7127 Attn: Chris Guergen Tel: (847) 402-3095 Appaloosa Management 51 John F. Kennedy Parkway Short Hill, NJ 07078 Attn: James Bolin Tel: (201) 376-5400 Bank of Boston 100 Federal Street Boston, MA 02110 Attn: Timothy Barns Tel: (617) 434-7976 Bankers Trust Company One Bankers Trust Plaza New York, NY 10006 Attn: Peter Nolan Tel: (212) 775-2272 The Bank of Hawaii 1850 North Central Avenue, Suite 400 Phoenix, AZ 85004 Attn: Joseph Donaldson Tel: (602) 257-2432 The Bank of New York 10990 Wilshire Boulevard, Suite 1125 Los Angeles, CA 90024 Attn: Bruce Miller Tel: (310) 996-5650 Banque Nationale de Paris 725 South Figueroa, 20th FL Los Angeles, CA 90017 Attn: Margaret Mudd Tel: (213) 688-6423
175 Chancellor Capital Management, Inc. 1166 Avenue of Americas, 27th Floor New York, NY 10036 Attn: Greg Smith Tel: (212) 278-9404 CHL High Yield 380 Madison Avenue New York, NY 10017 Attn: Jim Ferguson Tel: (212) 622-3070 Chang Hwa Commercial Bank One World Trade Center Suite 3211, 32nd Floor New York, NY Attn: Teddy Mou Tel: (212) 390-7040 CIBC Inc. 350 South Grand Avenue, Suite 2800 Los Angeles, CA 90071 Attn: Paul Chakmak Tel: (213) 617-6226 Citibank, N.A. 399 Park Avenue New York, NY 10017 Attn: Ken Ostmann Tel: (212) 559-0378 Credit Lyonnais New York Branch 1901 Avenue of Americas New York, NY 10019-6022 Attn: Jo Asciolla Tel: (212) 261-7834 Dean Witter 2 World Trade Center New York, NY 10048 Attn: Ralph Scolari Tel: (212) 892-2403 Donaldson Lufkin & Jenrette 277 Park Avenue, 9th FL New York, N.Y. 10172 Attn: Steve Hickey Tel: (212) 892-2403 Dresdner Bank AG, New York Branch 75 Wall Street New York, NY 10005 Attn: Sid Jordan Tel: (212) 574-0100
176 Eaton Vance 24 Federal Street Boston, MA 02110 Attn: Scott Paige Tel: (617) 482-8260 First Union National Bank of North Carolina One First Union Center Charlotte, NC 28288-0737 Attn: B. Bragg Commer Tel: (704) 374-2610 First Hawaiian 999 Bishop Street, 11th FL Honolulu, HI 96813 Attn: Robert Wheeler Tel: (808) 525-6367 The Fuji Bank Limited 333 South Hope Street, 39th FL Los Angeles, CA 900071 Attn: Ching Lim Tel: (213) 253-4179 Girocredit Bank AG Der Sparkassen Park Avenue Tower 65 East 55th Street, 29th Floor New York, NY 10022 Attn: John Redding Tel: (212) 909-0624 Harch Capital Management One Park Place 621 NW 53rd Street, Suite 620 Boca Raton, FL 93487 Attn: James DiDonato Tel: (407) 995-4900 Hibernia 313 Carondelet Street, 12th FL New Orleans, LA 70130 Attn: Troy Villafara Tel: (504) 533-5490 Indosuez capital Funding II, Limite 1211 Avenue of Americas, 7th FL New York, NY 10036 Attn: Andrew Marshak Tel: (212) 278-2232 Industrial Bank of Japan, Limited 350 South Grand Avenue, Suite 1500 Los Angeles, CA 90071 Attn: Mr. Sugano Tel: (213) 893-6436
177 Imperial Bank P.O. Box 92991 Los Angeles, CA 90090 Attn: Ray Valdama Tel: (310) 417-5710 ING Capital Advisers 333 South Grand Avenue Suite 400 Los Angeles, CA 90071 Attn: Mike Hatley Tel: (213) 621-9062 Key Bank of Washington 1325 Fourth Avenue, Floor 12 Seattle, WA 98101 Attn: John Brock Tel: (206) 684-6031 The Long-Term Credit Bank of Japan, LTD. 350 South Grand Avenue Suite 3000 Los Angeles, CA 90071 Attn: Brian Reed Tel: (213) 689-6350 Lyonnais 1901 Avenue of Americas New York, N.Y. 10019-6022 Attn: Jo Asciolla Tel: (212) 261-7834 Massachussets Mutual Life Insurance 1295 State Street, Mail Suite F457 Company Springfield, MA 01111 Attn: John Wheeler Tel: (413) 744-6228 Mellon Bank 300 South Grand Avenue Suite 3800 Los Angeles, CA 90071 Attn: Lawrence Ivey Tel: (213) 680-7354 Merrill Lynch 800 Scudders Mill Road Plainsboro, NJ 08536 Attn: Gilles Marchand Tel: (609) 282-2000
178 Midland 140 Broadway, 5th FL New York, NY 10005 Attn: Chris French Tel: (212) 658-2742 The Mitsubishi Trust and Banking 520 Madison Avenue Corporation New York, NY 10022 Attn: Patricia Loret De Moia Tel: (212) 891-8418 Mitsui Leasing (U.S.A.) Inc. 200 Park Avenue, Suite 3214 New York, NY 10166 Attn: Jerry Parisi Tel: (212) 883-3061 NationsBank, N.A. 444 South Flower, Suite 1500 Los Angeles, CA 90071 Attn: Scott Nichelson Tel: (213) 236-4908 The Nippon Credit Bank, Ltd., 550 South Hope Street, Suite 2500 Los Angeles Agency Los Angeles, CA 90071 Attn: Julien Michaels Tel: (213) 243-5720 Northern Life Insurance c/o Reliastar Investment Research 100 Washington Avenue South Suite 800 Minneapolis, MN 55401 Attn: Jim Tobin Tel: (612) 342-3204 Oak Hill Securities 65 East 55th Street New York, NY 10022 Attn: Scott Krase Tel: (212) 326-1500 Orix USA Corporation 780 Third Avenue, 18th Floor New York, NY 10017 Attn: Hiro Miyauchi Tel: (212) 418-8300
179 Pilgrim Prime Rate Trust Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, AZ 85004 Attn: Howard Tiffen Tel: (602) 417-8259 PPM America, Inc. 225 West Wacker, Suite 1200 Chicago, IL 60606 Attn: Michael Dire Tel: (312) 634-2509 Protective Asset Management, L.L.C. 1150 Two Galleria Tower 13455 Noel Road LB #45 Dallas, TX 75240 Attn: James Dondero Tel: (972) 233-4300 The Royal Bank of Scotland plc 88 Pine Street Wall Street Plaza, 26th Floor New York, NY 10005 Attn: Shona Pryor/Derek Bonnar Tel: (212) 269-1718 The Sakura Bank, Limited 515 South Figueroa Suite 400 Los Angeles, CA 90071 Attn: Mike Ross Tel: (213) 489-6756 SANWA BUSINESS CREDIT CORPORATION 601 South Figueroa Street Los Angeles, CA 90017 Attn: John Meshautt Tel: (213) 896-7285 Societe Generale 1221 Avenue of the Americas New York, NY 10020 Attn: Catherine Scaillier-Loiseau Tel: (212) 276-6469 Southern Pacific Thrift & Loan 12300 Wilshire Boulevard Association Los Angeles, CA 90025 Attn: Chris Kelleher Tel: (310) 442-3300
180 The Sumitomo Bank, Limited 777 South Figueroa Street, Suite 2600 Los Angeles, CA 90017 Attn: Mickey Jannol Tel: (213) 955-0800 Sun America 1 SunAmerica Center Century City Los Angeles, CA 90067-6022 Attn: Sabur Moini Tel: (310) 772-6078 TCW Asset Management 200 Park Avenue, Suite 220 New York, NY 10166 Attn: Justin Driscole Tel: (212) 297-4137 Toyo Trust & Banking 444 South Flower Street, Suite 1550 Los Angeles, CA 90071 Attn: Jeffrey King Tel: (213) 624-2424 The Travelers Insurance Company One Tower Square Hartford, CT 06183-2030 Attn: Teresa M. Torrey Tel: (860) 277-5952 Wells Fargo Bank, N.A. 555 Montgomery Street, 17th Floor San Francisco, CA 94111 Attn: Shawn Flannery/Mark Myers Tel: (415) 396-3741
181 SCHEDULE III REAL PROPERTY 182 SCHEDULE IV INDEBTEDNESS TO BE REFINANCED 183 SCHEDULE V CAPITALIZATION 184 SCHEDULE VI SUBSIDIARIES AND JOINT VENTURES 185 SCHEDULE VII EXISTING INDEBTEDNESS 186 SCHEDULE VIII INSURANCE 187 SCHEDULE IX EXISTING LIENS 188 SCHEDULE X EXISTING INVESTMENTS 189 SCHEDULE XI ADDITIONAL CAPITAL EXPENDITURES 190 SCHEDULE XII BASE CASE EBITDA
Test Period Ending Amount - ------------------ ------ December 31, 1997 $189,000,000 December 31, 1998 $215,000,000 December 31, 1999 $245,000,000 December 31, 2000 $279,000,000 December 31, 2001 $289,000,000 December 31, 2002 $300,000,000 December 31, 2003 $313,000,000
191 SCHEDULE XIII DESIGNATED HOTEL PROPERTIES 192 SCHEDULE XIV ERISA 193 SCHEDULE XV SUBSIDIARY RESTRICTIONS 194 SCHEDULE XVI EXISTING DOUBLETREE INVESTMENTS 195 SCHEDULE XVII EXISTING RED LION INVESTMENTS 196 EXHIBIT A FORM OF NOTICE OF BORROWING [Date] The Bank of Nova Scotia, as Administrative Agent for the Banks party to the Credit Agreement referred to below 600 Peachtree Street, N.E. Suite 2700 Atlanta, Georgia 30308 Attention: Ladies and Gentlemen: The undersigned, Doubletree Corporation (the "Borrower"), refers to the Credit Agreement, dated as of November __, 1996 (as amended from time to time, the "Credit Agreement," the terms defined therein being used herein as therein defined), among the Borrower, certain lenders from time to time party thereto (the "Banks"), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger and you, as Administrative Agent for such Banks, and hereby gives you notice, irrevocably, pursuant to Section 1.03(a) of the Credit Agreement, that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 1.03(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is ____________.1/ (ii) The aggregate principal amount of the Proposed Borrowing is $____________. ____________________ 1/ Shall be a Business Day at least one Business Day in the case of Base Rate Loans and three Business Days in the case of Eurodollar Loans, in each case, after the date hereof. 197 EXHIBIT A Page 2 (iii) The Proposed Borrowing shall consist of [Tranche A Term Loans] [Tranche B Term Loans] [Revolving Loans]. (iv) The Loans to be made pursuant to the Proposed Borrowing shall be initially maintained as [Base Rate Loans] [Eurodollar Loans]. [(v) The initial Interest Period for the Proposed Borrowing is _______ month(s).]2/ The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in the Credit Agreement and in the other Credit Documents are and will be true and correct in all material respects, both before and after giving effect to the Proposed Borrowing and to the application of the proceeds thereof, as though made on such date, unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date; and (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof. Very truly yours, DOUBLETREE CORPORATION By:_________________________ Title: ____________________ 2/ To be included for a Proposed Borrowing of Eurodollar Loans. 198 EXHIBIT B-1 TRANCHE A TERM NOTE $___________________ New York, New York [Date] FOR VALUE RECEIVED, DOUBLETREE CORPORATION (the "Borrower"), a Delaware corporation, hereby promises to pay to ________________ _______________ or its registered assigns (the "Bank"), in lawful money of the United States of America in immediately available funds, at the office of The Bank of Nova Scotia (the "Administrative Agent") located at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308 on the Tranche A Term Loan Maturity Date (as defined in the Agreement referred to below) the principal sum of _______________ DOLLARS ($____________) or, if less, the unpaid principal amount of all Tranche A Term Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the Tranche A Term Notes referred to in the Credit Agreement, dated as of November __, 1996, among the Borrower, the lenders from time to time party thereto (including the Bank), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and the Administrative Agent (as amended, modified or supplemented from time to time, the "Agreement") and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured by the Security Documents (as defined in the Agreement) and is entitled to the benefits of the Subsidiaries Guaranty (as defined in the Agreement). This Note is subject to voluntary prepayment and mandatory repayment prior to the Tranche A Term Loan Maturity Date, in whole or in part, as provided in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may become or be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. 199 EXHIBIT B-1 Page 2 THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. DOUBLETREE CORPORATION By:_________________________ Title: 200 EXHIBIT B-2 TRANCHE B TERM NOTE $_________________ New York, New York [Date] FOR VALUE RECEIVED, DOUBLETREE CORPORATION (the "Borrower"), a Delaware corporation, hereby promises to pay to ________________ _______________ or its registered assigns (the "Bank"), in lawful money of the United States of America in immediately available funds, at the office of The Bank of Nova Scotia (the "Administrative Agent") located at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308 on the Tranche B Term Loan Maturity Date (as defined in the Agreement referred to below) the principal sum of ______________ DOLLARS ($______________) or, if less, the unpaid principal amount of all Tranche B Term Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the Tranche B Term Notes referred to in the Credit Agreement, dated as of November __, 1996, among the Borrower, the lenders from time to time party thereto (including the Bank), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and the Administrative Agent (as amended, modified or supplemented from time to time, the "Agreement") and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured by the Security Documents (as defined in the Agreement) and is entitled to the benefits of the Subsidiaries Guaranty (as defined in the Agreement). This Note is subject to voluntary prepayment and mandatory repayment prior to the Tranche B Term Loan Maturity Date, in whole or in part, as provided in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may become or be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. 201 EXHIBIT B-2 Page 2 THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. DOUBLETREE CORPORATION By:_________________________ Title: 202 EXHIBIT B-3 REVOLVING NOTE $ __________ New York, New York [Date] FOR VALUE RECEIVED, DOUBLETREE CORPORATION (the "Borrower"), a Delaware corporation, hereby promises to pay to _______________ or its registered assigns (the "Bank"), in lawful money of the United States of America in immediately available funds, at the office of The Bank of Nova Scotia (the "Administrative Agent") located at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308 on the Revolving Loan Maturity Date (as defined in the Agreement referred to below) the principal sum of _____________________ DOLLARS ($___________) or, if less, the unpaid principal amount of all Revolving Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the Revolving Notes referred to in the Credit Agreement, dated as of November __, 1996, among the Borrower, the lenders from time to time party thereto (including the Bank), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and the Administrative Agent (as amended, modified or supplemented from time to time, the "Agreement") and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured by the Security Documents (as defined in the Agreement) and is entitled to the benefits of the Subsidiaries Guaranty (as defined in the Agreement). This Note is subject to voluntary prepayment and mandatory repayment prior to the Revolving Loan Maturity Date, in whole or in part, as provided in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may become or be declared to be due and payable in the manner and with the effect provided in the Agreement. 203 EXHIBIT B-3 Page 2 The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. DOUBLETREE CORPORATION By:_________________________ Title: 204 EXHIBIT B-4 SWINGLINE NOTE $5,000,000 New York, New York [Date] FOR VALUE RECEIVED, DOUBLETREE CORPORATION (the "Borrower"), a Delaware corporation, hereby promises to pay to THE BANK OF NOVA SCOTIA or its registered assigns (the "Bank"), in lawful money of the United States of America in immediately available funds, at the office of The Bank of Nova Scotia (the "Administrative Agent") located at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308 on the Swingline Expiry Date (as defined in the Agreement referred to below) the principal sum of FIVE MILLION DOLLARS ($5,000,000) or, if less, the unpaid principal amount of all Swingline Loans (as defined in the Agreement) made by the Bank pursuant to the Agreement. The Borrowers promise also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is the Swingline Note referred to in the Credit Agreement, dated as of November __, 1996, among the Borrower, the lenders from time to time party thereto (including the Bank), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and the Administrative Agent (as amended, modified or supplemented from time to time, the "Agreement") and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured by the Security Documents (as defined in the Agreement) and is entitled to the benefits of the Subsidiaries Guaranty (as defined in the Agreement). This Note is subject to voluntary prepayment and mandatory repayment prior to the Swingline Expiry Date, in whole or in part, as provided in the Agreement. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may become or be declared to be due and payable in the manner and with the effect provided in the Agreement. 205 EXHIBIT B-4 Page 2 The Borrowers hereby waive presentment, demand, protest or notice of any kind in connection with this Note. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. DOUBLETREE CORPORATION By:_________________________ Title: 206 EXHIBIT C LETTER OF CREDIT REQUEST No. (1) Dated (2) --- --- The Bank of Nova Scotia, as Administrative Agent under the Credit Agreement (the "Credit Agreement"), dated as of November __, 1996 among Doubletree Corporation, the lenders from time to time party thereto, Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arrangers, and The Bank of Nova Scotia, as Administrative Agent 600 Peachtree Street, N.E. Suite 2700 Atlanta, Georgia 30308 [Name and address of applicable Issuing Bank] Dear Sirs: We hereby request that [name of proposed Issuing Bank], in its individual capacity, issue a [Standby][Trade] Letter of Credit for the account of the undersigned on (3) (the "Date of Issuance") in the aggregate stated amount of (4) . __________________________________ (1) Letter of Credit Request Number. (2) Date of Letter of Credit Request. (3) Date of Issuance which shall be at least five Business Days from the date hereof (or such shorter period as is acceptable to the respective Issuing Bank). (4) Aggregate initial Stated Amount of Letter of Credit. 207 EXHIBIT C Page 2 For purposes of this Letter of Credit Request, unless otherwise defined herein, all capitalized terms used herein which are defined in the Credit Agreement shall have the respective meaning provided therein. The beneficiary of the requested Letter of Credit will be (5) , and such Letter of Credit will be in support of (6) and will have a stated expiration date of (7) . We hereby certify that: (1) The representations and warranties contained in the Credit Agreement are and will be true and correct in all material respects, both before and after giving effect to the issuance of the Letter of Credit requested hereby, on the Date of Issuance (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date). (2) No Default or Event of Default has occurred and is continuing nor, after giving effect to the issuance of the Letter of Credit requested hereby, would such a Default or Event of Default occur. __________________________________ (5) Insert name and address of beneficiary. (6) Insert description of L/C Supportable Obligation in the case of Standby Letters of Credit and a description of the commercial transaction which is being supported in the case of Trade Letters of Credit. (7) Insert last date upon which drafts may be presented which may not be later than (i) 12 months after the Date of Issuance or, if earlier, the third Business Day prior to the Revolving Loan Maturity Date for Standby Letters of Credit or (ii) 180 days after the Date of Issuance or, if earlier, 30 days prior to the Revolving Loan Maturity Date in the case of Trade Letters of Credit. 208 EXHIBIT C Page 3 Copies of all documentation with respect to the supported transaction are attached hereto. DOUBLETREE CORPORATION By_____________________________ Title: 209 EXHIBIT D SECTION 4.04(b)(ii) CERTIFICATE Reference is hereby made to the Credit Agreement, dated as November __, 1996, among Doubletree Corporation, the lenders from time to time party thereto, Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and The Bank of Nova Scotia, as Administrative Agent (as amended from time to time, the "Credit Agreement"). Pursuant to the provisions of Section 4.04(b)(ii) of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" as such term is used in Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended. [NAME OF BANK] By ____________________________ Title: Date: _______________, ____ 210 EXHIBIT F OFFICERS' CERTIFICATE I, the undersigned, [President/Vice President] of [Name of Credit Party], a [corporation] [partnership] organized and existing under the laws of the State of ________ (the "Company"), do hereby certify on behalf of the Company that: 1. This Certificate is furnished pursuant to Section ___ of the Credit Agreement, dated as November __, 1996, among [Doubletree Corporation] [the Company] the lenders from time to time party thereto, Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and The Bank of Nova Scotia, as Administrative Agent (such Credit Agreement, as in effect on the date of this Certificate, being herein called the "Credit Agreement"). Unless otherwise defined herein, capitalized terms used in this Certificate shall have the meanings set forth in the Credit Agreement. 2. The following named individuals are elected officers of the Company, each holds the office of the Company set forth opposite his name and has held such office since _________ __, 19__.(1) The signature written opposite the name and title of each such officer is his genuine signature.
