-----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, RyPLnVUCpq9yR/xfBdWfI2P3XTZ