Name(2) Office Signature -------------- ----------- ------------ ______________ ___________ _____________ ______________ ___________ _____________ ______________ ___________ _____________
3. Attached hereto as Exhibit A is a certified copy of the [Certificate of Incorporation] [Describe applicable Partnership Documents] of the Company, as filed in the Office of the Secretary of State of the State of ________ on ___________, 19__, together with all amendments thereto adopted through the date hereof. __________________________________ (1) Insert a date prior to the time of any corporate action relating to the Credit Documents or related documentation. (2) Include name, office and signature of each officer who will sign any Credit Document, including the officer who will sign the certification at the end of this Certificate or related documentation. 211 EXHIBIT F Page 2 4. Attached hereto as Exhibit B is a true and correct copy of the By-Laws of the Company which were duly adopted, are in full force and effect on the date hereof, and have been in effect since _____________, 19__. 5. Attached hereto as Exhibit C is a true and correct copy of resolutions which were duly adopted on __________, 19__ [by unanimous written consent of the [Board of Directors of the Company] [by a meeting of the Board of Directors of the Company at which a quorum was present and acting throughout], [Describe appropriate Partnership actions] and said resolutions have not been rescinded, amended or modified. Except as attached hereto as Exhibit C, no resolutions have been adopted by the [Board of Directors] [Describe Partnership body] of the Company which deal with the execution, delivery or performance of any of the Documents to which the Company is party. [6. On the date hereof, all of the applicable conditions set forth in Sections 5.05, 5.06, 5.07, 5.08, 5.09, 5.10 and 6.01 have been satisfied. 7. Attached hereto as Exhibit D are true and correct copies of all Acquisition Documents and Equity Financing Documents.](3) [6][8.] On the date hereof, the representations and warranties contained in the Credit Agreement and in the other Credit Documents are true and correct in all material respects with the same effect as though such representations and warranties had been made on the date hereof, both before and after giving effect to the incurrence of Loans on the date hereof and the application of the proceeds thereof, unless stated to relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date. [7][9.] On the date hereof, no Default or Event of Default has occurred and is continuing or would result from the Borrowing to occur on the date hereof or from the application of the proceeds thereof. __________________________________ (3) Insert in Officers' Certificate of the Borrower. 212 EXHIBIT F Page 3 [8][10.] There is no proceeding for the dissolution or liquidation of the Company or threatening its existence. IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of __________, 1996. [NAME OF CREDIT PARTY] ______________________________ Name: Title: 213 EXHIBIT F Page 4 I, the undersigned, [Secretary/Assistant Secretary] of the Company, do hereby certify on behalf of the Company that: 1. [Name of Person making above certifications] is the duly elected and qualified [President/Vice President] of the Company and the signature above is his genuine signature. 2. The certifications made by [name of Person making above certifications] on behalf of the Company in Items 2, 3, 4, 5 and [8][10] above are true and correct. IN WITNESS WHEREOF, I have hereunto set my hand this _____ day of _________, 1996. [NAME OF CREDIT PARTY] ____________________________ Name: Title: 214 EXHIBIT G PLEDGE AGREEMENT PLEDGE AGREEMENT (as amended, modified or supplemented from time to time, this "Agreement"), dated as of November ___, 1996, made by each of the undersigned pledgors (each a "Pledgor" and, together with any other entity that becomes a pledgor hereunder pursuant to Section 24 hereof, the "Pledgors"), to THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent (the "Pledgee"), for the benefit of the Secured Creditors (as defined below). Except as otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : WHEREAS, Doubletree Corporation (the "Borrower"), the lenders from time to time party thereto (the "Banks"), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger (the "Syndication Agent"), and The Bank of Nova Scotia, as Administrative Agent (together with any successor administrative agent, the "Administrative Agent"), have entered into a Credit Agreement, dated as of November ___, 1996 (as amended, modified or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans and the issuance of, and participation in, Letters of Credit as contemplated therein (the Banks, the Syndication Agent, the Administrative Agent and the Pledgee are herein called the "Bank Creditors"); WHEREAS, the Borrower and one or more of its Subsidiaries may at any time and from time to time enter into one or more Interest Rate Protection Agreements or Other Hedging Agreements with one or more Banks or any affiliate thereof (each such Bank or affiliate, even if the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason, together with such Bank's or affiliate's successors and assigns, if any, collectively, the "Other Creditors," and together with the Bank Creditors, the "Secured Creditors"); 215 EXHIBIT G Page 2 WHEREAS, pursuant to the Subsidiaries Guaranty, each Subsidiary Guarantor has jointly and severally guaranteed to the Secured Creditors the payment when due of all Guaranteed Obligations as described therein; WHEREAS, it is a condition to the making of Loans and the issuance of Letters of Credit under the Credit Agreement that each Pledgor shall have executed and delivered to the Pledgor this Agreement; and WHEREAS, each Pledgor will obtain benefits from the incurrence of Loans and the issuance of Letters of Credit under the Credit Agreement and the entering into of Interest Rate Protection Agreements or Other Hedging Agreements and, accordingly, each Pledgor desires to enter into this Agreement in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Pledgor, the receipt and sufficiency of which are hereby acknowledged, each Pledgor hereby makes the following representations and warranties to the Pledgee for the benefit of the Secured Creditors and hereby covenants and agrees with the Pledgee for the benefit of the Secured Creditors as follows: 1. SECURITY FOR OBLIGATIONS. This Agreement is made by each Pledgor for the benefit of the Secured Creditors to secure: (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and indebtedness (including, without limitation, indemnities, Fees and interest thereon) of such Pledgor to the Bank Creditors, whether now existing or hereafter incurred under, arising out of, or in connection with the Credit Agreement and the other Credit Documents to which such Pledgor is a party (including, in the case of the Subsidiary Guarantors, all such obligations and indebtedness of such Subsidiary Guarantors under the Subsidiaries Guaranty) and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained in the Credit Agreement and such other Credit Documents (all such obligations and liabilities under this clause (i), except to the extent consisting of obligations or indebtedness with respect to Interest Rate Protection Agreements or Other Hedging Agreements, being herein collectively called the "Credit Document Obligations"); 216 EXHIBIT G Page 3 (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and liabilities owing by such Pledgor to the Other Creditors under, or with respect to (including by reason of the Subsidiaries Guaranty), any Interest Rate Protection Agreement or Other Hedging Agreement, whether such Interest Rate Protection Agreement or Other Hedging Agreement is now in existence or hereafter arising, and the due performance and compliance by such Pledgor with all of the terms, conditions and agreements contained therein (all such obligations and liabilities described in this clause (ii) being herein collectively called the "Other Obligations"); (iii) any and all sums advanced by the Pledgee in order to preserve the Collateral (as hereinafter defined) or preserve its security interest in the Collateral; (iv) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities of such Pledgor referred to in clauses (i) and (ii) above, after an Event of Default (which term to mean and include any Event of Default under, and as defined in, the Credit Agreement or any payment default under any Interest Rate Protection Agreement or Other Hedging Agreement) shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Pledgee of its rights hereunder, together with reasonable attorneys' fees and court costs; and (v) all amounts paid by any Secured Creditor as to which such Secured Creditor has the right to reimbursement under Section 11 of this Agreement. all such obligations, liabilities, sums and expenses set forth in clauses (i) through (v) of this Section 1 being herein collectively called the "Obligations," it being acknowledged and agreed that the "Obligations" shall include extensions of credit of the types described above, whether outstanding on the date of this Agreement or extended from time to time after the date of this Agreement. 2. DEFINITION OF STOCK, NOTES, SECURITIES, PARTNERSHIP INTEREST, ETC. (a) As used herein, (i) the term "Stock" shall mean (x) with respect to corporations incorporated under the laws of the United States or any State or territory thereof (each a "Domestic Corporation"), all of the issued and outstanding shares of capital stock, and all warrants and options to purchase any such capital stock, of any Domestic Corporation at any time owned by any Pledgor, provided that the term "Stock" shall not include any capital stock to the extent that same constitutes RFS REIT Equity, and (y) with 217 EXHIBIT G Page 4 respect to corporations not Domestic Corporations (each a "Foreign Corporation"), all of the issued and outstanding shares of capital stock, and all warrants and options to purchase any such capital stock, at any time owned by any Pledgor of any Foreign Corporation, provided that, except as set forth in Section 8.13 of the Credit Agreement, no Pledgor shall be required to pledge hereunder, and nothing herein shall be deemed to constitute a pledge hereunder of, more than 65% of the total combined voting power of all classes of capital stock of any Foreign Corporation entitled to vote, (ii) the term "Notes" shall mean in the case of each Pledgor, all Intercompany Notes and all other promissory notes or other evidences of indebtedness (other than promissory notes that are in a principal amount of less than $1,000,000) from time to time issued to, or held by, any such Pledgor and (iii) the term "Securities" shall mean all of the Stock and Notes. Each Pledgor represents and warrants, that on the date hereof, (a) the Stock held by such Pledgor consists of the number and type of shares of the stock of the corporations as described in Annex A hereto for such Pledgor, (b) such Stock constitutes that percentage of the issued and outstanding capital stock of the issuing corporation as is set forth in Annex A hereto, (c) the Notes held by such Pledgor consist of the promissory notes described in Annex B hereto for such Pledgor, (d) such Pledgor is the holder of record and sole beneficial owner of the Stock and the Notes held by such Pledgor and (e) on the date hereof, such Pledgor owns no other Securities. (b) As used herein, the term "Partnership Interest" shall mean the entire partnership interests (whether general and/or limited partnership interests) at any time owned by each Pledgor in any Person (each a "Pledged Partnership"), provided that the term "Partnership Interest" shall not include the partnership units to the extent that same constitute RFS REIT Equity. Each Pledgor represents and warrants that, on the date hereof, (x) the Partnership Interests held by such Pledgor constitutes that percentage of the entire partnership interest of the respective Pledged Partnership as is set forth on Annex C hereto for such Pledgor and (y) such Pledgor owns no other Partnership Interests. (c) Notwithstanding anything to the contrary contained in clause (a) or (b) above, the terms "Stock" and "Partnership Interest" shall not include any equity interests in a Joint Venture of any Pledgor (whether such equity interests are in the form of partnership interests, capital stock or otherwise) to the extent that some are not permitted to be assigned or a security interest therein granted without the consent of the other joint venture partner (but only to the extent that such other joint venture partner is not a Subsidiary of a Pledgor). (d) All Stock at any time pledged or required to be pledged hereunder is hereinafter called the "Pledged Stock;" all Notes at any time pledged or required to be 218 EXHIBIT G Page 5 pledged hereunder are hereinafter called the "Pledged Notes;" all Pledged Stock and Pledged Notes together are called the "Pledged Securities;" all Partnership Interests at any time pledged or required to be pledged hereunder are hereinafter called the "Pledged Partnership Interests", and the Pledged Securities and the Pledged Partnership Interests, together with all proceeds thereof, including any securities and moneys received and at the time held by the Pledgee hereunder, are hereinafter called the "Collateral." 3. PLEDGE OF SECURITIES, ETC. 3.1. Pledge. (a) To secure the Obligations of such Pledgor and for the purposes set forth in Section 1 hereof, each Pledgor hereby (i) grants to the Pledgee a security interest in all of the Collateral owned by such Pledgor, (ii) pledges and deposits as security with the Pledgee, the Securities owned by such Pledgor on the date hereof, and delivers to the Pledgee certificates or instruments therefor, duly endorsed in blank by such Pledgor in the case of Notes and accompanied by undated stock powers duly executed in blank by such Pledgor (and accompanied by any transfer tax stamps required in connection with the pledge of such Securities) in the case of Stock, or such other instruments of transfer as are reasonably acceptable to the Pledgee, (iii) assigns, transfers, hypothecates, mortgages, charges and sets over to the Pledgee a continuing security interest in all of such Pledgor's right, title and interest in and to such Securities (and in and to the certificates or instruments evidencing such Securities), to be held by the Pledgee upon the terms and conditions set forth in this Agreement and (iv) transfers and assigns to the Pledgee such Pledgor's Partnership Interests (and delivers any certificates or instruments evidencing such partnership interests, duly endorsed in blank) and all of such Pledgor's right, title and interest in each Pledged Partnership including, without limitation: (i) all of the capital thereof and its interest in all profits, losses, Partnership Assets (as defined below) and other distributions to which such Pledgor shall at any time be entitled in respect of any such Collateral; (ii) all other payments due or to become due to such Pledgor in respect of any such Collateral, whether under any partnership agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (iii) all of its claims, rights, powers, privileges, authority, options, security interest, liens and remedies, if any, under any partnership or other agreement or at law or otherwise in respect of any such Collateral; 219 EXHIBIT G Page 6 (iv) all present and future claims, if any, of such Pledgor against any Pledged Partnership for moneys loaned or advanced, for services rendered or otherwise; (v) all of such Pledgor's rights under any partnership agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of such Pledgor relating to any Partnership Interest, including any power, if any, to terminate, cancel or modify any general or limited partnership agreement, to execute any instruments and to take any and all other action on behalf of and in the name of such Pledgor in respect of such Partnership Interest and any Pledged Partnership, to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect, or receipt for any of the foregoing or for any Partnership Asset, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing; (vi) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and (vii) to the extent not otherwise included, all proceeds of any or all of the foregoing. (b) As used herein, the term "Partnership Assets" shall mean all assets, whether tangible or intangible and whether real, personal or mixed (including, without limitation, all partnership capital and interests in other partnerships), at any time owned by any Pledged Partnership or represented by any Partnership Interest. 3.2. Subsequently Acquired Securities and/or Partnership Interests. (a) If any Pledgor shall acquire (by purchase, stock dividend or otherwise) any additional Securities at any time or from time to time after the date hereof, such Pledgor will promptly thereafter deposit such Securities (or certificates or instruments representing Securities) as security with the Pledgee and deliver to the Pledgee certificates or instruments therefor, duly endorsed in blank in the case of such Notes, and accompanied by undated stock powers duly executed in blank by such Pledgor (and accompanied by any transfer tax stamps required in connection with the pledge of such Securities) in the case of such Stock, 220 EXHIBIT G Page 7 or such other instruments of transfer as are reasonably acceptable to the Pledgee, and will promptly thereafter deliver to the Pledgee a certificate executed by a principal executive officer of such Pledgor describing such Securities and certifying that the same has been duly pledged with the Pledgee hereunder. (b) If any Pledgor shall acquire (by purchase, distribution or otherwise) any additional Partnership Interest at any time or from time to time after the date hereof, and, to the extent such Partnership Interest is certificated, forthwith deliver to the Pledgee certificates therefor, accompanied by such instruments of transfer as are acceptable to the Pledgee, and shall promptly thereafter deliver to the Pledgee a certificate executed by a principal executive officer of such Pledgor describing such Partnership Interest and certifying that the same has been duly pledged with the Pledgee hereunder. 3.3. Uncertificated Securities and Partnership Interests. Notwithstanding anything to the contrary contained in Sections 3.1 and 3.2 hereof, if any Securities (whether now owned or hereafter acquired) or Partnership Interests are uncertificated securities, the relevant Pledgor shall promptly notify the Pledgee thereof, and shall promptly take all actions required to perfect the security interest of the Pledgee under applicable law (including, in any event, under Sections 8-313 and 8-321 of the New York Uniform Commercial Code, if applicable). Each Pledgor further agrees to take such actions as the Pledgee deems necessary or reasonably desirable to effect the foregoing and to permit the Pledgee to exercise any of its rights and remedies hereunder, and agrees to provide an opinion of counsel reasonably satisfactory to the Pledgee with respect to any such pledge of uncertificated Securities promptly upon the reasonable request of the Pledgee. 4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. The Pledgee shall have the right, upon written notice to the Borrower (although no such notice shall be required upon the occurrence of an Event of Default of the type described in Section 10.05 of the Credit Agreement), to appoint one or more sub-agents for the purpose of retaining physical possession of the Pledged Securities or Pledged Partnership Interests, which may be held (in the discretion of the Pledgee) in the name of the relevant Pledgor, endorsed or assigned in blank or in favor of the Pledgee or any nominee or nominees of the Pledgee or a sub-agent appointed by the Pledgee. 5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until there shall have occurred and be continuing an Event of Default, each Pledgor shall be entitled to exercise any and all (i) voting and other consensual rights pertaining to the Pledged Securities owned by it, and to give consents, waivers or ratifications in respect thereof, and (ii) voting, consent, administration, management and other rights and remedies 221 EXHIBIT G Page 8 under any partnership agreement or otherwise with respect to the Pledged Partnership Interests of such Pledgor; provided, that, in each case, no vote shall be cast or any consent, waiver or ratification given or any action taken or omitted to be taken which would violate or be inconsistent with any of the terms of this Agreement, the Credit Agreement, any other Credit Document or any Interest Rate Protection Agreement or Other Hedging Agreement (collectively, the "Secured Debt Agreements"), or which would have the effect of impairing the value of the Collateral or any part thereof or the position or interests of the Pledgee or any other Secured Creditor in the Collateral. All such rights of each Pledgor to vote and to give consents, waivers and ratifications shall cease in case an Event of Default has occurred and is continuing, and Section 7 hereof shall become applicable. 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until there shall have occurred and be continuing an Event of Default, (i) all cash dividends and distributions payable in respect of the Pledged Stock and all payments in respect of the Pledged Notes shall be paid to the respective Pledgor, (ii) all cash distributions and other payments in respect of the Pledged Partnership Interests shall be paid to the respective Pledgor and (iii) all cash payments for moneys loaned or advanced, for services rendered or otherwise in respect of the Pledged Partnership Interests shall be paid to the respective Pledgor (although the respective Pledgor may be required to apply any such payments so received as described in preceding clauses (i), (ii) and (iii) in the manner provided in the Credit Agreement). The Pledgee shall be entitled to receive directly, and to retain as part of the Collateral: (i) all other or additional stock or other securities or partnership interests (other than cash) paid or distributed by way of dividend or otherwise in respect of the Collateral; (ii) all other or additional stock or other securities or partnership interests paid or distributed in respect of the Collateral by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; (iii) all other property (other than cash) paid or distributed by way of dividend or distribution in respect of the Collateral; and (iv) all other property or additional stock or other securities or partnership interests or property which may be paid in respect of the Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar reorganization. 222 EXHIBIT G Page 9 Nothing contained in this Section 6 shall limit or restrict in any way the Pledgee's right to receive proceeds of the Collateral in any form in accordance with Section 3 of this Agreement. All dividends, distributions or other payments which are received by any Pledgor contrary to the provisions of this Section 6 and Section 7 hereof shall be received in trust for the benefit of the Pledgee, shall be segregated from other property or funds of such Pledgor and shall be forthwith paid over to the Pledgee as Collateral in the same form as so received (with any necessary endorsement). 7. REMEDIES IN CASE OF DEFAULT OR EVENT OF DEFAULT. If there shall have occurred and be continuing an Event of Default, then and in every such case, the Pledgee shall be entitled, upon written notice to the Borrower (although no such notice shall be required upon the occurrence of any Event of Default of the type described in Section 10.05 of the Credit Agreement), to exercise all of the rights, powers and remedies (whether vested in it by this Agreement, any other Secured Debt Agreement or by law) for the protection and enforcement of its rights in respect of the Collateral, and the Pledgee shall be entitled to exercise all the rights and remedies of a secured party under the Uniform Commercial Code and also shall be entitled, without limitation, to exercise the following rights, which each Pledgor hereby agrees to be commercially reasonable: (a) to receive all amounts payable in respect of the Collateral otherwise payable under Section 6 hereof to the Pledgor; (b) to transfer all or any part of the Collateral into the Pledgee's name or the name of its nominee or nominees; (c) to accelerate any Pledged Note which may be accelerated in accordance with its terms, and take any other lawful action to collect upon any Pledged Note (including, without limitation, to make any demand for payment thereon); (d) to vote all or any part of the Pledged Stock or Pledged Partnership Interests (whether or not transferred into the name of the Pledgee) and give all consents, waivers and ratifications in respect of the Collateral and otherwise act with respect thereto as though it were the outright owner thereof (each Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney-in-fact of such Pledgor, with full power of substitution to do so); and (e) at any time and from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Collateral, or any interest therein, at any public or private sale, without demand of performance, advertisement or notice of 223 EXHIBIT G Page 10 intention to sell or of the time or place of sale or adjournment thereof or to redeem or otherwise (all of which are hereby waived by each Pledgor), for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Pledgee in its absolute discretion may determine, provided that at least 10 days' written notice of the time and place of any such sale shall be given to such Pledgor. The Pledgee shall not be obligated to make any such sale of Collateral regardless of whether any such notice of sale has theretofore been given. Each Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling the Collateral and any other security for the Obligations or otherwise. At any such sale, unless prohibited by applicable law, the Pledgee on behalf of the Secured Creditors may bid for and purchase all or any part of the Collateral so sold free from any such right or equity of redemption. Neither the Pledgee nor any other Secured Creditor shall be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing nor shall any of them be under any obligation to take any action whatsoever with regard thereto. 8. REMEDIES, ETC., CUMULATIVE. Each and every right, power and remedy of the Pledgee provided for in this Agreement or any other Secured Debt Agreement, or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by the Pledgee or any other Secured Creditor of any one or more of the rights, powers or remedies provided for in this Agreement or any other Secured Debt Agreement or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Pledgee or any other Secured Creditor of all such other rights, powers or remedies, and no failure or delay on the part of the Pledgee or any other Secured Creditor to exercise any such right, power or remedy shall operate as a waiver thereof. No notice to or demand on any Pledgor in any case shall entitle it to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Pledgee or any other Secured Creditor to any other or further action in any circumstances without notice or demand. The Secured Creditors agree that this Agreement may be enforced only by the action of the Administrative Agent or the Pledgee, in each case acting upon the instructions of the Required Banks (or, after the date on which all Credit Document Obligations have been paid in full, the holders of at least the majority of the outstanding Other Obligations) and that no other Secured Creditor shall have any right individually to seek to enforce or to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be exercised by the 224 EXHIBIT G Page 11 Administrative Agent or the Pledgee or the holders of at least a majority of the outstanding Other Obligations, as the case may be, for the benefit of the Secured Creditors upon the terms of this Agreement. 9. APPLICATION OF PROCEEDS. (a) All moneys collected by the Pledgee upon any sale or other disposition of the Collateral pursuant to the terms of this Agreement, together with all other moneys received by the Pledgee hereunder, shall be applied in the manner provided in the Security Agreement. (b) It is understood and agreed that the Pledgors shall remain jointly and severally liable to the extent of any deficiency between the amount of the proceeds of the Collateral hereunder and the aggregate amount of the Obligations. 10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the Pledgee hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or nonapplication thereof. 11. INDEMNITY. Each Pledgor jointly and severally agrees (i) to indemnify and hold harmless the Pledgee in such capacity and each other Secured Creditor and their respective successors, assigns, employees, agents and servants (individually an "Indemnitee," and collectively the "Indemnitees") from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and (ii) to reimburse each Indemnitee for all costs and expenses, including reasonable attorneys' fees, in each case growing out of or resulting from this Agreement or the exercise by any Indemnitee of any right or remedy granted to it hereunder or under any other Secured Debt Agreement (but excluding any claims, demands, losses, judgments and liabilities or expenses to the extent incurred by reason of gross negligence or willful misconduct of such Indemnitee). In no event shall the Pledgee be liable, in the absence of gross negligence or willful misconduct on its part, for any matter or thing in connection with this Agreement other than to account for monies actually received by it in accordance with the terms hereof. If and to the extent that the obligations of any Pledgor under this Section 11 are unenforceable for any reason, such Pledgor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 225 EXHIBIT G Page 12 12. PLEDGEE NOT BOUND. (a) Nothing herein shall be construed to make the Pledgee or any other Secured Creditor liable as a general partner or limited partner of any Pledged Partnership and the Pledgee or any other Secured Creditor by virtue of this Agreement or otherwise (except as referred to in the following sentence) shall not have any of the duties, obligations or liabilities of a general partner or limited partner of any Pledged Partnership. The parties hereto expressly agree that, unless the Pledgee shall become the absolute owner of a Pledged Partnership Interest pursuant hereto, this Agreement shall not be construed as creating a partnership or joint venture among the Pledgee, any other Secured Creditor and/or any Pledgor. (b) Except as provided in the last sentence of paragraph (a) of this Section, the Pledgee, by accepting this Agreement, did not intend to become a general partner or limited partner of any Pledged Partnership or otherwise be deemed to be a co-venturer with respect to any Pledgor or any Pledged Partnership either before or after an Event of Default shall have occurred. The Pledgee shall have only those powers set forth herein and shall assume none of the duties, obligations or liabilities of a general partner or limited partner of any Pledged Partnership or of any Pledgor. (c) The Pledgee shall not be obligated to perform or discharge any obligation of any Pledgor as a result of the collateral assignment hereby effected. (d) The acceptance by the Pledgee of this Agreement, with all the rights, powers, privileges and authority so created, shall not at any time or in any event obligate the Pledgee to appear in or defend any action or proceeding relating to the Collateral to which it is not a party, or to take any action hereunder or thereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Collateral. 13. FURTHER ASSURANCES; POWER-OF-ATTORNEY. (a) Each Pledgor agrees that it will join with the Pledgee in executing and, at such Pledgor's own expense, file and refile under the Uniform Commercial Code or other applicable law such financing statements, continuation statements and other documents in such offices as the Pledgee may deem necessary and wherever required by law in order to perfect and preserve the Pledgee's security interest in the Collateral and hereby authorizes the Pledgee to file financing statements and amendments thereto relative to all or any part of the Collateral without the signature of such Pledgor where permitted by law, and agrees to do such further acts and things and to execute and deliver to the Pledgee such additional conveyances, assignments, agreements and instruments as the Pledgee may reasonably require or 226 EXHIBIT G Page 13 deem necessary to carry into effect the purposes of this Agreement or to further assure and confirm unto the Pledgee its rights, powers and remedies hereunder. (b) Each Pledgor hereby appoints the Pledgee such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, to act from time to time solely after the occurrence and during the continuance of an Event of Default in the Pledgee's reasonable discretion to take any action and to execute any instrument which the Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement. 14. THE PLEDGEE AS AGENT. The Pledgee will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed by each Secured Creditor that by accepting the benefits of this Agreement each such Secured Creditor acknowledges and agrees that the obligations of the Pledgee as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement. The Pledgee shall act hereunder on the terms and conditions set forth herein and in Section 12 of the Credit Agreement. 15. TRANSFER BY THE PLEDGORS. No Pledgor will sell or otherwise dispose of, grant any option with respect to, or mortgage, pledge or otherwise encumber any of the Collateral or any interest therein (except as may be permitted in accordance with the terms of the Credit Agreement). 16. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGORS. Each Pledgor represents, warrants and covenants that (i) it is the legal, record and beneficial owner of all Pledged Securities and Pledged Partnership Interests pledged by it hereunder, subject to no Lien (except the Lien created by this Agreement and Liens permitted under Section 9.01(i)); (ii) it has full corporate or partnership power, authority and legal right to pledge all the Pledged Securities and Pledged Partnership Interests pledged by it pursuant to this Agreement; (iii) this Agreement has been duly authorized, executed and delivered by such Pledgor and constitutes a legal, valid and binding obligation of such Pledgor enforceable in accordance with its terms except to the extent that the enforceability hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (iv) except as have been obtained by the Pledgors as of the date hereof, no consent of any other party (including, without limitation, any stockholder, partner or creditor of such Pledgor or any of its Subsidiaries or any Pledged Partnership) and no consent, license, 227 EXHIBIT G Page 14 permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required to be obtained by such Pledgor in connection with the execution, delivery or performance of this Agreement, the validity or enforceability of this Agreement, the perfection or enforceability of the Pledgee's security interest in the Collateral or, except for compliance with or as may be required by applicable securities or other laws, the exercise by the Pledgee of any of its rights or remedies provided herein; (v) the execution, delivery and performance of this Agreement by such Pledgor will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, applicable to such Pledgor, or of the certificate of incorporation or by-laws (or equivalent organizational documents) of such Pledgor or of any securities issued by such Pledgor or any of its Subsidiaries, or of any mortgage, indenture, lease, deed of trust, loan agreement, credit agreement or other material contract, agreement or instrument or undertaking to which such Pledgor or any of its Subsidiaries is a party or which purports to be binding upon such Pledgor or any of its Subsidiaries or upon any of their respective assets and will not result in the creation or imposition of (or the obligation to create or impose) any lien or encumbrance on any of the assets of such Pledgor or any of its Subsidiaries except as contemplated by this Agreement; (vi) all the shares of Stock have been duly and validly issued, are fully paid and non- assessable and are subject to no options to purchase or similar rights; (vii) each of the Pledged Notes constitutes, or when executed by the obligor thereof will constitute, the legal, valid and binding obligation of such obligor, enforceable in accordance with its terms except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (viii) the pledge, assignment and delivery to the Pledgee of the Securities (other than uncertificated securities) pursuant to this Agreement creates a valid and perfected first priority Lien in the Securities, and the proceeds thereof, subject to no other Lien or to any agreement purporting to grant to any third party a Lien on the property or assets of the Pledgor which would include the Securities; (ix) each such Pledged Partnership Interest has been validly acquired and is fully paid for (to the extent applicable) and is duly and validly pledged hereunder; (x) each general or limited partnership agreement delivered to the Pledgee is an original signed counterpart (or a copy thereof) of the complete and entire such partnership agreement in effect on the date hereof; (xi) each partnership agreement is the legal, valid and binding obligation of each Pledgor, and to each Pledgor's knowledge, the other parties thereto, enforceable in accordance with its terms and, together with this Agreement, contains the entire agreement between the Pledgors relating to the subject matter thereof; (xii) no Pledgor is in default in the material payment of any portion of any mandatory capital contribution, if any, required to be made under any material general or limited partnership 228 EXHIBIT G Page 15 agreement to which such Pledgor is a party, and no Pledgor is in violation of any other material provisions of any material partnership agreement to which such Pledgor is a party, or otherwise in default or violation thereunder; (xiii) no Pledged Partnership Interest is subject to any defense, offset or counterclaim, nor have any of the foregoing been asserted or alleged against such Pledgor by any Person with respect thereto; (xiv) as of the Initial Borrowing Date, there are no certificates, instruments, documents or other writings (other than the general or limited partnership agreements and certificates delivered to the Collateral Administrative Agent) which evidence any Partnership Interest of such Pledgor; (xv) the pledge and assignment of the Pledged Partnership Interests pursuant to this Agreement, together with the relevant filings or recordings (which filings and recordings have been or will be made), creates a valid, perfected and continuing first priority security interest in such Partnership Interests and the proceeds thereof, subject to no prior lien or encumbrance or to any agreement purporting to grant to any third party a lien or encumbrance on the property or assets of such Pledgor which would include the Collateral; (xvi) there are no currently effective financing statements under the UCC covering any property which is now or hereafter may be included in the Collateral and such Pledgor will not, without the prior written consent of the Pledgee, execute and, until the Termination Date (as hereinafter defined), there will not ever be on file in any public office any enforceable financing statement or statements covering any or all of the Collateral, except financing statements filed or to be filed in favor of the Pledgee as secured party; (xvii) each Pledgor shall give the Pledgee prompt notice of any written claim it receives relating to the Collateral; (xviii) each Pledgor shall deliver to the Pledgee a copy of each other demand, notice or document received by it which may adversely affect the Pledgee's interest in the Collateral promptly upon, but in any event within 10 days after, such Pledgor's receipt thereof; (xix) a notice in the form set forth in Annex D attached hereto and by this reference made a part hereof (such notice the "Partnership Notice"), appropriately completed, notifying each Pledged Partnership of the existence of this Agreement and a certified copy of this Agreement have been delivered by each Pledgor to the relevant Pledged Partnership, and each such Pledgor has received and delivered to the Collateral Administrative Agent an acknowledgment in the form set forth in Annex E attached hereto (such acknowledgement, the "Partnership Acknowledgement"), duly executed by the relevant Pledged Partnership; and (xx) the chief executive office of such Pledgor is set forth on Annex F hereto or such other office as such Pledgor may establish in accordance with the terms of the Security Agreement. Each Pledgor covenants and agrees that it will defend the Pledgee's right, title and security interest in and to the Collateral against the claims and demands of all persons whomsoever; and such Pledgor covenants and agrees that it will have like title to and right to pledge any other property at any time hereafter pledged to the Pledgee as Collateral hereunder and will likewise defend the right thereto and security interest therein of the Pledgee and the other Secured Creditors. 229 EXHIBIT G Page 16 17. PLEDGORS' OBLIGATIONS ABSOLUTE, ETC. The obligations of each Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever (except the indefeasible payment in full in cash of all Obligations), including, without limitation: (i) any renewal, extension, amendment or modification of or addition or supplement to or deletion from any Secured Debt Agreement or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such agreement or instrument including, without limitation, this Agreement; (iii) any furnishing of any additional security to the Pledgee or its assignee or any acceptance thereof or any release of any security by the Pledgee or its assignee; (iv) any limitation on any party's liability or obligations under any such instrument or agreement or any invalidity or unenforceability, in whole or in part, of any such instrument or agreement or any term thereof; or (v) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to any Pledgor or any Subsidiary of any Pledgor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not such Pledgor shall have notice or knowledge of any of the foregoing. 18. REGISTRATION, ETC. (a) If there shall have occurred and be continuing an Event of Default then, and in every such case, upon receipt by any Pledgor from the Pledgee of a written request or requests that such Pledgor cause any registration, qualification or compliance under any Federal or state securities law or laws to be effected with respect to all or any part of the Pledged Stock, such Pledgor as soon as practicable and at its expense will cause such registration to be effected (and be kept effective) and will cause such qualification and compliance to be declared effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Pledged Stock, including, without limitation, registration under the Securities Act of 1933, as then in effect (or any similar statute then in effect), appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with any other government requirements, provided, that the Pledgee shall furnish to such Pledgor such information regarding the Pledgee as such Pledgor may reasonably request in writing and as shall be required in connection with any such registration, qualification or compliance. Such Pledgor will cause the Pledgee to be kept advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Pledgee such number of prospectuses, offering circulars or other documents incident thereto as the Pledgee from time to time may reasonably request, and will indemnify the Pledgee, each other Secured Creditor and all others participating in the distribution of such 230 EXHIBIT G Page 17 Pledged Stock against all claims, losses, damages and liabilities caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to such Pledgor by the Pledgee or such other Secured Creditor expressly for use therein. (b) If at any time when the Pledgee shall determine to exercise its right to sell all or any part of the Pledged Securities or Pledged Partnership Interests pursuant to Section 7 hereof, and such Pledged Securities or Pledged Partnership Interests or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as then in effect, the Pledgee may, in its sole and absolute discretion, sell such Pledged Securities or Pledged Partnership Interests, as the case may be, or part thereof by private sale in such manner and under such circumstances as the Pledgee may deem necessary or advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the foregoing, in any such event the Pledgee, in its sole and absolute discretion (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Securities or Pledged Partnership Interests or part thereof shall have been filed under such Securities Act, (ii) may approach and negotiate with a single possible purchaser to effect such sale, and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Securities or Pledged Partnership Interests or part thereof. In the event of any such sale, the Pledgee shall incur no responsibility or liability for selling all or any part of the Pledged Securities or Pledged Partnership Interests at a price which the Pledgee, in its sole and absolute discretion, in good faith deems reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until after registration as aforesaid. 19. TERMINATION; RELEASE. (a) After the Termination Date, this Agreement and the security interest created hereby shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 11 hereof shall survive any such termination), and the Pledgee, at the request and expense of any Pledgor, will execute and deliver to such Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral as has not theretofore been sold or otherwise applied or released pursuant to this 231 EXHIBIT G Page 18 Agreement, together with any moneys at the time held by the Pledgee or any of its sub-agents hereunder. As used in this Agreement, "Termination Date" shall mean the date upon which the Total Commitments and all Interest Rate Protection Agreements or Other Hedging Agreements have been terminated, no Note under the Credit Agreement is outstanding (and all Loans have been repaid in full), all Letters of Credit have been terminated and all Obligations then owing have been paid in full. (b) In the event that any part of the Collateral is sold in connection with a sale permitted by Section 9.02 of the Credit Agreement (other than a sale to any Pledgor or any Subsidiary thereof) or is otherwise released at the direction of the Required Banks (or all Banks if required by Section 13.12 of the Credit Agreement) and the proceeds of such sale or sales or from such release are applied in accordance with the provisions of Section 4.02(f) of the Credit Agreement, to the extent required to be so applied, the Pledgee, at the request and expense of any Pledgor, will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral (and releases therefor) as is then being (or has been) so sold or released and has not theretofore been released pursuant to this Agreement. (c) At any time that a Pledgor desires that the Pledgee assign, transfer and deliver Collateral (and releases therefor) as provided in Section 19(a) or (b) hereof, it shall deliver to the Pledgee a certificate signed by a principal executive officer of such Pledgor stating that the release of the respective Collateral is permitted pursuant to such Section 19(a) or (b). (d) If any Pledgor which is a Subsidiary of the Borrower is released from its obligations under the Subsidiaries Guaranty, then such Pledgor shall also be concurrently released herefrom. (e) The Pledgee shall have no liability whatsoever to any other Secured Creditor as the result of any release of Collateral by it in accordance with this Section 19. 20. NOTICES, ETC. All such notices and communications hereunder shall be sent or delivered by mail, telegraph, telex, telecopy, cable or overnight courier service and all such notices and communications shall, when mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight courier, be effective when delivered to the telegraph company, cable company or overnight courier, as the case may be, or sent by telex or telecopier and when mailed shall be effective three Business Days following deposit in the mail with proper postage, except that notices and communications to the Pledgee shall 232 EXHIBIT G Page 19 not be effective until received by the Pledgee. All notices and other communications shall be in writing and addressed as follows: (a) if to any Pledgor, at the address set forth opposite its signature below: (b) if to the Pledgee, at: The Bank of Nova Scotia 600 Peachtree Street, N.E. Suite 2700 Atlanta, Georgia 30308 Attention: (c) if to any Bank Creditor, either (x) to the Administrative Agent, at the address of the Administrative Agent specified in the Credit Agreement or (y) at such address as such Bank Creditor shall have specified in the Credit Agreement; (d) if to any Other Creditor at such address as such Other Creditor shall have specified in writing to the Pledgors and the Pledgee; or at such other address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. 21. WAIVER; AMENDMENT. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by each Pledgor directly affected thereby and the Pledgee (with the written consent of either (x) the Required Banks (or all of the Banks, to the extent required by Section 13.12 of the Credit Agreement) at all times prior to the time on which all Credit Document Obligations have been paid in full or (y) the holders of at least a majority of the outstanding Other Obligations at all times after the time on which all Credit Document Obligations have been paid in full); provided, that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall also require the written consent of the Requisite Creditors (as defined below) of such affected Class. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, i.e., whether (i) the Bank Creditors as holders of the Credit Document Obligations or (ii) the Other Creditors as the holders of the Other Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of 233 EXHIBIT G Page 20 (i) with respect to the Credit Document Obligations, the Required Banks and (ii) with respect to the Other Obligations, the holders of at least a majority of all obligations outstanding from time to time under the Interest Rate Protection Agreements or Other Hedging Agreements. 22. MISCELLANEOUS. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by each of the parties hereto and its successors and assigns. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAW OF THE STATE OF NEW YORK. The headings in this Agreement are for purposes of reference only and shall not limit or define the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which shall constitute one instrument. In the event that any provision of this Agreement shall prove to be invalid or unenforceable, such provision shall be deemed to be severable from the other provisions of this Agreement which shall remain binding on all parties hereto. 23. RECOURSE. This Agreement is made with full recourse to the Pledgors and pursuant to and upon all the representations, warranties, covenants and agreements on the part of the Pledgors contained herein and in the other Secured Debt Agreements and otherwise in writing in connection herewith or therewith. 24. ADDITIONAL PLEDGORS. It is understood and agreed that any Wholly-Owned Subsidiary of the Borrower that is required to execute a counterpart of this Agreement after the date hereof pursuant to the Credit Agreement shall automatically become a Pledgor hereunder by executing a counterpart hereof and delivering the same to the Pledgee. 25. MISCELLANEOUS. Notwithstanding anything to the contrary contained herein or in the Credit Agreement, each Pledgor hereby covenants and agrees that with respect to any Pledged Partnership Interest pledged by it hereunder, such Pledgor will use its reasonable best efforts to deliver to the respective Pledged Partnerships (with copies to the Pledgee) a Partnership Notice (appropriately completed) and such Pledgor will use its reasonable best efforts to deliver to the Pledgee a Partnership Acknowledgement signed by the respective Pledged Partnerships, in each case within forty-five days following the pledge of any Pledged Partnership Interests hereunder. * * * 234 EXHIBIT G Page 21 IN WITNESS WHEREOF, each Pledgor and the Pledgee have caused this Agreement to be executed by their duly elected officers duly authorized as of the date first above written. DOUBLETREE CORPORATION By:_________________ Title: SAMANTHA HOTEL CORPORATION By ------------------------ Title: HARBOR HOTEL CORPORATION By ------------------------- Title: DOUBLETREE PARTNERS By ------------------------- Title: INNCO CORPORATION By ------------------------ Title: 235 EXHIBIT G Page 22 DOUBLETREE HOTELS CORPORATION By ------------------------ Title: DT MANAGEMENT, INC. By ------------------------ Title: ARIZONA DTM PASADENA, INC. By ------------------------ Title: DTM BURLINGAME, INC. By ------------------------ Title: DTM CAMBRIDGE, INC. By ------------------------ Title: DTM PALM SPRING, INC. By ------------------------ Title: 236 EXHIBIT G Page 23 DTM WALNUT CREEK, INC. By ------------------------ Title: DTM COCONUT GROVE, INC. By ------------------------ Title: DTM NASHVILLE, INC. By ------------------------ Title: DTM SANTA CLARA, INC. By ------------------------ Title: DTM VENTURA, INC. By ------------------------ Title: DTM ST. LOUIS, INC. By ------------------------ Title: 237 EXHIBIT G Page 24 DTM OKLAHOMA, INC. By ------------------------ Title: DTM TULSA, INC. By ------------------------ Title: DTR LIMITED PARTNERSHIP By ------------------------ Title: DOUBLETREE OF PHOENIX, INC. By ------------------------ Title: HOSCO CORPORATION By ------------------------ Title: DOUBLETREE HOTEL SYSTEMS,INC. By ------------------------ Title: 238 EXHIBIT G Page 25 COMPRIS HOTEL CORPORATION By ------------------------ Title: DTR RFS LESSEE, INC. By ------------------------ Title: DOUBLETREE, INC. OF CALIFORNIA By ------------------------ Title: DT REAL ESTATE, INC. By ------------------------ Title: TUK INNS, INC. By ------------------------ Title: DT INVESTMENTS, INC. By ------------------------ Title: 239 EXHIBIT G Page 26 DTR CAMBRIDGE, INC. By ------------------------ Title: DTR SANTA CLARA, INC. By ------------------------ Title: DTR SONORAN HOLDING, INC. By ------------------------ Title: DTM ATLANTIC CITY, INC. By ------------------------ Title: DTR INDEPENDENCE, INC. By ------------------------ Title: DTR NORTH CANTON, INC. By ------------------------ Title: 240 EXHIBIT G Page 27 DTR SAN ANTONIO, INC. By ------------------------ Title: DTR WEST MONTROSE, INC. By ------------------------ Title: RED LION HOTELS, INC. By ------------------------ Title: Accepted and Agreed to: THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent for the Banks By:_________________________ Title: 241 ANNEX A to PLEDGE AGREEMENT LIST OF STOCK I. Doubletree Corporation
Percentage of Outstanding Name of Issuing Certificate Type of Number of Shares of Corporation Number Shares Shares Capital Stock --------------- ----------- ------- ------ -------------
II. Each Subsidiary Guarantor
Percentage of Outstanding Name of Issuing Certificate Type of Number of Shares of Corporation Number Shares Shares Capital Stock --------------- ----------- ------- ------ -------------
242 ANNEX B to PLEDGE AGREEMENT LIST OF NOTES I. Doubletree Corporation
Principal Amount Maturity Date Obligor (if any) (if any) - ------- -------------------- ---------------
II. [List Each Subsidiary Guarantor Individually]
Principal Amount Maturity Date Obligor (if any) (if any) - ------- -------------------- ---------------
243 ANNEX C to PLEDGE AGREEMENT PARTNERSHIP INTERESTS A. Doubletree Corporation
Type of Percentage Partnership Pledged Entities Owned Interest ---------------- ---------- -----------
[TO BE PROVIDED BY PLEDGOR] B. [List Each Subsidiary Guarantor Individually]
Type of Percentage Partnership Pledged Entities Owned Interest ---------------- ---------- -----------
244 ANNEX F to PLEDGE AGREEMENT OFFICE LOCATIONS A. Doubletree Corporation
Office Locations County ---------------- ------
B. [List Each Subsidiary Guarantor Individually]
Office Locations County ---------------- ------
245 ANNEX D to PLEDGE AGREEMENT FORM OF PARTNERSHIP NOTICE [Letterhead of Pledgor] [Date] TO: [Name of Pledged Partnership] Notice is hereby given that, pursuant to a Pledge Agreement (a true and correct copy of which is attached hereto), dated as of November __, 1996 (as amended, modified or supplemented from time to time in accordance with the terms thereof, the "Pledge Agreement"), among [NAME OF PLEDGOR] (the "Pledgor"), the other pledgors from time to time party thereto and The Bank of Nova Scotia (the "Pledgee"), as Collateral Administrative Agent on behalf of the Secured Creditors described therein, the Pledgor has pledged and assigned to the Pledgee for the benefit of the Secured Creditors, and granted to the Pledgee for the benefit of the Secured Creditors, a continuing security interest in, all right, title and interest of the Pledgor, whether now existing or hereafter arising or acquired, as a [limited] [general] partner in [NAME OF PLEDGED PARTNERSHIP] (the "Partnership"), and in, to and under the [TITLE OF APPLICABLE PARTNERSHIP AGREEMENT] (the "Partnership Agreement"), including, without limitation: (i) the Pledgor's interest in all of the capital of the Partnership and the Pledgor's interest in all profits, losses, Partnership Assets (as defined in the Pledge Agreement) and other distributions to which the Pledgor shall at any time be entitled in respect of such partnership interest; (ii) all other payments due or to become due to the Pledgor in respect of such partnership interest, whether under the Partnership Agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (iii) all of the Pledgor's claims, rights, powers, privileges, authority, options, security interest, liens and remedies, if any, under the Partnership Agreement or at law or otherwise in respect of such partnership interest; (iv) all present and future claims, if any, of the Pledgor against the Partnership for moneys loaned or advanced, for services rendered or otherwise; 246 ANNEX D Page 2 (v) all of the Pledgor's rights under the Partnership Agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of the Pledgor relating to the partnership interest, including any power to terminate, cancel or modify the Partnership Agreement, to execute any instruments and to take any and all other action on behalf of and in the name of the Pledgor in respect of the Partnership Interest and the Partnership, to make determinations, to exercise any election (including, but not limited, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing or for any Partnership Asset, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing; (vi) all other property hereafter delivered to the Pledgor in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and (vii) to the extent not otherwise included, all proceeds of any or all of the foregoing. Pursuant to the Pledge Agreement, the Partnership is hereby authorized and directed to register the Pledgor's pledge to the Pledgee on behalf of the Secured Creditors of the interest of the Pledgor on the Partnership's books. The Pledgor hereby requests the Partnership to indicate the Partnership's acceptance of this Notice and consent to and confirmation of its terms and provisions by signing a copy hereof where indicated on the attached page and returning the same to the Pledgee on behalf of the Secured Creditors. [NAME OF PLEDGOR] By_________________________________ Title: 247 ANNEX E to PLEDGE AGREEMENT FORM OF ACKNOWLEDGMENT [NAME OF PLEDGED PARTNERSHIP] (the "Partnership") hereby acknowledges receipt of a copy of the assignment by [NAME OF PLEDGOR] ("Pledgor") of its interest under the [TITLE OF APPLICABLE PARTNERSHIP AGREEMENT] (the "Partnership Agreement") pursuant to the terms of the Pledge Agreement, dated as of ____________, 1996 (as amended, modified or supplemented from time to time in accordance with the terms thereof, the "Pledge Agreement"), among the Pledgor, the other pledgors from time to time party thereto and The Bank of Nova Scotia (the "Pledgee"), or Collateral Administrative Agent on behalf of the Secured Creditors described therein. The undersigned hereby further confirms the registration of the Pledgor's pledge of its interest to the Pledgee on behalf of the Secured Creditors on the Partnership's books. Dated: ______________ __, ____ [NAME OF PLEDGED PARTNERSHIP] By:____________________________ Title: 248 EXHIBIT H SECURITY AGREEMENT among DOUBLETREE CORPORATION, CERTAIN OF ITS SUBSIDIARIES and THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent Dated as of November __, 1996 249 TABLE OF CONTENTS
Page ---- ARTICLE I SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1. Grant of Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2. Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.1. Necessary Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2. No Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.3. Other Financing Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.4. Chief Executive Office; Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.5. Location of Inventory and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.6. Recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.7. Trade Names; Change of Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III SPECIAL PROVISIONS CONCERNING RECEIVABLES; CONTRACT RIGHTS; INSTRUMENTS; CHATTEL PAPER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1. Additional Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2. Maintenance of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.3. Direction to Account Debtors; Contracting Parties; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.4. Modification of Terms; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.5. Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.6. Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.7. Assignors Remain Liable Under Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.8. Assignors Remain Liable Under Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.9. Further Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE IV SPECIAL PROVISIONS CONCERNING TRADEMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.1. Additional Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.2. Licenses and Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.3. Infringements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.4. Preservation of Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.5. Maintenance of Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.6. Future Registered Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.7. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(i) 250
Page ---- ARTICLE V SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND TRADE SECRETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.1. Additional Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.2. Licenses and Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.3. Infringements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.4. Maintenance of Patents or Copyright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.5. Prosecution of Patent Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.6. Other Patents and Copyrights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.7. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE VI PROVISIONS CONCERNING ALL COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.1. Protection of Collateral Administrative Agent's Security . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.2. Further Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.3. Financing Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VII REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.1. Remedies; Obtaining the Collateral Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.2. Remedies; Disposition of the Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.3. Waiver of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.4. Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.5. Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.6. Discontinuance of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE VIII INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.1. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.2. Indemnity Obligations Secured by Collateral; Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE IX DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.2. Waiver; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.3. Obligations Absolute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.4. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.5. Headings Descriptive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 10.6. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 10.7. Assignor's Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 10.8. Termination; Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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Page ---- 10.9. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 10.13. Additional Assignors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ANNEX A Schedule of Chief Executive Offices/Record Locations ANNEX B Schedule of Inventory and Equipment Locations ANNEX C Schedule of Trade and Fictitious Names ANNEX D Schedule of Marks ANNEX E Schedule of Patents ANNEX F Schedule of Copyrights ANNEX G Form of Assignment of Security Interest in Certain United States Trademarks and Patents ANNEX H Form of Assignment of Security Interest in United States Copyrights
(iii) 252 EXHIBIT H SECURITY AGREEMENT SECURITY AGREEMENT, dated as of November __, 1996, made by each of the undersigned assignors (each an "Assignor" and, together with any other entity that becomes an assignor hereunder pursuant to Section 10.13 hereof, the "Assignors") in favor of The Bank of Nova Scotia, as Collateral Administrative Agent (the "Collateral Administrative Agent"), for the benefit of the Secured Creditors (as defined below). Except as otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as so defined. W I T N E S S E T H : WHEREAS, Doubletree Corporation, the lenders party from time to time party thereto (the "Banks"), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger (the "Syndication Agent"), and The Bank of Nova Scotia, as Administrative Agent (together with any successor administrative agent, the "Administrative Agent"), have entered into a Credit Agreement, dated as of November __, 1996, providing for the making of Loans and the issuance of, and participations in, Letters of Credit as contemplated therein (as amended, modified or supplemented from time to time, the "Credit Agreement") (the Banks, the Administrative Agent, the Syndication Agent and the Collateral Administrative Agent are herein called the "Bank Creditors"); WHEREAS, the Borrower and one or more of its Subsidiaries may at any time and from time to time enter into one or more Interest Rate Protection Agreements or Other Hedging Agreements with one or more Banks or any affiliate thereof (each such Bank or affiliate, even if the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason, together with such Bank's or affiliate's successors and assigns, if any, collectively, the "Other Creditors," and together with the Bank Creditors, are herein called the "Secured Creditors"); WHEREAS, pursuant to the Subsidiaries Guaranty, each Subsidiary Guarantor has jointly and severally guaranteed to the Secured Creditors the payment when due of all Guaranteed Obligations as described therein; 253 EXHIBIT H Page 2 WHEREAS, it is a condition precedent to the making of Loans and the issuance of Letters of Credit under the Credit Agreement that each Assignor shall have executed and delivered to the Collateral Administrative Agent this Agreement; WHEREAS, each Assignor will obtain benefits from the incurrence of Loans and the issuance of Letters of Credit under the Credit Agreement and the entering into of Interest Rate Protection Agreements as Other Hedging Agreements and, accordingly, each Assignor desires to enter into this Agreement in order to satisfy the condition described in the preceding paragraph; NOW, THEREFORE, in consideration of the benefits accruing to each Assignor, the receipt and sufficiency of which are hereby acknowledged, each Assignor hereby makes the following representations and warranties to the Collateral Administrative Agent for the benefit of the Secured Creditors and hereby covenants and agrees with the Collateral Administrative Agent for the benefit of the Secured Creditors as follows: ARTICLE I SECURITY INTERESTS 1.1. Grant of Security Interests. (a) As security for the prompt and complete payment and performance when due of all of its Obligations, each Assignor does hereby assign and transfer unto the Collateral Administrative Agent, and does hereby pledge and grant to the Collateral Administrative Agent for the benefit of the Secured Creditors, a continuing security interest in, all of the right, title and interest of such Assignor in, to and under all of the following, whether now existing or hereafter from time to time acquired: (i) each and every Receivable, (ii) all Contracts, together with all Contract Rights arising thereunder, (iii) all Inventory, (iv) all Equipment, (v) all Marks, together with the registrations and right to all renewals thereof, and the goodwill of the business of such Assignor symbolized by the Marks, (vi) all Patents and Copyrights, (vii) all computer programs of such Assignor and all intellectual property rights therein and all other proprietary information of such Assignor, including, but not limited to, Trade Secret Rights, (viii) all other Goods, General Intangibles, Permits, Chattel Paper, Documents and Instruments, (ix) the Cash Collateral Account and all monies, securities, instruments and other Cash Equivalents deposited or required to be deposited in such Cash Collateral Account, (x) all revenues, receipts, income, accounts, and other Receivables derived or to be derived from the ownership or operation of any Hotel Property and related facilities located thereon, 254 EXHIBIT H Page 3 including, without limitation of the generality of the foregoing, all room revenues and room charges and charges for hotel services (including advance deposits therefor) and other revenues and income derived or to be derived from the sale or rental of hotel rooms and meeting rooms, the provision of hotel services, the sale of food, beverages and merchandise, the rental of shops, leasing of commercial or residential spaces, the granting of concessions (including taxi concessions and concessions for the installation of coin-operated machines to the extent of such Assignor's interest therein) within or about any Hotel Property and related facilities, the rental or operation of travel desks, the rental or operation of parking facilities and the provision of services to guests of any Hotel Property and related facilities located thereon and any other items of revenue, receipts or other income, (xi) all books and records of each Assignor with respect to any and all of the foregoing and (xii) all Proceeds and products of any and all of the foregoing (all of each Assignor's right, title and interest in the above, collectively, the "Collateral"). (b) Notwithstanding any thing to the contrary contained in clause (a) above, the Collateral shall not include any asset that any Assignor owns, as agent, for the benefit of a third party (other than a Subsidiary of such Assignor) rather than for its own benefit. (c) The security interest of the Collateral Administrative Agent under this Agreement extends to all Collateral of the kind which is the subject of this Agreement which any Assignor may acquire at any time during the term of this Agreement. 1.2. Power of Attorney. Each Assignor hereby constitutes and appoints the Collateral Administrative Agent its true and lawful attorney, irrevocably, with full power after the occurrence of and during the continuance of an Event of Default (in the name of such Assignor or otherwise) to act, require, demand, receive, compound and give acquittance for any and all moneys and claims for moneys due or to become due to such Assignor under or arising out of the Collateral, to endorse any checks or other instruments or orders in connection therewith and to file any claims or take any action or institute any proceedings which the Collateral Administrative Agent may deem to be necessary or advisable to protect the interests of the Secured Creditors, which appointment as attorney is coupled with an interest. 255 EXHIBIT H Page 4 ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS Each Assignor represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: 2.1. Necessary Filings. All filings, registrations and recordings necessary or appropriate to create, preserve and perfect the security interest granted by such Assignor to the Collateral Administrative Agent hereby in respect of the Collateral have been accomplished and the security interest granted to the Collateral Administrative Agent pursuant to this Agreement in and to the Collateral creates a perfected security interest therein subject to no other Liens (other than Permitted Liens) and is entitled to all the rights, priorities and benefits afforded by the Uniform Commercial Code or other relevant law as enacted in any relevant jurisdiction to perfected security interests, in each case to the extent that the Collateral consists of the type of property in which a security interest may be perfected by filing a financing statement under the Uniform Commercial Code as enacted in any relevant jurisdiction or in the United States Patent and Trademark Office or in the United States Copyright Office. 2.2. No Liens. Such Assignor is, and as to Collateral acquired by it from time to time after the date hereof such Assignor will be, the owner of all Collateral free from any Lien, security interest, encumbrance or other right, title or interest of any Person (other than Permitted Liens), and such Assignor shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Collateral Administrative Agent. 2.3. Other Financing Statements. As of the date hereof, there is no financing statement (or similar statement or instrument of registration under the law of any jurisdiction) covering or purporting to cover any interest of any kind in the Collateral (other than financing statements filed in respect of Permitted Liens), and so long as the Termination Date has not occurred, such Assignor will not execute or authorize to be filed in any public office any financing statement (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to the Collateral, except financing statements filed or to be filed in respect of and covering the security interests granted hereby by such Assignor or in connection with Permitted Liens. 256 EXHIBIT H Page 5 2.4. Chief Executive Office; Records. The chief executive office of such Assignor is located at the address indicated on Annex A hereto for such Assignor. Such Assignor will not move its chief executive office except to such new location as such Assignor may establish in accordance with the last sentence of this Section 2.4. The originals of all documents evidencing all Receivables and Contract Rights of such Assignor and the only original books of account and records of such Assignor relating thereto are, and will continue to be, kept at such chief executive office, at one or more of the other locations set forth on Annex A hereto or at such new locations as such Assignor may establish in accordance with the last sentence of this Section 2.4. All Receivables and Contract Rights of such Assignor are, and will continue to be, maintained at, and controlled and directed (including, without limitation, for general accounting purposes) from, the office locations described above or such new location established in accordance with the last sentence of this Section 2.4. No Assignor shall establish new locations for such offices until (i) it shall have given to the Collateral Administrative Agent not less than 15 days' prior written notice of its intention to do so, clearly describing such new location and providing such other information in connection therewith as the Collateral Administrative Agent may reasonably request, (ii) with respect to such new location, it shall have taken all action, reasonably satisfactory to the Collateral Administrative Agent, to maintain the security interest of the Collateral Administrative Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. 2.5. Location of Inventory and Equipment. All Inventory and Equipment held on the date hereof by each Assignor is located at one of the locations shown on Annex B hereto for such Assignor. Each Assignor agrees that all Inventory and Equipment now held or subsequently acquired by it shall be kept at (or shall be in transport to) any one of the locations shown on Annex B hereto, or such new location as such Assignor may establish in accordance with the last sentence of this Section 2.5. Any Assignor may establish a new location for Inventory and Equipment only if (i) it shall have given to the Collateral Administrative Agent not less than 15 days' prior written notice of its intention so to do, clearly describing such new location and providing such other information in connection therewith as the Collateral Administrative Agent may request, (ii) with respect to such new location, it shall have taken all action reasonably satisfactory to the Collateral Administrative Agent to maintain the security interest of the Collateral Administrative Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. 2.6. Recourse. This Agreement is made with full recourse to each Assignor (including, without limitation, with full recourse to all assets of such Assignor) and pursuant to and upon all the warranties, representations, covenants and agreements on the part of 257 EXHIBIT H Page 6 such Assignor contained herein, in the other Secured Debt Agreements and otherwise in writing in connection herewith or therewith. 2.7. Trade Names; Change of Name. No Assignor has or operates in any jurisdiction under, or in the preceding 12 months has had or has operated in any jurisdiction under, any trade names, fictitious names or other names except its legal name and such other trade or fictitious names as are listed on Annex E hereto for such Assignor. No Assignor shall change its legal name or assume or operate in any jurisdiction under any trade, fictitious or other name except those names listed on Annex C hereto for such Assignor and new names established in accordance with the last sentence of this Section 2.7. No Assignor shall assume or operate in any jurisdiction under any new trade, fictitious or other name until (i) it shall have given to the Collateral Administrative Agent not less than 15 days' prior written notice of its intention so to do, clearly describing such new name and the jurisdictions in which such new name shall be used and providing such other information in connection therewith as the Collateral Administrative Agent may reasonably request, (ii) with respect to such new name, it shall have taken all action reasonably requested by the Collateral Administrative Agent to maintain the security interest of the Collateral Administrative Agent in the Collateral intended to be granted hereby at all times fully perfected and in full force and effect. ARTICLE III SPECIAL PROVISIONS CONCERNING RECEIVABLES; CONTRACT RIGHTS; INSTRUMENTS; CHATTEL PAPER 3.1. Additional Representations and Warranties. As of the time when each of its Receivables arises, each Assignor shall be deemed to have represented and warranted that such Receivable, and all records, papers and documents relating thereto (if any) are what they purport to be, and such Receivable will evidence true and valid obligations of the account debtor named therein. 3.2. Maintenance of Records. Each Assignor will keep and maintain at its own cost and expense accurate records of its Receivables and Contracts, including, but not limited to, originals or copies of all documentation (including each Contract) with respect thereto, records of all payments received, all credits granted thereon, all merchandise returned and all other dealings therewith, and such Assignor will make the same available on such Assignor's premises to the Collateral Administrative Agent for inspection, at such Assignor's own cost and expense, at any and all reasonable times upon prior notice to such 258 EXHIBIT H Page 7 Assignor. Upon the occurrence and during the continuance of an Event of Default and at the request of the Collateral Administrative Agent, such Assignor shall, at its own cost and expense, deliver all tangible evidence of its Receivables and Contract Rights (including, without limitation, all documents evidencing the Receivables and all Contracts) and such books and records to the Collateral Administrative Agent or to its representatives (copies of which evidence and books and records may be retained by such Assignor). Upon the occurrence and during the continuance of an Event of Default and if the Collateral Administrative Agent so directs, such Assignor shall legend, in form and manner satisfactory to the Collateral Administrative Agent, the Receivables and the Contracts, as well as books, records and documents (if any) of such Assignor evidencing or pertaining to such Receivables and Contracts with an appropriate reference to the fact that such Receivables and Contracts have been assigned to the Collateral Administrative Agent and that the Collateral Administrative Agent has a security interest therein. 3.3. Direction to Account Debtors; Contracting Parties; etc. Upon the occurrence and during the continuance of an Event of Default, and if the Collateral Administrative Agent so directs any Assignor, such Assignor agrees (x) to cause all payments on account of the Receivables and Contracts to be made directly to the Cash Collateral Account, (y) that the Collateral Administrative Agent may, at its option, directly notify the obligors with respect to any Receivables and/or under any Contracts to make payments with respect thereto as provided in the preceding clause (x) and (z) that the Collateral Administrative Agent may enforce collection of any such Receivables and Contracts and may adjust, settle or compromise the amount of payment thereof, in the same manner and to the same extent as such Assignor. Without notice to or assent by any Assignor, the Collateral Administrative Agent may apply any or all amounts then in, or thereafter deposited in, the Cash Collateral Account which application shall be effected in the manner provided in Section 7.4 of this Agreement. The costs and expenses (including reasonable attorneys' fees) of collection, whether incurred by an Assignor or the Collateral Administrative Agent, shall be borne by the relevant Assignor. The Collateral Administrative Agent shall deliver a copy of each notice referred to in the preceding clause (y) to the relevant Assignor (although no such notice shall be required upon the occurrence of an Event of Default of the type described in Section 10.05 of the Credit Agreement). 3.4. Modification of Terms; etc. Except in accordance with such Assignor's ordinary course of business, no Assignor shall rescind or cancel any indebtedness evidenced by any Receivable or under any Contract, or modify any term thereof or make any adjustment with respect thereto, or extend or renew the same, or compromise or settle any material dispute, claim, suit or legal proceeding relating thereto, or sell any Receivable or Contract, or interest therein, without the prior written consent of 259 EXHIBIT H Page 8 the Collateral Administrative Agent. Each Assignor will duly fulfill all obligations on its part to be fulfilled under or in connection with the Receivables and Contracts (except to the extent that the failure to so perform, either individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole) and will do nothing to impair the security interest of the Collateral Administrative Agent in the Receivables or Contracts. 3.5. Collection. Each Assignor shall endeavor in accordance with reasonable business practices to cause to be collected from the account debtor named in each of its Receivables or obligor under any Contract, as and when due (including, without limitation, amounts which are delinquent, such amounts to be collected in accordance with generally accepted lawful collection procedures) any and all amounts owing under or on account of such Receivable or Contract, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Receivable or under such Contract, except that, prior to the occurrence of an Event of Default, any Assignor may allow in the ordinary course of business adjustments to amounts owing under its Receivables and Contracts. The reasonable costs and expenses (including, without limitation, reasonable attorneys' fees) of collection, whether incurred by an Assignor or the Collateral Administrative Agent, shall be borne by the relevant Assignor. 3.6. Instruments. If any Assignor owns or acquires any Instruments constituting Collateral and having a face value of $1,000,000 or greater, such Assignor will within 10 Business Days notify the Collateral Administrative Agent thereof, and upon request by the Collateral Administrative Agent will promptly deliver such Instrument (other than checks payable to any Assignor and processed in the ordinary course of business) to the Collateral Administrative Agent appropriately endorsed to the order of the Collateral Administrative Agent as further security hereunder. 3.7. Assignors Remain Liable Under Receivables. Anything herein to the contrary notwithstanding, the Assignors shall remain liable under each of the Receivables to observe and perform all of the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to such Receivables. Neither the Collateral Administrative Agent nor any other Secured Creditor shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Collateral Administrative Agent or any other Secured Creditor of any payment relating to such Receivable pursuant hereto, nor shall the Collateral Administrative Agent or any other Secured Creditor be obligated in any manner to perform any of the obligations of any 260 EXHIBIT H Page 9 Assignor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by them or as to the sufficiency of any performance by any party under any Receivable (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to them or to which they may be entitled at any time or times. 3.8. Assignors Remain Liable Under Contracts. Anything herein to the contrary notwithstanding, the Assignors shall remain liable under each of the Contracts to observe and perform all of the conditions and obligations to be observed and performed by them thereunder, all in accordance with and pursuant to the terms and provisions of each Contract. Neither the Collateral Administrative Agent nor any other Secured Creditor shall have any obligation or liability under any Contract by reason of or arising out of this Agreement or the receipt by the Collateral Administrative Agent or any other Secured Creditor of any payment relating to such contract pursuant hereto, nor shall the Collateral Administrative Agent or any other Secured Creditor be obligated in any manner to perform any of the obligations of any Assignor under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any performance by any party under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to them or to which they may be entitled at any time or times. 3.9. Further Actions. Each Assignor will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Administrative Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, certificates, reports and other assurances or instruments and take such further steps relating to its Receivables, Contracts, Instruments and other property or rights covered by the security interest hereby granted, as the Collateral Administrative Agent may reasonably require. ARTICLE IV SPECIAL PROVISIONS CONCERNING TRADEMARKS 4.1. Additional Representations and Warranties. Each Assignor represents and warrants that it is the true and lawful owner of or otherwise has the right to use the registered Marks listed in Annex D hereto for such Assignor and that said listed Marks include all material United States marks and applications for United States marks registered in the United States Patent and Trademark Office that such Assignor owns or uses in connection with its business as of the date hereof. Each Assignor represents and warrants 261 EXHIBIT H Page 10 that it owns, is licensed to use or otherwise has the right to use all material Marks that it uses. Each Assignor further warrants that it has no knowledge of any third party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any trademark, service mark or trade name (other than such infringements which, either individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole). Each Assignor represents and warrants that it is the true and lawful owner of or otherwise has the right to use all U.S. trademark registrations and applications listed in Annex D hereto and that said registrations are valid, subsisting, have not been cancelled and that such Assignor is not aware of any third-party claim that any of said registrations is invalid or unenforceable, or is not aware that there is any reason that any of said registrations is invalid or unenforceable, or is not aware that there is any reason that any of said material applications will not pass to registration. Each Assignor hereby grants to the Collateral Administrative Agent an absolute power of attorney to sign, upon the occurrence and during the continuance of an Event of Default, any document which may be required by the United States Patent and Trademark Office in order to effect an absolute assignment of all right, title and interest in each Mark, and record the same. 4.2. Licenses and Assignments. Except as otherwise permitted by the Secured Debt Agreements, each Assignor hereby agrees not to divest itself of any right under any Mark acquired after the date hereof absent prior written approval of the Collateral Administrative Agent. 4.3. Infringements. Each Assignor agrees, promptly upon learning thereof, to notify the Collateral Administrative Agent in writing of the name and address of, and to furnish such pertinent information that may be available with respect to, any party who such Assignor believes is infringing or diluting or otherwise violating in any material respect any of such Assignor's rights in and to any material Mark, or with respect to any party claiming that such Assignor's use of any material Mark violates in any material respect any property right of that party. Each Assignor further agrees, unless otherwise agreed by the Collateral Administrative Agent, to prosecute any Person infringing any Mark in accordance with reasonable business practices. 4.4. Preservation of Marks. Each Assignor agrees to use its Marks in interstate commerce during the time in which this Agreement is in effect and to take all such other actions as are necessary to preserve such Marks as trademarks or service marks under the laws of the United States; provided, that no Assignor shall be obligated to preserve any such Mark in the event such Assignor determines, in its reasonable business 262 EXHIBIT H Page 11 judgment, that the preservation of such Mark is no longer desirable in the conduct of its business. 4.5. Maintenance of Registration. Each Assignor shall, at its own expense, diligently process all documents required to maintain trademark registrations, including but not limited to affidavits of use and applications for renewals of registration in the United States Patent and Trademark Office for all of its registered Marks, and shall pay all fees and disbursements in connection therewith and shall not abandon any such filing of affidavit of use or any such application of renewal prior to the exhaustion of all administrative and judicial remedies without prior written consent of the Collateral Administrative Agent; provided, that no Assignor shall be obligated to maintain any Mark in the event that such Assignor determines, in its reasonable business judgment, that the maintenance of such Mark is no longer necessary or material to or desirable in the conduct of its business. 4.6. Future Registered Marks. If any Mark registration is issued hereafter to any Assignor as a result of any application now or hereafter pending before the United States Patent and Trademark Office, within 30 days of receipt of such certificate, such Assignor shall deliver to the Collateral Administrative Agent a copy of such certificate, and an assignment for security in such Mark, to the Collateral Administrative Agent and at the expense of such Assignor, confirming the assignment for security in such Mark to the Collateral Administrative Agent hereunder, the form of such security to be substantially the same as the form hereof or in such other form as may be reasonably satisfactory to the Collateral Administrative Agent. 4.7. Remedies. If an Event of Default shall occur and be continuing, the Collateral Administrative Agent may, by written notice to the relevant Assignor, take any or all of the following actions: (i) declare the entire right, title and interest of such Assignor in and to each of the Marks, together with all trademark rights and rights of protection to the same, vested in the Collateral Administrative Agent for the benefit of the Secured Creditors, in which event such rights, title and interest shall immediately vest, in the Collateral Administrative Agent for the benefit of the Secured Creditors, and the Collateral Administrative Agent shall be entitled to exercise the power of attorney referred to in Section 4.1 hereof to execute, cause to be acknowledged and notarized and record said absolute assignment with the applicable agency; (ii) take and use or sell the Marks and the goodwill of such Assignor's business symbolized by the Marks and the right to carry on the business and use the assets of such Assignor in connection with which the Marks have been used; and (iii) direct such Assignor to refrain, in which event such Assignor shall refrain, from using the Marks in any manner whatsoever, directly or indirectly, and such Assignor shall execute such further documents that the Collateral Administrative Agent may 263 EXHIBIT H Page 12 reasonably request to further confirm this and to transfer ownership of the Marks and registrations and any pending trademark application in the United States Patent and Trademark Office to the Collateral Administrative Agent. ARTICLE V SPECIAL PROVISIONS CONCERNING PATENTS, COPYRIGHTS AND TRADE SECRETS 5.1. Additional Representations and Warranties. Each Assignor represents and warrants that it is the true and lawful owner of all rights in (i) all United States trade secrets and proprietary information necessary to operate the business of the Assignor (the "Trade Secret Rights"), (ii) the Patents listed in Annex E hereto for such Assignor and that said Patents include all the material United States patents and applications for United States patents that such Assignor owns as of the date hereof and (iii) the Copyrights listed in Annex F hereto for such Assignor and that said Copyrights constitute all the material United States copyrights registered with the United States Copyright Office and applications to United States copyrights that such Assignor owns as of the date hereof. Each Assignor further warrants that it has no knowledge of any third party claim that any aspect of such Assignor's present or contemplated business operations infringes or will infringe any patent or such Assignor has misappropriated any trade secret or proprietary information (other than such infringements which, either individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole). Each Assignor hereby grants to the Collateral Administrative Agent an absolute power of attorney to sign, upon the occurrence and during the continuance of any Event of Default, any document which may be required by the United States Patent and Trademark Office in order to effect an absolute assignment of all right, title and interest in each Patent, and to record the same. 5.2. Licenses and Assignments. Except as otherwise permitted by the Secured Debt Agreements, each Assignor hereby agrees not to divest itself of any right under any Patent or Copyright acquired after the date hereof absent prior written approval of the Collateral Administrative Agent. 5.3. Infringements. Each Assignor agrees, promptly upon learning thereof, to furnish the Collateral Administrative Agent in writing with all pertinent information available to such Assignor with respect to any infringement, contributing infringement or 264 EXHIBIT H Page 13 active inducement to infringe in any material Patent or material Copyright or to any claim that the practice of any material Patent or use of any material Copyright violates any property right of a third party, or with respect to any misappropriation of any Trade Secret Right or any claim that practice of any Trade Secret Right violates any property right of a third party. Each Assignor further agrees, absent direction of the Collateral Administrative Agent to the contrary, diligently to prosecute any Person infringing any Patent or Copyright or any Person misappropriating any Trade Secret Right in accordance with such Assignor's reasonable business judgment; provided, that any litigation in connection with any such infringement shall be commenced, prosecuted or settled in accordance with such Assignor's reasonable business judgment. 5.4. Maintenance of Patents or Copyright. At its own expense, each Assignor shall make timely payment of all post-issuance fees required to maintain in force rights under each Patent or Copyright, absent prior written consent of the Collateral Administrative Agent. 5.5. Prosecution of Patent Applications. At its own expense, each Assignor shall, except as otherwise permitted by the Credit Agreement, diligently prosecute all applications for (i) United States Patents listed in Annex E hereto and (ii) Copyrights listed on Annex F hereto, in each case for such Assignor and shall not abandon any such application prior to exhaustion of all administrative and judicial remedies, absent written consent of the Collateral Administrative Agent. 5.6. Other Patents and Copyrights. Within 30 days of the acquisition or issuance of a United States Patent, registration of a Copyright, or acquisition of a registered copyright, or of filing of an application for a United States Patent or Copyright, the relevant Assignor shall deliver to the Collateral Administrative Agent a copy of said Copyright or certificate or registration of, or application therefor, said patents, as the case may be, with an assignment for security as to such Patent or Copyright, as the case may be, to the Collateral Administrative Agent and at the expense of such Assignor, confirming the assignment for security, the form of such assignment for security to be substantially the same as the form hereof or in such other form as may be reasonably satisfactory to the Collateral Administrative Agent. 5.7. Remedies. If an Event of Default shall occur and be continuing, the Collateral Administrative Agent may by written notice to the relevant Assignor, take any or all of the following actions: (i) declare the entire right, title, and interest of such Assignor in each of the Patents and Copyrights vested in the Collateral Administrative Agent for the benefit of the Secured Creditors, in which event such right, title, and interest shall 265 EXHIBIT H Page 14 immediately vest in the Collateral Administrative Agent for the benefit of the Secured Creditors, in which case the Collateral Administrative Agent shall be entitled to exercise the power of attorney referred to in Section 5.1 hereof to execute, cause to be acknowledged and notarized and to record said absolute assignment with the applicable agency; (ii) take and practice or sell the Patents and Copyrights; and (iii) direct such Assignor to refrain, in which event such Assignor shall refrain, from practicing the Patents and using the Copyrights directly or indirectly, and such Assignor shall execute such further documents as the Collateral Administrative Agent may reasonably request further to confirm this and to transfer ownership of the Patents and Copyrights to the Collateral Administrative Agent for the benefit of the Secured Creditors. ARTICLE VI PROVISIONS CONCERNING ALL COLLATERAL 6.1. Protection of Collateral Administrative Agent's Security. Each Assignor will do nothing to impair the rights of the Collateral Administrative Agent in the Collateral. Each Assignor will at all times keep its Inventory and Equipment insured in favor of the Collateral Administrative Agent, at such Assignor's own expense to the extent and in the manner provided in the Credit Agreement. Except to the extent otherwise permitted to be retained by such Assignor or applied by such Assignor pursuant to the terms of the Credit Agreement, the Collateral Administrative Agent shall, at the time any proceeds of such insurance are distributed to the Secured Creditors, apply such proceeds in accordance with Section 7.4 hereof. Each Assignor assumes all liability and responsibility in connection with the Collateral acquired by it and the liability of such Assignor to pay the Obligations shall in no way be affected or diminished by reason of the fact that such Collateral may be lost, destroyed, stolen, damaged or for any reason whatsoever unavailable to such Assignor. 6.2. Further Actions. Each Assignor will, at its own expense and upon the request of the Collateral Administrative Agent, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Administrative Agent from time to time such lists, descriptions and designations of its Collateral, warehouse receipts, receipts in the nature of warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral and other property or rights covered by the security interest hereby 266 EXHIBIT H Page 15 granted, which the Collateral Administrative Agent deems reasonably appropriate or advisable to perfect, preserve or protect its security interest in the Collateral. 6.3. Financing Statements. Each Assignor agrees to execute and deliver to the Collateral Administrative Agent such financing statements, in form reasonably acceptable to the Collateral Administrative Agent, as the Collateral Administrative Agent may from time to time reasonably request or as are necessary or desirable in the opinion of the Collateral Administrative Agent to establish and maintain a valid, enforceable, first priority perfected security interest in the Collateral as provided herein and the other rights and security contemplated hereby all in accordance with the UCC as enacted in any and all relevant jurisdictions or any other relevant law. Each Assignor will pay any applicable filing fees, recordation taxes and related expenses relating to its Collateral. Each Assignor hereby authorizes the Collateral Administrative Agent to file any such financing statements without the signature of such Assignor where permitted by law. ARTICLE VII REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT 7.1. Remedies; Obtaining the Collateral Upon Default. Each Assignor agrees that, if any Event of Default shall have occurred and be continuing, then and in every such case, the Collateral Administrative Agent, in addition to any rights now or hereafter existing under applicable law, shall have all rights as a secured creditor under any UCC, and such additional rights and remedies to which a secured creditor is entitled under the laws in effect, in all relevant jurisdictions and may: (i) personally, or by agents or attorneys, immediately take possession of the Collateral or any part thereof, from such Assignor or any other Person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon such Assignor's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of such Assignor; (ii) instruct the obligor or obligors on any agreement, instrument or other obligation (including, without limitation, the Receivables and the Contracts) constituting the Collateral to make any payment required by the terms of such agreement, instrument or other obligation directly to the Collateral Administrative Agent and may exercise any and all remedies of such Assignor in respect of such Collateral; 267 EXHIBIT H Page 16 (iii) withdraw all monies, securities and instruments in the Cash Collateral Account for application to the Obligations in accordance with Section 7.4 hereof; (iv) sell, assign or otherwise liquidate any or all of the Collateral or any part thereof in accordance with Section 7.2 hereof, or direct the relevant Assignor to sell, assign or otherwise liquidate any or all of the Collateral or any part thereof, and, in each case, take possession of the proceeds of any such sale or liquidation; (v) take possession of the Collateral or any part thereof, by directing the relevant Assignor in writing to deliver the same to the Collateral Administrative Agent at any place or places designated by the Collateral Administrative Agent, in which event such Assignor shall at its own expense: (x) forthwith cause the same to be moved to the place or places so designated by the Collateral Administrative Agent and there delivered to the Collateral Administrative Agent; (y) store and keep any Collateral so delivered to the Collateral Administrative Agent at such place or places pending further action by the Collateral Administrative Agent as provided in Section 7.2 hereof; and (z) while the Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain them in good condition; and (vi) license or sublicense, whether on an exclusive or nonexclusive basis, any Marks, Patents or Copyrights included in the Collateral for such term and on such conditions and in such manner as the Collateral Administrative Agent shall in its sole judgment determine; it being understood that each Assignor's obligation so to deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Collateral Administrative Agent shall be entitled to a decree requiring specific performance by such Assignor of said obligation. By accepting the benefits of this Agreement, the Secured Creditors agree that this Agreement may be enforced only by the action of the Collateral Administrative Agent acting upon the instructions of the Required Secured Creditors and that no other Secured Creditor shall have any right individually to seek to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be 268 EXHIBIT H Page 17 exercised by the Collateral Administrative Agent for the benefit of the Secured Creditors upon the terms of this Agreement and the Credit Agreement. 7.2. Remedies; Disposition of the Collateral. Any Collateral repossessed by the Collateral Administrative Agent under or pursuant to Section 7.1 hereof and any other Collateral whether or not so repossessed by the Collateral Administrative Agent, may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale the property to be sold, and in general in such manner, at such time or times, at such place or places and on such terms as the Collateral Administrative Agent may, in compliance with any mandatory requirements of applicable law, determine to be commercially reasonable. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Collateral Administrative Agent or after any overhaul or repair at the expense of the relevant Assignor which the Collateral Administrative Agent shall determine to be commercially reasonable. Any such disposition which shall be a private sale or other private proceedings permitted by such requirements shall be made upon not less than 10 days' prior written notice to the relevant Assignor specifying the time at which such disposition is to be made and the intended sale price or other consideration therefor, and shall be subject, for the 10 days after the giving of such notice, to the right of the relevant Assignor or any nominee of such Assignor to acquire the Collateral involved at a price or for such other consideration at least equal to the intended sale price or other consideration so specified. Any such disposition which shall be a public sale permitted by such requirements shall be made upon not less than 10 days' prior written notice to the relevant Assignor specifying the time and place of such sale and, in the absence of applicable requirements of law, shall be by public auction (which may, at the Collateral Administrative Agent's option, be subject to reserve), after publication of notice of such auction (where required by applicable law) not less than 10 days prior thereto. The Collateral Administrative Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the sale may be so adjourned. To the extent permitted by any such requirement of law, the Collateral Administrative Agent may bid for and become the purchaser of the Collateral or any item thereof, offered for sale in accordance with this Section without accountability to the relevant Assignor. If, under mandatory requirements of applicable law, the Collateral Administrative Agent shall be required to make disposition of the Collateral within a period of time which does not permit the giving of notice to the relevant Assignor as hereinabove specified, the Collateral Administrative Agent need give such Assignor only such notice of disposition as shall be reasonably practicable in view of such mandatory requirements of applicable law. Each Assignor agrees to do or cause to be done all such other acts and 269 EXHIBIT H Page 18 things as may be reasonably necessary to make such sale or sales of all or any portion of the Collateral valid and binding and in compliance with any and all applicable laws, regulations, orders, writs, injunctions, decrees or awards of any and all courts, arbitrators or governmental instrumentalities, domestic or foreign, having jurisdiction over any such sale or sales, all at such Assignor's expense. 7.3. Waiver of Claims. Except as otherwise provided in this Agreement. EACH ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL ADMINISTRATIVE AGENT'S TAKING POSSESSION OR THE COLLATERAL ADMINISTRATIVE AGENT'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES, and each Assignor hereby further waives, to the extent permitted by law: (i) all damages occasioned by such taking of possession except any damages which are the direct result of the Collateral Administrative Agent's gross negligence or willful misconduct; (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Collateral Administrative Agent's rights hereunder; and (iii) all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Agreement or the absolute sale of the Collateral or any portion thereof, and each Assignor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws. Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the relevant Assignor therein and thereto, and shall be a perpetual bar both at law and in equity against such Assignor and against any and all Persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under such Assignor. 7.4. Application of Proceeds. (a) All moneys collected by the Collateral Administrative Agent (or, to the extent the Pledge Agreement, any Mortgage or any 270 EXHIBIT H Page 19 Additional Security Document require proceeds of collateral under such Security Document to be applied in accordance with the provisions of this Agreement, the Pledgee or Mortgagee under such other Security Document) upon any sale or other disposition of the Collateral, together with all other moneys received by the Collateral Administrative Agent hereunder, shall be applied as follows. (i) first, to the payment of all amounts owing the Collateral Administrative Agent of the type described in clauses (iii) and (iv) of the definition of "Obligations"; (ii) second, to the extent proceeds remain after the application pursuant to the preceding clause (i), an amount equal to the outstanding Primary Obligations shall be paid to the Secured Creditors as provided in Section 7.4(e) hereof, with each Secured Creditor receiving an amount equal to such outstanding Primary Obligations or, if the proceeds are insufficient to pay in full all such Primary Obligations, its Pro Rata Share of the amount remaining to be distributed; (iii) third, to the extent proceeds remain after the application pursuant to the preceding clauses (i) and (ii), an amount equal to the outstanding Secondary Obligations shall be paid to the Secured Creditors as provided in Section 7.4(e) hereof, with each Secured Creditor receiving an amount equal to its outstanding Secondary Obligations or, if the proceeds are insufficient to pay in full all such Secondary Obligations, its Pro Rata Share of the amount remaining to be distributed; and (iv) fourth, to the extent proceeds remain after the application pursuant to the preceding clauses (i) through (iii), inclusive, and following the termination of this Agreement pursuant to Section 10.8(a) hereof, to the relevant Assignor or to whomever may be lawfully entitled to receive such surplus. (b) For purposes of this Agreement (x) "Pro Rata Share" shall mean, when calculating a Secured Creditor's portion of any distribution or amount, that amount (expressed as a percentage) equal to a fraction the numerator of which is the then unpaid amount of such Secured Creditor's Primary Obligations or Secondary Obligations, as the case may be, and the denominator of which is the then outstanding amount of all Primary Obligations or Secondary Obligations, as the case may be, (y) "Primary Obligations" shall mean (i) in the case of the Credit Agreement Obligations, all principal of, and interest on, all Loans, all Unpaid Drawings and all Fees and (ii) in the case of the Other Obligations that are secured by this Agreement or any other Security Document, all amounts due under such Interest Rate Protection Agreements or Other Hedging Agreements (other than 271 EXHIBIT H Page 20 indemnities, fees (including, without limitation, attorneys' fees) and similar obligations and liabilities) and (z) "Secondary Obligations" shall mean all Obligations other than Primary Obligations. (c) When payments to Secured Creditors are based upon their respective Pro Rata Shares, the amounts received by such Secured Creditors hereunder shall be applied (for purposes of making determinations under this Section 7.4 only) (i) first, to their Primary Obligations and (ii) second, to their Secondary Obligations. If any payment to any Secured Creditor of its Pro Rata Share of any distribution would result in overpayment to such Secured Creditor, such excess amount shall instead be distributed in respect of the unpaid Primary Obligations or Secondary Obligations, as the case may be, of the other Secured Creditors, with each Secured Creditor whose Primary Obligations or Secondary Obligations, as the case may be, have not been paid in full to receive an amount equal to such excess amount multiplied by a fraction the numerator of which is the unpaid Primary Obligations or Secondary Obligations, as the case may be, of such Secured Creditor and the denominator of which is the unpaid Primary Obligations or Secondary Obligations, as the case may be, of all Secured Creditors entitled to such distribution. (d) Each of the Secured Creditors, by their acceptance of the benefits hereof, agrees and acknowledges that if the Bank Creditors are to receive a distribution on account of undrawn amounts with respect to Letters of Credit issued under the Credit Agreement (which shall only occur after all outstanding Loans and Unpaid Drawings with respect to such Letters of Credit have been paid in full), such amounts shall be paid to the Administrative Agent under the Credit Agreement and held by it, for the equal and ratable benefit of the Bank Creditors, as cash security for the repayment of Obligations owing to the Bank Creditors as such. If any amounts are held as cash security pursuant to the immediately preceding sentence, then upon the termination of all outstanding Letters of Credit, and after the application of all such cash security to the repayment of all Obligations owing to the Bank Creditors after giving effect to the termination of all such Letters of Credit, if there remains any excess cash, such excess cash shall be returned by the Administrative Agent to the Collateral Administrative Agent for distribution in accordance with Section 7.4(a) hereof. (e) All payments required to be made hereunder shall be made (x) if to the Bank Creditors, to the Administrative Agent under the Credit Agreement for the account of the Bank Creditors, and (y) if to the Other Creditors, to the trustee, paying agent or other similar representative (each a "Representative") for the Other Creditors or, in the absence of such a Representative, directly to the Other Creditors. 272 EXHIBIT H Page 21 (f) For purposes of applying payments received in accordance with this Section 7.4, the Collateral Administrative Agent shall be entitled to rely upon (i) the Administrative Agent under the Credit Agreement and (ii) the Representative for the Other Creditors or, in the absence of such a Representative, upon the Other Creditors for a determination (which the Administrative Agent, each Representative for any Other Creditors and the Secured Creditors agree (or shall agree) to provide upon request of the Collateral Administrative Agent) of the outstanding Primary Obligations and Secondary Obligations owed to the Bank Creditors or the Other Creditors, as the case may be. Unless it has actual knowledge (including by way of written notice from a Bank Creditor or an Other Creditor) to the contrary, the Administrative Agent and each Representative, in furnishing information pursuant to the preceding sentence, and the Collateral Administrative Agent, in acting hereunder, shall be entitled to assume that no Secondary Obligations are outstanding. Unless it has actual knowledge (including by way of written notice from an Other Creditor) to the contrary, the Collateral Administrative Agent, in acting hereunder, shall be entitled to assume that no Interest Rate Protection Agreements or Other Hedging Agreements are in existence. (g) It is understood that the Assignors shall remain jointly and severally liable to the extent of any deficiency between the amount of the proceeds of the Collateral and the aggregate amount of the Obligations. 7.5. Remedies Cumulative. Each and every right, power and remedy hereby specifically given to the Collateral Administrative Agent shall be in addition to every other right, power and remedy specifically given under this Agreement, the other Secured Debt Agreements or now or hereafter existing at law, in equity or by statute and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Collateral Administrative Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of the exercise of one shall not be deemed a waiver of the right to exercise any other or others. No delay or omission of the Collateral Administrative Agent in the exercise of any such right, power or remedy and no renewal or extension of any of the Obligations shall impair any such right, power or remedy or shall be construed to be a waiver of any Default or Event of Default or an acquiescence therein. No notice to or demand on any Assignor in any case shall entitle it to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Collateral Administrative Agent to any other or further action in any circumstances without notice or demand. In the event that the Collateral Administrative Agent shall bring any suit to enforce any of its rights hereunder and shall be entitled to judgment, then in such suit the Collateral Administrative Agent may recover 273 EXHIBIT H Page 22 reasonable expenses, including reasonable attorneys' fees, and the amounts thereof shall be included in such judgment. 7.6. Discontinuance of Proceedings. In case the Collateral Administrative Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Administrative Agent, then and in every such case the relevant Assignor, the Collateral Administrative Agent and each holder of any of the Obligations shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Collateral Administrative Agent shall continue as if no such proceeding had been instituted. ARTICLE VIII INDEMNITY 8.1. Indemnity. (a) Each Assignor jointly and severally agrees to indemnify, reimburse and hold the Collateral Administrative Agent, each other Secured Creditor and their respective successors, permitted assigns, employees, agents and servants (hereinafter in this Section 8.1 referred to individually as "Indemnitee," and collectively as "Indemnitees") harmless from any and all liabilities, obligations, damages, injuries, penalties, claims, demands, actions, suits, judgments and any and all costs, expenses or disbursements (including reasonable attorneys' fees and expenses) (for the purposes of this Section 8.1 the foregoing are collectively called "expenses") of whatsoever kind and nature imposed on, asserted against or incurred by any of the Indemnitees in any way relating to or arising out of this Agreement, any other Secured Debt Agreement or any other document executed in connection herewith or therewith or in any other way connected with the administration of the transactions contemplated hereby or thereby or the enforcement of any of the terms of, or the preservation of any rights under any thereof, or in any way relating to or arising out of the manufacture, ownership, ordering, purchase, delivery, control, acceptance, lease, financing, possession, operation, condition, sale, return or other disposition, or use of the Collateral (including, without limitation, latent or other defects, whether or not discoverable), the violation of the laws of any country, state or other governmental body or unit, any tort (including, without limitation, claims arising or imposed under the doctrine of strict liability, or for or on account of injury to or the death of any Person (including any Indemnitee), or property damage), or contract claim; provided that no Indemnitee shall be indemnified pursuant to this Section 8.1(a) for losses, damages 274 EXHIBIT H Page 23 or liabilities to the extent caused by the gross negligence or willful misconduct of such Indemnitee. Each Assignor agrees that upon written notice by any Indemnitee of the assertion of such a liability, obligation, damage, injury, penalty, claim, demand, action, suit or judgment, the relevant Assignor shall assume full responsibility for the defense thereof. Each Indemnitee agrees to use its best efforts to promptly notify the relevant Assignor of any such assertion of which such Indemnitee has knowledge. (b) Without limiting the application of Section 8.1(a) hereof, each Assignor agrees, jointly and severally, to pay, or reimburse the Collateral Administrative Agent for any and all reasonable fees, costs and expenses of whatever kind or nature incurred in connection with the creation, preservation or protection of the Collateral Administrative Agent's Liens on, and security interest in, the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or Liens upon or in respect of the Collateral, premiums for insurance with respect to the Collateral and all other fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Collateral Administrative Agent's interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral. (c) Without limiting the application of Section 8.1(a) or (b) hereof, each Assignor agrees, jointly and severally, to pay, indemnify and hold each Indemnitee harmless from and against any loss, costs, damages and expenses which such Indemnitee may suffer, expend or incur in consequence of or growing out of any misrepresentation by any Assignor in this Agreement, any Interest Rate Protection Agreement or Currency Hedging Agreement, any other Credit Document or in any writing contemplated by or made or delivered pursuant to or in connection with this Agreement, any Interest Rate Protection Agreement or Currency Hedging Agreement or any other Credit Document. (d) If and to the extent that the obligations of any Assignor under this Section 8.1 are unenforceable for any reason, such Assignor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 8.2. Indemnity Obligations Secured by Collateral; Survival. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Obligations secured by the Collateral. The indemnity obligations of each Assignor contained in this Article VIII shall continue in full force and effect notwithstanding the full payment of all of the other Obligations and notwithstanding the full 275 EXHIBIT H Page 24 payment of all the Notes issued under the Credit Agreement, the termination of all Interest Rate Protection Agreements or Other Hedging Agreements and the payment of all other Obligations and notwithstanding the discharge thereof. ARTICLE IX DEFINITIONS The following terms shall have the meanings herein specified. Such definitions shall be equally applicable to the singular and plural forms of the terms defined. "Administrative Agent" shall have the meaning provided in the recitals of this Agreement. "Agreement" shall mean this Security Agreement as the same may be modified, supplemented or amended from time to time in accordance with its terms. "Assignor" shall have the meaning provided in the first paragraph of this Agreement. "Bank Creditors" shall have the meaning provided in the recitals of this Agreement. "Banks" shall have the meaning provided in the recitals of this Agreement. "Borrower" shall have the meaning provided in the recitals of this Agreement. "Cash Collateral Account" shall mean a cash collateral account maintained with, and in the sole dominion and control of, the Collateral Administrative Agent for the benefit of the Secured Creditors. "Chattel Paper" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Class" shall have the meaning provided in Section 10.2 of this Agreement. 276 EXHIBIT H Page 25 "Collateral" shall have the meaning provided in Section 1.1(a) of this Agreement. "Collateral Administrative Agent" shall have the meaning provided in the first paragraph of this Agreement. "Contract Rights" shall mean all rights of any Assignor under each Contract, including, without limitation, (i) any and all rights to receive and demand payments under any or all Contracts, (ii) any and all rights to receive and compel performance under any or all Contracts and (iii) any and all other rights, interests and claims now existing or in the future arising in connection with any or all Contracts. "Contracts" shall mean all contracts, between any Assignor and one or more additional parties (including, without limitation, each Management Agreement, Joint Venture Agreement, partnership agreement, franchise agreement and any Interest Rate Protection Agreements or Other Hedging Agreements), but excluding any contract to the extent that the terms thereof prohibit (after giving effect to any approvals or waivers) the assignment of, or granting a security interest in, such contract (it being understood and agreed, however, that notwithstanding the foregoing, all rights to payment for money due or to become due pursuant to any such excluded contract shall be subject to the security interests created by this Agreement). "Copyrights" shall mean any United States copyright owned by any Assignor, including any registrations of any Copyrights, in the United States Copyright Office, as well as any application for a United States copyright registration now or hereafter made with the United States Copyright Office by any Assignor. "Credit Agreement" shall have the meaning provided in the recitals of this Agreement. "Credit Agreement Obligations" shall have the meaning provided in the definition of "Obligations" in this Article IX. "Default" shall mean any event which, with notice or lapse of time, or both, would constitute an Event of Default. "Documents" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. 277 EXHIBIT H Page 26 "Equipment" shall mean any "equipment," as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, now or hereafter owned by any Assignor and, in any event, shall include, but shall not be limited to, all machinery, equipment, furnishings, movable trade fixtures and vehicles now or hereafter owned by any Assignor and any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "Event of Default" shall mean any Event of Default under, and as defined in, the Credit Agreement and shall in any event, without limitation, include any payment default on any of the Other Obligations (to the extent secured hereby) after the expiration of any applicable grace period. "General Intangibles" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York and shall in any event include all of any Assignor's claims, rights, powers, privileges, authority, options, security interests, liens and remedies under any partnership agreement to which such Assignor is a party or with respect to any partnership of which such Assignor is a partner. "Goods" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Indemnitee" shall have the meaning provided in Section 8.1 of this Agreement. "Instrument" shall have the meaning provided in the Uniform Commercial Code as in effect on the date hereof in the State of New York. "Inventory" shall mean merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, together with all goods, supplies, incidentals, packaging materials, labels, materials and any other items used or usable in manufacturing, processing, packaging or shipping same, in all stages of production -- from raw materials through work-in-process to finished goods -- and all products and proceeds of whatever sort and wherever located and any portion thereof which may be returned, rejected, reclaimed or repossessed by the Collateral Administrative Agent from any Assignor's customers, and shall specifically include all "inventory" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, now or hereafter owned by any Assignor, provided that the term inventory shall not include 278 EXHIBIT H Page 27 any liquor located in any jurisdiction to the extent that the laws of such jurisdiction prohibit the creation of a security interest in liquor. "Liens" shall mean any security interest, mortgage, pledge, lien, claim, charge, encumbrance, title retention agreement, lessor's interest in a financing lease or analogous instrument, in, of, or on any Assignor's property. "Marks" shall mean all right, title and interest in and to any United States trademarks, service marks and trade names now held or hereafter acquired by any Assignor, including any registration of any trademarks and service marks in the United States Patent and Trademark Office and any trade dress including logos and/or designs used by any Assignor in the United States. "Obligations" shall mean (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and indebtedness (including, without limitation, indemnities, Fees and interest thereon) of each Assignor to the Bank Creditors, whether now existing or hereafter incurred under, arising out of, or in connection with the Credit Agreement and the other Credit Documents to which such Assignor is a party (including, in the case of the Subsidiary Guarantors, all such obligations and indebtedness of such Subsidiary Guarantors under the Subsidiaries Guaranty) and the due performance and compliance by such Assignor with all of the terms, conditions and agreements contained in the Credit Agreement and such other Credit Documents (all such obligations and liabilities under this clause (i), except to the extent consisting of obligations or indebtedness with respect to Interest Rate Protection Agreements or Other Hedging Agreements, being herein collectively called the "Credit Document Obligations"); (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations and liabilities owing by such Assignor to the Other Creditors under, or with respect to (including by reason of the Subsidiaries Guaranty), any Interest Rate Protection Agreement or Other Hedging Agreement, whether such Interest Rate Protection Agreement or Other Hedging Agreement is now in existence or hereafter arising, and the due performance and compliance by such Assignor with all of the terms, conditions and agreements contained therein (all such obligations and liabilities described in this clause (ii) being herein collectively called the "Other Obligations"); (iii) any and all sums advanced by the Assignee in order to preserve the Collateral (as hereinafter defined) or preserve its security interest in the Collateral; (iv) in the event of any proceeding for the collection or enforcement of any indebtedness, obligations, or liabilities of such Assignor referred to in clauses (i) and (ii) above, after an Event of Default (which term to mean and include any Event of Default under, and as defined in, the Credit Agreement or any payment default under any Interest Rate Protection Agreement 279 EXHIBIT H Page 28 or Other Hedging Agreement) shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Assignee of its rights hereunder, together with reasonable attorneys' fees and court costs; and (v) all amounts paid by any Secured Creditor as to which such Secured Creditor has the right to reimbursement under Section 11 of this Agreement; it being acknowledged and agreed that the "Obligations" shall include extensions of credit of the types described above, whether outstanding on the date of this Agreement or extended from time to time after the date of this Agreement. "Other Creditors" shall have the meaning provided in the recitals of this Agreement. "Other Obligations" shall have the meaning provided in the definition of "Obligations" in this Article IX. "Patents" shall mean any United States patent to which any Assignor now or hereafter has title and any divisions or continuations thereof, as well as any application for a United States patent now or hereafter made by any Assignor. "Permits" shall mean, to the extent permitted to be assigned by the terms thereof or by applicable law, all licenses, permits, rights, orders, variances, franchises or authorizations of or from any governmental authority or agency in connection with the maintenance or operation of any Hotel Property. "Primary Obligations" shall have the meaning provided in Section 7.4(b) of this Agreement. "Pro Rata Share" shall have the meaning provided in Section 7.4(b) of this Agreement. "Proceeds" shall have the meaning provided in the Uniform Commercial Code as in effect in the State of New York on the date hereof or under other relevant law and, in any event, shall include, but not be limited to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Collateral Administrative Agent or any Assignor from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or due and payable to any Assignor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any person acting 280 EXHIBIT H Page 29 under color of governmental authority) and (iii) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. "Receivables" shall mean any "account" as such term is defined in the Uniform Commercial Code as in effect on the date hereof in the State of New York, now or hereafter owned by any Assignor and, in any event, shall include, but shall not be limited to, all of such Assignor's rights to payment for goods sold or leased or services performed by such Assignor, whether now in existence or arising from time to time hereafter, including, without limitation, rights evidenced by an account, note, contract, security agreement, chattel paper, or other evidence of indebtedness or security, together with (a) all security pledged, assigned, hypothecated or granted to or held by such Assignor to secure the foregoing, (b) all of any Assignor's right, title and interest in and to any goods, the sale of which gave rise thereto, (c) all guarantees, endorsements and indemnifications on, or of, any of the foregoing, (d) all powers of attorney for the execution of any evidence of indebtedness or security or other writing in connection therewith, (e) all books, records, ledger cards, and invoices relating thereto, (f) all evidences of the filing of financing statements and other statements and the registration of other instruments in connection therewith and amendments thereto, notices to other creditors or secured parties, and certificates from filing or other registration officers, (g) all credit information, reports and memoranda relating thereto and (h) all other writings related in any way to the foregoing. "Representative" shall have the meaning provided in Section 7.4(e) of this Agreement. "Required Secured Creditors" shall mean (i) the Required Banks (or, to the extent required by Section 13.12 of the Credit Agreement, each of the Banks) under the Credit Agreement so long as any Credit Agreement Obligations remain outstanding and (ii) in any situation not covered by preceding clause (i), the holders of a majority of the outstanding principal amount of the Other Obligations that are secured by this Agreement. "Requisite Creditors" shall have the meaning provided in Section 10.2 of this Agreement. "Secondary Obligations" shall have the meaning provided in Section 7.4(b) of this Agreement. "Secured Creditors" shall have the meaning provided in the recitals of this Agreement. 281 EXHIBIT H Page 30 "Secured Debt Agreements" shall mean and include this Agreement, the other Credit Documents and, to the extent entitled to the benefits of this Agreement, the Interest Rate Protection Agreements and Other Hedging Agreements. "Termination Date" shall have the meaning provided in Section 10.8 of this Agreement. "Trade Secret Rights" shall have the meaning provided in Section 5.1 of this Agreement. ARTICLE X MISCELLANEOUS 10.1. Notices. Except as otherwise specified herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been duly given or made when delivered to the party to which such notice, request, demand or other communication is required or permitted to be given or made under this Agreement, addressed as follows: (a) if to any Assignor, at it address set forth opposite its signature below; (b) if to the Collateral Administrative Agent, at: The Bank of Nova Scotia 600 Peachtree Street, N.E. Suite 2700 Atlanta, Georgia 30308 Attention: Tel. No.: Fax. No.: (c) if to any Bank Creditor, at such address as such Bank Creditor shall have specified in the Credit Agreement; (d) if to any Other Creditor, at such address as such Other Creditor shall have specified in writing to each Assignor and the Collateral Administrative Agent; 282 EXHIBIT H Page 31 or at such other address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. 10.2. Waiver; Amendment. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by each Assignor directly effected thereby and the Collateral Administrative Agent (with the written consent of the Required Secured Creditors); provided, however, that any change, waiver, modification or variance affecting the rights and benefits of a single Class of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall require the written consent of the Requisite Creditors of such affected Class. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, i.e., whether (x) the Bank Creditors as holders of the Credit Agreement Obligations or (y) if applicable, the Other Creditors as the holders of the Other Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of (x) with respect to the Credit Agreement Obligations, the Required Banks and (y) with respect to the Other Obligations that are secured by this Agreement, the holders of at least a majority of all obligations outstanding from time to time under the respective Interest Rate Protection Agreements or Other Hedging Agreements. 10.3. Obligations Absolute. The obligations of each Assignor hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (a) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of such Assignor; (b) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of this Agreement or any other Secured Debt Agreement; or (c) any amendment to or modification of any Secured Debt Agreement or any security for any of the Obligations; whether or not any Assignor shall have notice or knowledge of any of the foregoing. 10.4. Successors and Assigns. This Agreement shall be binding upon each Assignor and its successors and assigns (although no Assignor may assign its rights and obligations hereunder except in accordance with the provisions of the Secured Debt Agreements) and shall inure to the benefit of the Collateral Administrative Agent and the Secured Creditors and their respective successors and assigns. All agreements, statements, representations and warranties made by each Assignor herein or in any certificate or other instrument delivered by such Assignor or on its behalf under this Agreement shall be considered to have been relied upon by the Secured Creditors and shall survive the execution and delivery of this Agreement and the other Secured Debt Agreements regardless of any investigation made by the Secured Creditors or on their behalf. 283 EXHIBIT H Page 32 10.5. Headings Descriptive. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 10.6. Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 10.7. Assignor's Duties. It is expressly agreed, anything herein contained to the contrary notwithstanding, that each Assignor shall remain liable to perform all of the obligations, if any, assumed by it with respect to the Collateral and the Collateral Administrative Agent shall not have any obligations or liabilities with respect to any Collateral by reason of or arising out of this Agreement, nor shall the Collateral Administrative Agent be required or obligated in any manner to perform or fulfill any of the obligations of each Assignor under or with respect to any Collateral. 10.8. Termination; Release. (a) After the Termination Date, this Agreement shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 8.1 hereof shall survive such termination) and the Collateral Administrative Agent, at the request and expense of the respective Assignor, will promptly execute and deliver to such Assignor a proper instrument or instruments (including Uniform Commercial Code termination statements on form UCC-3) acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to such Assignor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Collateral Administrative Agent and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement. As used in this Agreement, "Termination Date" shall mean the date upon which the Total Commitments and, to the extent entitled to the benefits of this Agreement, all Interest Rate Protection Agreements or Other Hedging Agreements have been terminated, no Note is outstanding (and all Loans have been repaid in full), all Letters of Credit have been terminated and all Obligations then owing have been paid in full. (b) In the event that any part of the Collateral is sold in connection with a sale permitted by Section 9.02 of the Credit Agreement (other than a sale to any Assignor or a Subsidiary thereof) or otherwise released at the direction of the Required Secured Creditors and the proceeds of such sale or sales or from such release are applied in accordance with the provisions of the Credit Agreement, to the extent required to be so applied, such Collateral will be sold free and clear of the Liens created by this Agreement 284 EXHIBIT H Page 33 and the Collateral Administrative Agent, at the request and expense of the relevant Assignor, will duly assign, transfer and deliver to such Assignor (without recourse and without any representation or warranty) such of the Collateral as is then being (or has been) so sold or released and as may be in the possession of the Collateral Administrative Agent and has not theretofore been released pursuant to this Agreement. (c) At any time that an Assignor desires that the Collateral Administrative Agent take any action to acknowledge or give effect to any release of Collateral pursuant to the foregoing Section 10.8(a) or (b), such Assignor shall deliver to the Collateral Administrative Agent a certificate signed by a principal executive officer of such Assignor stating that the release of the respective Collateral is permitted pursuant to Section 10.8(a) or (b). 10.9. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with each Assignor and the Collateral Administrative Agent. 10.10. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.11. The Collateral Administrative Agent. The Collateral Administrative Agent will hold in accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed that the obligations of the Collateral Administrative Agent as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement and in Section 12 of the Credit Agreement. The Collateral Administrative Agent shall act hereunder and thereunder on the terms and conditions set forth herein and in Section 12 of the Credit Agreement. 10.12. Benefit of Agreement. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of and be enforceable by each of the parties hereto and its successors and assigns. 285 EXHIBIT H Page 34 10.13. Additional Assignors. It is understood and agreed that any Wholly-Owned Subsidiary of the Borrower that is required to execute a counterpart of this Agreement pursuant to the Credit Agreement shall automatically become an Assignor hereunder by executing a counterpart hereof and delivering the same to the Collateral Administrative Agent. 286 EXHIBIT H Page 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. SAMANTHA HOTEL CORPORATION By ------------------------ Title: HARBOR HOTEL CORPORATION By ------------------------- Title: DOUBLETREE PARTNERS By ------------------------- Title: INNCO CORPORATION By ------------------------ Title: DOUBLETREE HOTELS CORPORATION By ------------------------ Title: 287 EXHIBIT H Page 36 DT MANAGEMENT, INC. By ------------------------ Title: ARIZONA DTM PASADENA, INC. By ------------------------ Title: DTM BURLINGAME, INC. By ------------------------ Title: DTM CAMBRIDGE, INC. By ------------------------ Title: DTM PALM SPRING, INC. By ------------------------ Title: DTM WALNUT CREEK, INC. By ------------------------ Title: 288 EXHIBIT H Page 37 DTM COCONUT GROVE, INC. By ------------------------ Title: DTM NASHVILLE, INC. By ------------------------ Title: DTM SANTA CLARA, INC. By ------------------------ Title: DTM VENTURA, INC. By ------------------------ Title: DTM ST. LOUIS, INC. By ------------------------ Title: 289 EXHIBIT H Page 38 DTM OKLAHOMA, INC. By ------------------------ Title: DTM TULSA, INC. By ------------------------ Title: DTR LIMITED PARTNERSHIP By ------------------------ Title: DOUBLETREE OF PHOENIX, INC. By ------------------------ Title: HOSCO CORPORATION By ------------------------ Title: DOUBLETREE HOTEL SYSTEMS, INC. By ------------------------ Title: 290 EXHIBIT H Page 39 COMPRIS HOTEL CORPORATION By ------------------------ Title: DTR RFS LESSEE, INC. By ------------------------ Title: DOUBLETREE, INC. OF CALIFORNIA By ------------------------ Title: DT REAL ESTATE, INC. By ------------------------ Title: TUK INNS, INC. By ------------------------ Title: 291 EXHIBIT H Page 40 DT INVESTMENTS, INC. By ------------------------ Title: DTR CAMBRIDGE, INC. By ------------------------ Title: DTR SANTA CLARA, INC. By ------------------------ Title: DTR SONORAN HOLDING, INC. By ------------------------ Title: DTM ATLANTIC CITY, INC. By ------------------------ Title: 292 EXHIBIT H Page 41 DTR INDEPENDENCE, INC. By ------------------------ Title: DTR NORTH CANTON, INC. By ------------------------ Title: DTR SAN ANTONIO, INC. By ------------------------ Title: DTR WEST MONTROSE, INC. By ------------------------ Title: RED LION HOTELS, INC. By ------------------------ Title: 293 EXHIBIT H Page 42 Accepted and Agreed to: THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent for the Banks By:_________________________ Title: 294 ANNEX A to SECURITY AGREEMENT SCHEDULE OF CHIEF EXECUTIVE OFFICES AND OTHER RECORD LOCATIONS 295 ANNEX B to SECURITY AGREEMENT SCHEDULE OF INVENTORY AND EQUIPMENT LOCATIONS Assignor Location -------- -------- 296 ANNEX C to SECURITY AGREEMENT SCHEDULE OF TRADE AND FICTITIOUS NAMES 297 ANNEX D to SECURITY AGREEMENT SCHEDULE OF MARKS 298 ANNEX E to SECURITY AGREEMENT SCHEDULE OF PATENTS 299 ANNEX F to SECURITY AGREEMENT SCHEDULE OF COPYRIGHTS 300 ANNEX G to SECURITY AGREEMENT ASSIGNMENT OF SECURITY INTEREST IN UNITED STATES TRADEMARKS AND PATENTS FOR GOOD AND VALUABLE CONSIDERATION, receipt and sufficiency of which are hereby acknowledged, [Name of Assignor], a __________ [partnership] [corporation] ("the Assignor") with principal offices at ____________________________, hereby assigns and grants to The Bank of Nova Scotia, as Collateral Administrative Agent, with principal offices at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308 (the "Assignee"), a security interest in (i) all of the Assignor's right, title and interest in and to the United States trademarks, trademark registrations and trademark applications (the "Marks") set forth on Schedule A attached hereto, (ii) all of the Assignor's rights, title and interest in and to the United States patents (the "Patents") set forth on Schedule B attached hereto, in each case together with (iii) all Proceeds (as such term is defined in the Security Agreement referred to below) and products of the Marks and Patents, (iv) the goodwill of the businesses with which the Marks are associated and (v) all causes of action arising prior to or after the date hereof for infringement of any of the Marks and Patents or unfair competition regarding the same. THIS ASSIGNMENT is made to secure the satisfactory performance and payment of all the Obligations of the Assignor, as such term is defined in the Security Agreement among the Assignor, the other assignors from time to time party thereto and 301 ANNEX G Page 2 the Assignee, dated as November __, 1996 (as amended from time to time, the "Security Agreement"). Upon the occurrence of the Termination Date (as defined in the Security Agreement), the Assignee shall, upon such satisfaction, execute, acknowledge, and deliver to the Assignor an instrument in writing releasing the security interest in the Marks and Patents acquired under this Assignment. This Assignment has been granted in conjunction with the security interest granted to the Assignee under the Security Agreement. The rights and remedies of the Assignee with respect to the security interest granted herein are without prejudice to, and are in addition to those set forth in the Security Agreement, all terms and provisions of which are incorporated herein by reference. In the event that any provisions of this Assignment are deemed to conflict with the Security Agreement, the provisions of the Security Agreement shall govern. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the ____ day of _________, 199__. [NAME OF ASSIGNOR], Assignor By_____________________________ Title: 302 ANNEX G Page 3 THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent, Assignee By_____________________________ Title: 303 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this ____ day of _________, 199_, before me personally came ________ _________________ who, being by me duly sworn, did state as follows: that [s]he is _______________ of [Name of Assignor], that [s]he is authorized to execute the foregoing Assignment on behalf of said [partnership] [corporation] and that [s]he did so by authority of the [Executive Committee] [Board of Directors] of said [partnership] [corporation]. _________________________ Notary Public 304 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this ____ day of _________, 199_, before me personally came _______________________________ who, being by me duly sworn, did state as follows: that he is __________________ of The Bank of Nova Scotia that he is authorized to execute the foregoing Assignment on behalf of said corporation and that he did so by authority of the Board of Directors of said corporation. ____________________________ Notary Public 305 SCHEDULE A MARK REG. NO. REG. DATE - ---- -------- --------- 306 SCHEDULE B PATENT PATENT NO. ISSUE DATE - ------ ---------- ---------- 307 ANNEX H to SECURITY AGREEMENT ASSIGNMENT OF SECURITY INTEREST IN UNITED STATES COPYRIGHTS WHEREAS, [Name of Assignor], a _______________ [corporation] [partnership] (the "Assignor"), having its chief executive office at _____________________________________________, ____________________________, is the owner of all right, title and interest in and to the United States copyrights and associated United States copyright registrations and applications for registration set forth in Schedule A attached hereto; WHEREAS, THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent, having its principal offices at 600 Peachtree Street, N.E., Suite 2700, Atlanta, Georgia 30308 (the "Assignee"), desires to acquire a security interest in said copyrights and copyright registrations and applications therefor; and WHEREAS, the Assignor is willing to assign to the Assignee, and to grant to the Assignee a security interest in and lien upon the copyrights and copyright registrations and applications therefor described above. NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and subject to the terms and conditions of the Security Agreement, dated as of November __, 1996, made by the Assignor, the other assignors from time to time party thereto and the Assignee (as amended from time to time, the "Security Agreement"), the Assignor hereby assigns to the Assignee, and grants to the Assignee a security interest in the copyrights and copyright registrations and applications therefor set forth in Schedule A attached hereto. This Assignment has been granted in conjunction with the security interest granted to the Assignee under the Security Agreement. The rights and remedies of the Assignee with respect to the security interest granted herein are without prejudice to, and are in addition to those set forth in the Security Agreement, all terms and provisions of which are incorporated herein by reference. In the event that any provisions of this Assignment are deemed to conflict with the Security Agreement, the provisions of the Security Agreement shall govern. 308 ANNEX H Page 2 Executed at New York, New York, the __ day of _________, 199_. [NAME OF ASSIGNOR], as Assignor By__________________________ Name: Title: THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent, Assignee By__________________________ Name: Title: 309 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this __ day of _________, 199_, before me personally came ______________________________, who being duly sworn, did depose and say that [s]he is ___________________ of [Name of Assignor], that [s]he is authorized to execute the foregoing Assignment on behalf of said [partnership] [corporation] and that [s]he did so by authority of the [Executive Committee] [Board of Directors] of said [partnership] [corporation]. _________________________ Notary Public 310 SCHEDULE A U.S. COPYRIGHTS REGISTRATION PUBLICATION NUMBERS DATE COPYRIGHT TITLE - ------------ ------------ --------------- 311 EXHIBIT I SUBSIDIARIES GUARANTY SUBSIDIARIES GUARANTY, dated as of November __, 1996 (as amended, modified or supplemented from time to time, this "Guaranty"), made by each of the undersigned guarantors (each a "Guarantor," and together with any other entity that becomes a guarantor hereunder pursuant to Section 25 hereof, the "Guarantors"). Except as otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : WHEREAS, Doubletree Corporation (the "Borrower"), the lenders from time to time party thereto (the "Banks"), Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger (the "Syndication Agent"), and The Bank of Nova Scotia, as Administrative Agent (together with any successor administrative agent, the "Administrative Agent"), have entered into a Credit Agreement, dated as of November __, 1996 (as amended, modified, or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans and the issuance of, and participation in, Letters of Credit, as contemplated therein (the Banks, the Syndication Agent, the Collateral Administrative Agent and the Administrative Agent are herein called the "Bank Creditors"); WHEREAS, the Borrower or one or more of its respective Subsidiaries may at any time and from time to time enter into one or more Interest Rate Protection Agreements or Other Hedging Agreements with one or more Banks or any affiliate thereof (each such Bank or affiliate, even if the respective Bank subsequently ceases to be a Bank under the Credit Agreement for any reason, together with such Bank's or affiliate's successors and assigns, if any, collectively, the "Other Creditors," and together with the Bank Creditors, the "Secured Creditors"); WHEREAS, each Guarantor is a direct or indirect Wholly-Owned Subsidiary of the Borrower; WHEREAS, it is a condition to the making of Loans and the issuance of Letters of Credit under the Credit Agreement that each Guarantor shall have executed and delivered this Guaranty; and WHEREAS, each Guarantor will obtain benefits from the incurrence of Loans and the issuance of Letters of Credit under the Credit Agreement and the entering 312 EXHIBIT I Page 2 into of Interest Rate Protection Agreements or Other Hedging Agreements and, accordingly, desires to execute this Guaranty in order to satisfy the conditions described in the preceding paragraph; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, each Guarantor hereby makes the following representations and warranties to the Secured Creditors and hereby covenants and agrees with each Secured Creditor as follows: 1. Each Guarantor, jointly and severally, irrevocably, absolutely and unconditionally guarantees: (i) to the Bank Creditors the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of (x) the principal of and interest on the Notes issued by, and the Loans made to, the Borrower under the Credit Agreement, and all reimbursement obligations and Unpaid Drawings with respect to Letters of Credit issued under the Credit Agreement and (y) all other obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due), liabilities and indebtedness owing by the Borrower to the Bank Creditors under the Credit Agreement or any other Credit Document to which the Borrower is a party (including, without limitation, indemnities, Fees and interest thereon), whether now existing or hereafter incurred under, arising out of or in connection with the Credit Agreement or any such other Credit Document and the due performance and compliance by the Borrower with all of the terms, conditions and agreements contained in the Credit Documents (all such principal, interest, liabilities, indebtedness and obligations being herein collectively called the "Credit Document Obligations"); and (ii) to each Other Creditor the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due), liabilities and indebtedness owing by the Borrower or any other Subsidiary of the Borrower under any Interest Rate Protection Agreement or Other Hedging Agreement, whether now in existence or hereafter arising, and the due performance and compliance by the Borrower or such Subsidiary with all of the terms, conditions and agreements contained in the Interest Rate Protection Agreements or Other Hedging Agreements (all such obligations, liabilities and indebtedness being herein collectively called the "Other Obligations," and together with the Credit Document Obligations, the "Guaranteed Obligations"). Each Guarantor understands, agrees and confirms that the Secured Creditors may enforce this Guaranty up to the full amount of the Guaranteed Obligations against such Guarantor without proceeding against any other Guarantor, the Borrower, against any security for the Guaranteed Obligations, or under any other guaranty covering all or a portion of the Guaranteed Obligations. 313 EXHIBIT I Page 3 2. Additionally, each Guarantor, jointly and severally, unconditionally, absolutely and irrevocably, guarantees the payment of any and all Guaranteed Obligations whether or not due or payable by the Borrower or any Subsidiary thereof upon the occurrence in respect of the Borrower or any such Subsidiary of any of the events specified in Section 10.05 of the Credit Agreement, and unconditionally and irrevocably, jointly and severally, promises to pay such Guaranteed Obligations to the Secured Creditors, or order, on demand, in legal tender of the United States. This Guaranty shall constitute a guaranty of payment, and not of collection. 3. The liability of each Guarantor hereunder is primary, absolute and unconditional and is exclusive and independent of any security for or other guaranty of the indebtedness of the Borrower or any Subsidiary thereof whether executed by such Guarantor, any other Guarantor, any other guarantor or by any other party, and the liability of each Guarantor hereunder shall not be affected or impaired by any circumstance or occurrence whatsoever (other than the indefeasible satisfaction in full in cash of the Guaranteed Obligations), including, without limitation: (a) any direction as to application of payment by the Borrower or any Subsidiary thereof or by any other party, (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Guaranteed Obligations, (c) any payment on or in reduction of any such other guaranty or undertaking, (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower or any Subsidiary thereof, (e) any payment made to any Secured Creditor on the indebtedness which any Secured Creditor repays the Borrower or any Subsidiary thereof pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding, (f) any action or inaction by the Secured Creditors as contemplated in Section 6 hereof or (g) any invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor. 4. The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor, any other guarantor, the Borrower or any Subsidiary thereof, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor, any other guarantor, the Borrower or any Subsidiary thereof and whether or not any other Guarantor, any other guarantor, the Borrower or any Subsidiary thereof be joined in any such action or actions. Each Guarantor waives, to the fullest extent permitted by law, the benefits of any statute of limitations affecting its liability hereunder or the enforcement thereof. To the extent permitted by law, any payment by the Borrower or any Subsidiary thereof or other circumstance which operates to toll any statute of limitations as to the Borrower or any such Subsidiary shall operate to toll the statute of limitations as to each Guarantor. 314 EXHIBIT I Page 4 5. Each Guarantor hereby waives notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives promptness, diligence, presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liabilities, suit or taking of other action by the Administrative Agent, the Collateral Administrative Agent or any other Secured Creditor against, and any other notice to, any party liable thereon (including such Guarantor, any other Guarantor, any other guarantor, the Borrower or any Subsidiary thereof). 6. Any Secured Creditor may at any time and from time to time without the consent of, or notice to, any Guarantor, without incurring responsibility to such Guarantor, without impairing or releasing the obligations of such Guarantor hereunder, upon or without any terms or conditions and in whole or in part: (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations (including any increase or decrease in the rate of interest thereon), any security therefor, or any liability incurred directly or indirectly in respect thereof, and the guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (b) take and hold security for the payment of the Guaranteed Obligations and sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (c) exercise or refrain from exercising any rights against the Borrower, any other Credit Party, any Subsidiary thereof or otherwise act or refrain from acting; (d) release or substitute any one or more endorsers, Guarantors, other guarantors, the Borrower, any Subsidiary thereof or other obligors; (e) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower or any Subsidiary thereof to creditors of the Borrower or such Subsidiary other than the Secured Creditors; 315 EXHIBIT I Page 5 (f) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower or any Subsidiary thereof to the Secured Creditors regardless of what liabilities of the Borrower or such Subsidiary remain unpaid; (g) consent to or waive any breach of, or any act, omission or default under, any of the Interest Rate Protection Agreements or Other Hedging Agreements, the Credit Documents or any of the instruments or agreements referred to therein, or otherwise amend, modify or supplement any of the Interest Rate Protection Agreements or Other Hedging Agreements, the Credit Documents or any of such other instruments or agreements; (h) act or fail to act in any manner referred to in this Guaranty which may deprive such Guarantor of its right to subrogation against the Borrower or any Subsidiary thereof to recover full indemnity for any payments made pursuant to this Guaranty; and/or (i) take any other action which would, under otherwise applicable principles of common law, give rise to a legal or equitable discharge of such Guarantor from its liabilities under this Guaranty. 7. This Guaranty is a continuing one and all liabilities to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. No failure or delay on the part of any Secured Creditor in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly specified are cumulative and not exclusive of any rights or remedies which any Secured Creditor would otherwise have. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Secured Creditor to any other or further action in any circumstances without notice or demand. It is not necessary for any Secured Creditor to inquire into the capacity or powers of the Borrower or any Subsidiary thereof or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 8. Any indebtedness of the Borrower or any Subsidiary thereof now or hereafter held by any Guarantor is hereby subordinated to the indebtedness of the Borrower or such Subsidiary to the Secured Creditors, and such indebtedness of the Borrower or such Subsidiary to any Guarantor, if the Administrative Agent or the Collateral Administrative 316 EXHIBIT I Page 6 Agent, after the occurrence and during the continuance of an Event of Default, so requests, shall be collected, enforced and received by such Guarantor as trustee for the Secured Creditors and be paid over to the Secured Creditors on account of the indebtedness of the Borrower or such Subsidiary to the Secured Creditors, but without affecting or impairing in any manner the liability of such Guarantor under the other provisions of this Guaranty. Without limiting the generality of the foregoing, each Guarantor hereby agrees with the Secured Creditors that it will not exercise any right of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been irrevocably paid in full in cash. 9. (a) Each Guarantor waives any right (except as shall be required by applicable law and cannot be waived) to require the Secured Creditors to: (i) proceed against the Borrower, any Subsidiary thereof, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party; (ii) proceed against or exhaust any security held from the Borrower, any Subsidiary thereof, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party; or (iii) pursue any other remedy in the Secured Creditors' power whatsoever. Each Guarantor waives any defense based on or arising out of any defense of the Borrower, any Subsidiary thereof, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party other than payment in full of the Guaranteed Obligations, including, without limitation, any defense based on or arising out of the disability of the Borrower, any Subsidiary thereof, any other Guarantor, any other guarantor of the Guaranteed Obligations or any other party, or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower or any Subsidiary thereof other than payment in full of the Guaranteed Obligations. The Secured Creditors may, at their election, foreclose on any security held by the Administrative Agent, the Collateral Administrative Agent or the other Secured Creditors by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, or exercise any other right or remedy the Secured Creditors may have against the Borrower or any Subsidiary thereof or any other party, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Guaranteed Obligations have been paid in full. Each Guarantor waives any defense arising out of any such election by the Secured Creditors, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against the Borrower or any Subsidiary thereof or any other party or any security. (b) Each Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the 317 EXHIBIT I Page 7 existence, creation or incurring of new or additional indebtedness. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's and each of its Subsidiary's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which such Guarantor assumes and incurs hereunder, and agrees that the Secured Creditors shall have no duty to advise any Guarantor of information known to them regarding such circumstances or risks. (c) Each Guarantor understands, is aware and hereby acknowledges that to the extent the Guaranteed Obligations are secured by real property located in the State of California, such Guarantor shall be liable for the full amount of its liability hereunder notwithstanding foreclosure on such real property by trustee sale or any other reason impairing such Guarantor's or any Secured Creditors' right to proceed against the Borrower or any Subsidiary thereof. Each Guarantor hereby waives, to the fullest extent permitted by law, all rights and benefits under Section 2809 of the California Civil Code purporting to reduce a guarantor's obligation in proportion to the principal obligation. Each Guarantor hereby waives (to the fullest extent permitted by applicable law) all rights and benefits under Section 580a of the California Code of Civil Procedure purporting to limit the amount of any deficiency judgment which might be recoverable following the occurrence of a trustee's sale under a deed of trust and all rights and benefits under Section 580b of the California Code of Civil Procedure stating that no deficiency may be recovered on a real property purchase money obligation. Each Guarantor further understands, is aware and hereby acknowledges that if the Secured Creditors elect to nonjudicially foreclose on any real property security located in the State of California any right of subrogation of such Guarantor against the Secured Creditors may be impaired or extinguished and that as a result of such impairment or extinguishment of subrogation rights, such Guarantor will have a defense to a deficiency judgment arising out of the operation of (i) Section 580d of the California Code of Civil Procedure which states that no deficiency may be recovered on a note secured by a deed of trust on real property in case such real property is sold under the power of sale contained in such deed of trust, and (ii) related principles of estoppel. To the fullest extent permitted by law, each Guarantor waives all rights and benefits and any defense arising out of the operation of Section 580d of the California Code of Civil Procedure and related principles of estoppel, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against the Borrower or the Subsidiary thereof or any other party or any security. In addition, each Guarantor hereby waives, to the fullest extent permitted by applicable laws, without limiting the generality of the foregoing or any other provision hereof, all rights and benefits which might otherwise be available to such Guarantor under Section 726 of the California Code of Civil Procedure and all rights and benefits which might otherwise be available to such Guarantor under California Civil Code Sections 2809, 2810, 2815, 2819, 2821, 2839, 2845, 2848, 2849, 2850, 2899 and 3433. 318 EXHIBIT I Page 8 (d) Each Guarantor hereby further waives (to the fullest extent permitted by applicable law): (i) all rights and defenses arising out of an election of remedies by the Secured Creditors, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a Guaranteed Obligation, has destroyed such Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the California Code of Civil Procedure or otherwise; (ii) such Guarantor's rights of subrogation and reimbursement and any other rights and defenses available to such Guarantor by reason of the California Civil Code Sections 2787 to 2855, inclusive, including, without limitation, (x) any defenses such Guarantor may have to the Guaranteed Obligations by reason of an election of remedies by the Secured Creditors and (y) any rights or defenses such Guarantor may have by reason of protection afforded to the principal borrower with respect to the obligation so guaranteed pursuant to the antideficiency or other laws of the State of California limiting or discharging the borrower's indebtedness, including, without limitation, California Code of Civil Procedure Sections 580a, 580b, 580d or 726. 10. The Secured Creditors agree that this Guaranty may be enforced only by the action of the Administrative Agent or the Collateral Administrative Agent, in each case acting upon the instructions of the Required Banks (or, after the date on which all Credit Document Obligations have been paid in full, the holders of at least a majority of the outstanding Other Obligations) and that no other Secured Creditors shall have any right individually to seek to enforce or to enforce this Guaranty or to realize upon the security to be granted by the Security Documents, it being understood and agreed that such rights and remedies may be exercised by the Administrative Agent or the Collateral Administrative Agent or the holders of at least a majority of the outstanding Other Obligations, as the case may be, for the benefit of the Secured Creditors upon the terms of this Guaranty and the Security Documents. The Secured Creditors further agree that this Guaranty may not be enforced against any director, officer, employee, partner or stockholder of any Guarantor (except to the extent such partner or stockholder is also a Guarantor hereunder). 11. In order to induce the Banks to make Loans and issue or participate in Letters of Credit pursuant to the Credit Agreement, and in order to induce the Other Creditors to execute, deliver and perform the Interest Rate Protection Agreements or Other Hedging Agreements, each Guarantor represents, warrants and covenants that: (a) Such Guarantor (i) is a duly organized and validly existing corporation or partnership in good standing under the laws of the jurisdiction of its organization, (ii) has the corporate or partnership power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good 319 EXHIBIT I Page 9 standing in each jurisdiction where the conduct of its business requires such qualification except for failures to be so qualified which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower or of the Borrower and its Subsidiaries taken as a whole. (b) Such Guarantor has the corporate or partnership power and authority to execute, deliver and perform the terms and provisions of this Guaranty and each other Document to which it is a party and has taken all necessary corporate or partnership action to authorize the execution, delivery and performance by it of this Guaranty and each such other Document. Such Guarantor has duly executed and delivered this Guaranty and each other Document to which it is a party, and this Guaranty and each such other Document constitutes the legal, valid and binding obligation of such Guarantor enforceable in accordance with its terms, except to the extent that the enforceability hereof or thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law). (c) Neither the execution, delivery or performance by such Guarantor of this Guaranty or any other Document to which it is a party, nor compliance by it with the terms and provisions hereof and thereof, will (i) contravene any provision of any applicable law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality (other than contraventions relating to an Acquisition Document which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect (x) on the Acquisition or the Transaction or (y) on the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole), (ii) conflict with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (except pursuant to the Security Documents) upon any of the property or assets of such Guarantor or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement or loan agreement, or any other material agreement, contract or instrument to which such Guarantor or any of its Subsidiaries is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) violate any provision of the certificate of incorporation, by-laws or partnership agreement (or equivalent organizational documents) of such Guarantor or any of its Subsidiaries (other than violations of immaterial 320 EXHIBIT I Page 10 partnership agreements existing on the Initial Borrowing Date by reason of the Acquisition). (d) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required for, (i) the execution, delivery and performance of this Guaranty by such Guarantor or any other Document to which such Guarantor is a party or (ii) the legality, validity, binding effect or enforceability of this Guaranty or any other Document to which such Guarantor is a party. (e) There are no actions, suits or proceedings pending or, to the best knowledge of such Guarantor, threatened (i) with respect to this Guaranty or any other Document to which such Guarantor is a party or (ii) with respect to such Guarantor that are reasonably likely to materially and adversely affect the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole. 12. Each Guarantor covenants and agrees that on and after the Effective Date and until the termination of the Total Commitments and all Interest Rate Protection Agreements or Other Hedging Agreements and when no Note or Letter of Credit remains outstanding and all Guaranteed Obligations have been paid in full, such Guarantor will comply, and will cause each of its Subsidiaries to comply, with all of the applicable provisions, covenants and agreements contained in Sections 8 and 9 of the Credit Agreement, and will take, or will refrain from taking, as the case may be, all actions that are necessary to be taken or not taken so that it is not in violation of any provision, covenant or agreement contained in Section 8 or 9 of the Credit Agreement, and so that no Default or Event of Default, is caused by the actions of such Guarantor or any of its Subsidiaries. 13. The Guarantors hereby jointly and severally agree to pay all reasonable out-of-pocket costs and expenses of each Secured Creditor in connection with the enforcement of this Guaranty and of each Agent in connection with any amendment, waiver or consent relating hereto (including in each case, without limitation, the reasonable fees and disbursements of counsel employed by each Secured Creditor). 14. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the Secured Creditors and their successors and assigns. 321 EXHIBIT I Page 11 15. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated except with the written consent of each Guarantor directly affected thereby and with the written consent of either (x) the Required Banks (or to the extent required by Section 13.12 of the Credit Agreement, with the written consent of each Bank) at all times prior to the time on which all Credit Document Obligations have been paid in full or (y) the holders of at least a majority of the outstanding Other Obligations at all times after the time on which all Credit Document Obligations have been paid in full; provided, that any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall also require the written consent of the Requisite Creditors (as defined below) of such Class of Secured Creditors (it being understood that the addition or release of any Guarantor hereunder shall not constitute a change, waiver, discharge or termination affecting any Guarantor other than the Guarantor so added or released). For the purpose of this Guaranty; the term "Class" shall mean each class of Secured Creditors, i.e., whether (x) the Bank Creditors as holders of the Credit Document Obligations or (y) the Other Creditors as the holders of the Other Obligations. For the purpose of this Guaranty, the term "Requisite Creditors" of any Class shall mean (x) with respect to the Credit Document Obligations, the Required Banks (or to the extent required by Section 13.12 of the Credit Agreement, each Bank) and (y) with respect to the Other Obligations, the holders of at least a majority of all obligations outstanding from time to time under the Interest Rate Protection or Other Hedging Agreements. 16. Each Guarantor acknowledges that an executed (or conformed) copy of each of the Credit Documents and Interest Rate Protection Agreements or Other Hedging Agreements has been made available to its principal executive officers and such officers are familiar with the contents thereof. 17. In addition to any rights now or hereafter granted under applicable law (including, without limitation, Section 151 of the New York Debtor and Secured Creditor Law) and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default (such term to mean and include any "Event of Default" as defined in the Credit Agreement or any payment default under any Interest Rate Protection Agreement or Other Hedging Agreement continuing after any applicable grace period), each Secured Creditor is hereby authorized, at any time or from time to time, without notice to any Guarantor or to any other Person, any such notice being expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Secured Creditor to or for the credit or the account of such Guarantor, against and on account of the obligations and liabilities of such Guarantor to such Secured Creditor under this Guaranty, irrespective of whether or not such Secured Creditor shall have made any demand hereunder and although said obligations, liabilities, deposits or claims, or any of them, shall be contingent or 322 EXHIBIT I Page 12 unmatured. Notwithstanding anything to the contrary contained in this Section 17, no Secured Creditor shall exercise any such right of set-off without the prior written consent of the Agents or the Required Banks so long as the Guaranteed Obligations shall be secured by any real property located in the State of California, it being understood and agreed, however, that this sentence is for the sole benefit of the Secured Creditors and may be amended, modified or waived in any respect by the Required Banks without the requirement of prior notice to or consent by any Credit Party and does not constitute a waiver of any rights against any Credit Party or against any Collateral. 18. Each Guarantor hereby confirms that it is its intention that this Guaranty not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Code, the Uniform Fraudulent Conveyance Act or any similar Federal or state law. To effectuate the foregoing intention, each Guarantor hereby irrevocably agrees that the Guaranteed Obligations guaranteed by such Guarantor shall be limited to such amount as will, after giving effect to such maximum amount and all other (contingent or otherwise) liabilities of such Guarantor that are relevant under such laws, and after giving effect to any rights to contribution pursuant to any agreement providing for an equitable contribution among such Guarantor and the other Guarantors, result in the Guaranteed Obligations of such Guarantor in respect of such maximum amount not constituting a fraudulent transfer or conveyance. 19. All notices, requests, demands or other communications pursuant hereto shall be deemed to have been duly given or made when delivered to the Person to which such notice, request, demand or other communication is required or permitted to be given or made under this Guaranty, addressed to such party at (i) in the case of any Bank Creditor, as provided in the Credit Agreement, (ii) in the case of any Guarantor, at its address set forth opposite its signature below and (iii) in the case of any Other Creditor, at such address as such Other Creditor shall have specified in writing to the Guarantors; or in any case at such other address as any of the Persons listed above may hereafter notify the others in writing. 20. If claim is ever made upon any Secured Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of the aforesaid payees repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such payee or any of its property or (ii) any settlement or compromise of any such claim effected by such payee with any such claimant (including the Borrower or any Subsidiary thereof), then and in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon such Guarantor, notwithstanding any revocation hereof or other instrument evidencing any liability of the Borrower or any Subsidiary thereof, and such Guarantor shall be and remain liable to the 323 EXHIBIT I Page 13 aforesaid payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such payee. 21. (A) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE SECURED CREDITORS AND OF THE UNDERSIGNED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding with respect to this Guaranty or any other Credit Document to which any Guarantor is a party may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Guaranty, each Guarantor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor hereby further irrevocably waives any claim that any such court lacks personal jurisdiction over such Guarantor, and agrees not to plead or claim in any legal action or proceeding with respect to this Guaranty or any other Credit Document to which such Guarantor is a party brought in any of the aforesaid courts that any such court lacks personal jurisdiction over such Guarantor. Each Guarantor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Guarantor at its address set forth opposite its signature below, such service to become effective 30 days after such mailing. Each Guarantor hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other Credit Document to which such Guarantor is a party that such service of process was in any way invalid or ineffective. Nothing herein shall affect the right of any of the Secured Creditors to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against each Guarantor in any other jurisdiction. (b) Each Guarantor hereby irrevocably waives (to the fullest extent permitted by applicable law) any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Guaranty or any other Credit Document to which such Guarantor is a party brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that such action or proceeding brought in any such court has been brought in an inconvenient forum. (C) EACH GUARANTOR AND EACH SECURED CREDITOR (BY ITS ACCEPTANCE OF THE BENEFITS OF THIS GUARANTY) HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS GUARANTY, THE OTHER CREDIT DOCUMENTS TO WHICH SUCH 324 EXHIBIT I Page 14 GUARANTOR IS A PARTY OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 22. In the event that all of the capital stock of one or more Guarantors is sold or otherwise disposed of or liquidated in compliance with the requirements of Section 9.02 of the Credit Agreement (or such sale or other disposition has been approved in writing by the Required Banks (or all Banks if required by Section 13.12 of the Credit Agreement)) and the proceeds of such sale, disposition or liquidation are applied in accordance with the provisions of the Credit Agreement, to the extent applicable, such Guarantor shall upon consummation of such sale or other disposition (except to the extent that such sale or disposition is for the Borrower or another Subsidiary thereof) be released from this Guaranty automatically and without further action and this Guaranty shall, as to each such Guarantor or Guarantors, terminate, and have no further force or effect (it being understood and agreed that the sale of one or more Persons that own, directly or indirectly, all of the capital stock or partnership interests of any Guarantor shall be deemed to be a sale of such Guarantor for the purposes of this Section 22). 23. This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Guarantors and the Administrative Agent. 24. All payments made by any Guarantor hereunder will be made without setoff, counterclaim or other defense. 25. It is understood and agreed that any Wholly-Owned Subsidiary of the Borrower that is required to execute a counterpart of this Guaranty after the date hereof pursuant to the Credit Agreement shall automatically become a Guarantor hereunder by executing a counterpart hereof and delivering the same to the Administrative Agent. 26. At any time a payment in respect of the Guaranteed Obligations is made under this Guaranty, the right of contribution of each Guarantor against each other Guarantor shall be determined as provided in the immediately following sentence, with the right of contribution of each Guarantor to be revised and restated as of each date on which a payment (a "Relevant Payment") is made on the Guaranteed Obligations under this Guaranty. At any time that a Relevant Payment is made by a Guarantor that results in the aggregate payments made by such Guarantor in respect of the Guaranteed Obligations to and including the date of the Relevant Payment exceeding such Guarantor's Contribution Percentage (as defined below) of the aggregate payments made by all Guarantors in respect of the Guaranteed Obligations to and including the date of the Relevant Payment (such 325 EXHIBIT I Page 15 excess, the "Aggregate Excess Amount"), each such Guarantor shall have a right of contribution against each other Guarantor who has made payments in respect of the Guaranteed Obligations to and including the date of the Relevant Payment in an aggregate amount less than such other Guarantor's Contribution Percentage of the aggregate payments made to and including the date of the Relevant Payment by all Guarantors in respect of the Guaranteed Obligations (the aggregate amount of such deficit, the "Aggregate Deficit Amount") in an amount equal to (x) a fraction the numerator of which is the Aggregate Excess Amount of such Guarantor and the denominator of which is the Aggregate Excess Amount of all Guarantors multiplied by (y) the Aggregate Deficit Amount of such other Guarantor. A Guarantor's right of contribution pursuant to the preceding sentences shall arise at the time of each computation, subject to adjustment to the time of any subsequent computation; provided, that no Guarantor may take any action to enforce such right until the Guaranteed Obligations have been paid in full and the Total Commitment has been terminated, it being expressly recognized and agreed by all parties hereto that any Guarantor's right of contribution arising pursuant to this Contribution Agreement against any other Guarantor shall be expressly junior and subordinate to such other Guarantor's obligations and liabilities in respect of the Guaranteed Obligations and any other obligations owing under this Guaranty. As used in this Section 27: (i) each Guarantor's "Contribution Percentage" shall mean the percentage obtained by dividing (x) the Adjusted Net Worth (as defined below) of such Guarantor by (y) the aggregate Adjusted Net Worth of all Guarantors; (ii) the "Adjusted Net Worth" of each Guarantor shall mean the greater of (x) the Net Worth (as defined below) of such Guarantor and (y) zero; and (iii) the "Net Worth" of each Guarantor shall mean the amount by which the fair salable value of such Guarantor's assets on the date of any Relevant Payment exceeds its existing debts and other liabilities (including contingent liabilities, but without giving effect to any Guaranteed Obligations arising under this Guaranty) on such date. All parties hereto recognize and agree that, except for any right of contribution arising pursuant to this Section 27, each Guarantor who makes any payment in respect of the Guaranteed Obligations shall have no right of contribution or subrogation against any other Guarantor in respect of such payment. Each of the Guarantors recognizes and acknowledges that the rights to contribution arising hereunder shall constitute an asset in favor of the party entitled to such contribution. In this connection, each Guarantor has the right to waive its contribution right against any Guarantor to the extent that after giving effect to such waiver such Guarantor would remain solvent, in the determination of the Required Banks. * * * 326 EXHIBIT I Page 16 IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed and delivered as of the date first above written. Addresses: GUARANTORS ---------- SAMANTHA HOTEL CORPORATION By ------------------------ Title: HARBOR HOTEL CORPORATION By ------------------------- Title: DOUBLETREE PARTNERS By ------------------------- Title: INNCO CORPORATION By ------------------------ Title: DOUBLETREE HOTELS CORPORATION By ------------------------ Title: 327 EXHIBIT I Page 17 DT MANAGEMENT, INC. By ------------------------ Title: ARIZONA DTM PASADENA, INC. By ------------------------ Title: DTM BURLINGAME, INC. By ------------------------ Title: DTM CAMBRIDGE, INC. By ------------------------ Title: DTM PALM SPRING, INC. By ------------------------ Title: DTM WALNUT CREEK, INC. By ------------------------ Title: 328 EXHIBIT I Page 18 DTM COCONUT GROVE, INC. By ------------------------ Title: DTM NASHVILLE, INC. By ------------------------ Title: DTM SANTA CLARA, INC. By ------------------------ Title: DTM VENTURA, INC. By ------------------------ Title: DTM ST. LOUIS, INC. By ------------------------ Title: DTM OKLAHOMA, INC. By ------------------------ Title: 329 EXHIBIT I Page 19 DTM TULSA, INC. By ------------------------ Title: DTR LIMITED PARTNERSHIP By ------------------------ Title: DOUBLETREE OF PHOENIX, INC. By ------------------------ Title: HOSCO CORPORATION By ------------------------ Title: DOUBLETREE HOTEL SYSTEMS, INC. By ------------------------ Title: COMPRIS HOTEL CORPORATION By ------------------------ Title: 330 EXHIBIT I Page 20 DTR RFS LESSEE, INC. By ------------------------ Title: DOUBLETREE, INC. OF CALIFORNIA By ------------------------ Title: DT REAL ESTATE, INC. By ------------------------ Title: TUK INNS, INC. By ------------------------ Title: DT INVESTMENTS, INC. By ------------------------ Title: DTR CAMBRIDGE, INC. By ------------------------ Title: 331 EXHIBIT I Page 21 DTR SANTA CLARA, INC. By ------------------------ Title: DTR SONORAN HOLDING, INC. By ------------------------ Title: DTM ATLANTIC CITY, INC. By ------------------------ Title: DTR INDEPENDENCE, INC. By ------------------------ Title: DTR NORTH CANTON, INC. By ------------------------ Title: DTR SAN ANTONIO, INC. By ------------------------ Title: 332 EXHIBIT I Page 22 DTR WEST MONTROSE, INC. By ------------------------ Title: RED LION HOTELS, INC. By ------------------------ Title: Accepted and Agreed to: THE BANK OF NOVA SCOTIA, as Collateral Administrative Agent for the Banks By:_________________________ Title: 333 EXHIBIT J SOLVENCY CERTIFICATE I, the undersigned, the Chief Financial Officer of Doubletree Corporation (the "Borrower"), do hereby certify on behalf of the Borrower that: 1. This Certificate is furnished to the Agents and each of the Banks pursuant to Section 5.16(i) of the Credit Agreement, dated as of November __, 1996, among the Borrower, the Banks party thereto from time to time, Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and The Bank of Nova Scotia, as Administrative Agent (such Credit Agreement, as in effect on the date of this Certificate, being herein called the "Credit Agreement"). Unless otherwise defined herein, capitalized terms used in this Certificate shall have the meanings set forth in the Credit Agreement. 2. For purposes of this Certificate, the terms below shall have the following definitions: (a) "Fair Value" The amount at which the assets, in their entirety, of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis) would change hands between a willing buyer and a willing seller, within a commercially reasonable period of time, each having reasonable knowledge of the relevant facts, with neither being under any compulsion to act. (b) "Present Fair Salable Value" The amount that could be obtained by an independent willing seller from an independent willing buyer if the assets of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis) are sold with reasonable promptness under normal selling conditions in a current market. 334 EXHIBIT J Page 2 (c) "New Financing" The Indebtedness incurred or to be incurred by the Borrower and its Subsidiaries under the Credit Documents (assuming the full utilization by the Borrower of the Revolving Loan Commitments under the Credit Agreement) and the other Documents and all other financings contemplated by the Documents, in each case after giving effect to the Transaction and the incurrence of all financings contemplated therewith. (d) "Stated Liabilities" The recorded liabilities (including contingent liabilities) that would be recorded in accordance with generally accepted accounting principles ("GAAP") of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis), in each case, at November __, 1996 after giving effect to the Transaction, determined in accordance with GAAP consistently applied, together with, (i) the net change in long-term debt (including current maturities) between December 31, 1995 and the date hereof and (ii) without duplication, the amount of all New Financing. (e) "Identified Contingent Liabilities" The maximum estimated amount of liabilities reasonably likely to result from pending litigation, asserted claims and assessments, guaranties, uninsured risks and other contingent liabilities of each of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis) after giving effect to the Transaction (exclusive of such contingent liabilities to the extent reflected in Stated Liabilities). (f) "Will be able to pay its Stated Liabilities and Identified Contingent Liabilities, as they mature" For the period from the date hereof through the Tranche B Term Loan Maturity Date, each of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis) will have sufficient assets and cash flow to pay their respective Stated Liabilities and Identified Contingent Liabilities as those liabilities mature or otherwise become payable. 335 EXHIBIT J Page 3 (g) "Does not have Unreasonably Small Capital" For the period from the date hereof through the Tranche B Term Loan Maturity Date, each of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis), after consummation of the Transaction and all Indebtedness (including the Loans) being incurred or assumed and Liens created by the Borrower and its Subsidiaries in connection therewith, is a going concern and has sufficient capital to ensure that it will continue to be a going concern for such period and to remain a going concern. 3. For purposes of this Certificate, I, or other officers of the Borrower under my direction and supervision, have performed the following procedures as of and for the periods set forth below. (a) I have reviewed the financial statements (including the pro forma financial statements) referred to in Section 7.05(a) of the Credit Agreement. (b) I have made inquiries of certain officials of the Borrower and its Subsidiaries, who have responsibility for financial and accounting matters regarding (i) the existence and amount of Identified Contingent Liabilities associated with the business of the Borrower and its Subsidiaries and (ii) whether the unaudited pro forma consolidated financial statements referred to in paragraph (a) above are in conformity with GAAP applied on a basis substantially consistent with that of the audited financial statements as at December 31, 1995. (c) I have knowledge of and have reviewed to my satisfaction the Credit Documents and the other Documents, and the respective Schedules and Exhibits thereto. (d) With respect to Identified Contingent Liabilities, I: 1. inquired of certain officials of the Borrower and its Subsidiaries, who have responsibility for legal, financial and accounting matters as to the existence and estimated liability with respect to all contingent liabilities known to them; 336 EXHIBIT J Page 4 2. confirmed with officers of the Borrower and its Subsidiaries, that, to the best of such officers' knowledge, (i) all appropriate items were included in Stated Liabilities or the listing of Identified Contingent Liabilities and that (ii) the amounts relating thereto were the maximum estimated amount of liabilities reasonably likely to result therefrom as of the date hereof; and (e) I have examined the Projections which have been delivered to the Banks and considered the effect thereon of any changes since the date of the preparation thereof on the results projected therein. After such review, I hereby certify that in my opinion the Projections are reasonable and attainable and the Projections support the conclusions contained in paragraph 4 below. (f) I have made inquiries of certain officers of the Borrower and its Subsidiaries who have responsibility for financial reporting and accounting matters regarding whether they were aware of any events or conditions that, as of the date hereof, would cause the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis), after giving effect to the Transaction and the related financing transactions (including the incurrence of the New Financing), to (i) have assets with a Fair Value or Present Fair Salable Value that are less than the sum of Stated Liabilities and Identified Contingent Liabilities; (ii) have Unreasonably Small Capital; or (iii) not be able to pay its Stated Liabilities and Identified Contingent Liabilities as they mature or otherwise become payable. 4. Based on and subject to the foregoing, I hereby certify on behalf of the Borrower that, after giving effect to the Transaction and the related financing transactions (including the incurrence of the New Financing), it is my informed opinion that (i) the Fair Value and Present Fair Salable Value of the assets of each of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis) exceed its Stated Liabilities and Identified Contingent Liabilities; (ii) each of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis) does not have Unreasonably Small Capital; and (iii) each of the Borrower and its Subsidiaries (on a consolidated basis) and the Borrower (on a stand-alone basis) will be able to pay its Stated Liabilities and Identified Contingent Liabilities, as they mature or otherwise become payable. 337 EXHIBIT J Page 5 IN WITNESS WHEREOF, I have hereto set my hand this ____ day of November, 1996. DOUBLETREE CORPORATION By_______________________________________ Name: Title: Chief Financial Officer 338 ANNEX A 339 EXHIBIT K ASSIGNMENT AND ASSUMPTION AGREEMENT DATE: ________ __, 19__ Reference is made to the Credit Agreement described in Item 2 of Annex I annexed hereto (as such Credit Agreement may hereafter be amended, modified or supplemented from time to time, the "Credit Agreement"). Unless defined in Annex I attached hereto, terms defined in the Credit Agreement are used herein as therein defined. _____________ (the "Assignor") and ______________ (the "Assignee") hereby agree as follows: 1. The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty (other than as expressly provided herein), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified in Item 4 of Annex I (the "Assigned Share") of all of the outstanding rights and obligations under the Credit Agreement relating to the facilities listed in Item 4 of Annex I, including, without limitation, [(x) in the case of any assignment of all or any portion of the Total Term Loan Commitment, all rights and obligations with respect to the Assigned Share of such Total Term Loan Commitment,]1/ (y) in the case of any assignment of all or any portion of the Assignor's outstanding Tranche A Term Loans and/or Tranche B Term Loans, all rights and obligations with respect to the Assigned Share of such outstanding Tranche A Term Loans and/or Tranche B Term Loans and (z) in the case of any assignment of all or any portion of the Assignor's Revolving Loan Commitment, all rights and obligations with respect to the Assigned Share of the Total Revolving Loan Commitment and all outstanding Revolving Loans, Swingline Loans and Letters of Credit. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claims; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the other Credit Documents or the execution, legality, ____________________ 1/ Delete bracketed language in Assignment and Assumption Agreements executed after the termination of the Total Term Loan Commitment. 340 EXHIBIT K Page 2 validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any of its Subsidiaries or the performance or observance by the Borrower or any of its Subsidiaries of any of their respective obligations under the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement and the other Credit Documents, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption Agreement; (ii) agrees that it will, independently and without reliance upon any Agent, the Assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Administrative Agent and the Syndication Agent to take such action as agents on its behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent and the Syndication Agent by the terms thereof, together with such powers as are reasonably incidental thereto; [and] (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank[; and (v) attaches the forms and/or Certificate set forth in the penultimate sentence of section 13.04(b) of the Credit Agreement.]2/ 4. Following the execution of this Assignment and Assumption Agreement by the Assignor and the Assignee, an executed original hereof (together with all attachments) will be delivered to the Administrative Agent. The effective date of this Assignment and Assumption Agreement shall be the date of execution hereof by the Assignor and the Assignee, to the extent required by the Credit Agreement, the receipt of the consent of each Agent, receipt by the Administrative Agent of the assignment fee referred to in Section 13.04(b) of the Credit Agreement, and the recordation by the Administrative Agent of the assignment effected hereby in the Register, unless otherwise specified in Item 5 of Annex I (the "Settlement Date"). 5. Upon the delivery of a fully executed original hereof to the Administrative Agent, as of the Settlement Date, (i) the Assignee shall be a party to the ____________________ 2/ If the Assignee is organized under the laws of a jurisdiction outside the United States. 341 EXHIBIT K Page 3 Credit Agreement and, to the extent provided in this Assignment and Assumption Agreement, have the rights and obligations of a Bank thereunder and under the other Credit Documents and (ii) the Assignor shall, to the extent provided in this Assignment and Assumption Agreement, relinquish its rights and be released from its obligations under the Credit Agreement and the other Credit Documents. 6. It is agreed that upon the effectiveness hereof, the Assignee shall be entitled to (x) all interest on the Assigned Share of the Loans at the rates specified in Item 6 of Annex I, (y) all Commitment Commission (if applicable) on the Assigned Share of the respective Commitments at the rate specified in Item 7 of Annex I and (z) all Letter of Credit Fees (if applicable) on the Assignee's participation in all Letters of Credit at the rate specified in Item 8 of Annex I, which, in each case, accrue on and after the Settlement Date, such interest and, if applicable, Commitment Commission and Letter of Credit Fees, to be paid by the Administrative Agent directly to the Assignee. It is further agreed that all payments of principal made on the Assigned Share of the Loans which occur on and after the Settlement Date will be paid directly by the Administrative Agent to the Assignee. Upon the Settlement Date, the Assignee shall pay to the Assignor an amount specified by the Assignor in writing which represents the Assigned Share of the principal amount of the respective Loans made by the Assignor pursuant to the Credit Agreement which are outstanding on the Settlement Date, net of any closing costs, and which are being assigned hereunder. The Assignor and the Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Settlement Date directly between themselves. 7. THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 342 EXHIBIT K Page 4 IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution also being made on Annex I hereto. [NAME OF ASSIGNOR], as Assignor By____________________________ Title: [NAME OF ASSIGNEE], as Assignee By____________________________ Title: [Acknowledged and Agreed: MORGAN STANLEY SENIOR FUNDING, INC., as Syndication Agent and as Arranger By____________________________ Title: THE BANK OF NOVA SCOTIA, as Administrative Agent By____________________________ Title:]3/ ____________________ 3/ The consent of each Agent is required for assignments made as provided in Section 13.04(b)(y) of the Audit Agreement. 343 ANNEX I ANNEX FOR ASSIGNMENT AND ASSUMPTION AGREEMENT ANNEX I 1. The Borrower: Doubletree Corporation. 2. Name and Date of Credit Agreement: Credit Agreement, dated as of November __, 1996, among Doubletree Corporation, the lenders from time to time party thereto, Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and The Bank of Nova Scotia, as Administrative Agent. 3. Date of Assignment Agreement: 4. Amounts (as of date of item #3 above):
[Total [Total [Outstanding [Outstanding Tranche Tranche Principal Principal Revolving A Term Loan B Term Loan of A Term of B Term Loan Commitment] Commitment] Loans] Loans] Commitment ---------- ---------- ----- ----- ---------- a. Aggregate Amount for all Banks $_______ $_______ $________ $________ $_________ b. Assigned Share ________% ________% ________% ________% ________% c. Amount of Assigned Share $_______4/ $_______5/ $________6/ $________7/ $_________ - - - -
5. Settlement Date: __________________________________ 4/ Insert for assignments made before the termination of the Total Tranche A Term Loan Commitment. 5/ Insert for assignments made before the Initial Borrowing Date. 6/ Insert for assignments made after the Initial Borrowing Date. 7/ Insert for assignments made after the Initial Borrowing Date. 344 ANNEX I Page 2 6. Rate of Interest to the Assignee: As set forth in Section 1.08 of the Credit Agreement (unless otherwise agreed to by the Assignor and the Assignee).8/ 7. Term Loan Commitment Commission to the Assignee; As set forth in Section 3.01(a) of the Credit Agreement (unless otherwise agreed to by the Assignor and the Assignee).9/ 8. Revolving Loan Commitment Commission to the Assignee: As set forth in Section 3.01(b) of the Credit Agreement; (unless otherwise agreed to by the Assignor and the Assignee).10/
__________________________________ 8/ Each of the Borrowers and the Administrative Agent shall, following recordation of such assignment by the Administrative Agent on the Register, direct the entire amount of interest to the Assignee at the rate set forth in Section 1.08 of the Credit Agreement, with the Assignor and Assignee effecting any agreed upon sharing of interest through payments by the Assignee to the Assignor. 9/ Insert "Not Applicable" in lieu of text if no portion of the Total Term Loan Commitment is being assigned or for assignments made after the termination of the Total Term Loan Commitment. The Borrower and the Administrative Agent shall, following recordation of such assignment by the Administrative Agent on the Register, direct the entire amount of the Term Loan Commitment Commission to the Assignee at the rate set forth in Section 3.01(a) of the Credit Agreement, with the Assignor and the Assignee effecting any agreed upon sharing of the Term Loan Commitment Commission through payment by the Assignee to the Assignor. 10/ Insert "Not Applicable" in lieu of text if no portion of the Total Revolving Loan Commitment is being assigned. The Borrower and the Administrative Agent shall, following recordation of such assignment by the Administrative Agent on the Register, direct the entire amount of the Revolving Loan Commitment Commission to the Assignee at the rate set forth in Section 3.01(b) of the Credit Agreement, with the Assignor and the Assignee effecting any agreed upon sharing of the Revolving Loan Commitment Commission through payment by the Assignee to the Assignor. 345 ANNEX I Page 3 9. Letter of Credit Fee to the Assignee: As set forth in Section 3.01(c) of the Credit Agreement (unless otherwise agreed to by the Assignor and the Assignee).11/ 10. Notice: ASSIGNEE: ------------------- ------------------- Attention: Telephone: Telecopier: Reference: Payment Instructions: ASSIGNEE: ------------------- ------------------- Attention: Reference:
__________________________________ 11/ Insert "Not Applicable" in lieu of text if no portion of the Total Revolving Loan Commitment is being assigned. The Borrower and the Administrative Agent shall, following recordation of such assignment by the Administrative Agent on the Register, direct the entire amount of the Letter of Credit Fee to the Assignee at the rate set forth in Section 3.01(c) of the Credit Agreement, with the Assignor and the Assignee effecting any agreed upon sharing of the Letter of Credit Fee through payment by the Assignee to the Assignor. 346 ANNEX I Page 4 Accepted and Agreed: [NAME OF ASSIGNEE] [NAME OF ASSIGNOR] By________________________ By__________________________ ________________________ __________________________ (Print Name and Title) (Print Name and Title) 347 EXHIBIT L INTERCOMPANY NOTE New York, New York [Date] FOR VALUE RECEIVED, [NAME OF PAYOR] (the "Payor"), hereby promises to pay on demand to the order of _____________ or its assigns (the "Payee"), in lawful money of the United States of America in immediately available funds, at such location in the United States of America as the Payee shall from time to time designate, the unpaid principal amount of all loans and advances made by the Payee to the Payor. The Payor promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at such rate per annum as shall be agreed upon from time to time by the Payor and Payee. Upon the commencement of any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar proceeding of any jurisdiction relating to the Payor, the unpaid principal amount hereof shall become immediately due the payable without presentment, demand, protest or notice of any kind in connection with this Note. This Note evidences certain permitted intercompany Indebtedness referred to in the Credit Agreement, dated as of November __, 1996, among Doubletree Corporation, the lenders party thereto from time to time, Morgan Stanley Senior Funding, Inc., as Syndication Agent and as Arranger, and The Bank of Nova Scotia, as Administrative Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"), and is subject to the terms thereof, and shall be pledged by the Payee pursuant to the Pledge Agreement (as defined in the Credit Agreement). The Payor hereby acknowledges and agrees that the Collateral Administrative Agent pursuant to and as defined in the Pledge Agreement, as in effect from time to time, may exercise all rights provided therein with respect to this Note. 348 EXHIBIT L Page 2 The Payee is hereby authorized to record all loans and advances made by it to the Payor (all of which shall be evidenced by this Note), and all repayments or prepayments thereof, in its books and records, such books and records constituting prima facie evidence of the accuracy of the information contained therein. All payments under this Note shall be made without offset, counterclaim or deduction of any kind. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. [NAME OF PAYOR] By___________________________________ Title: [NAME OF PAYEE] By____________________________ Title: Pay to the order of ______________________________ EX-23.1 7 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITOR The Board of Directors Doubletree Corporation: The audits referred to in our report dated February 27, 1996, included the related financial statement schedule as of December 31, 1995, and for each of the years in the three-year period ended December 31, 1995 included in the Registration Statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such 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. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the Registration Statement. KPMG Peat Marwick LLP Orange County, California October 29, 1996 EX-23.2 8 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-13161 of Doubletree Corporation on Form S-3 of our reports dated February 24, 1996, on Red Lion Hotels, Inc. as of and for the ten months ended December 31, 1995, and of Red Lion, a California Limited Partnership, for the seven months ended July 31, 1995, appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. Deloitte & Touche LLP Portland, Oregon October 31, 1996 EX-23.3 9 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.3 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the use of our reports dated February 7, 1995 on the financial statements of Red Lion, a California Limited Partnership, as of and for the two years ended December 31, 1994 included in this registration statement, as amended by Amendment No. 2 thereto, and to all references to our Firm included in this registration statement, as amended. Arthur Andersen LLP Portland, Oregon October 31, 1996 -----END PRIVACY-ENHANCED MESSAGE-----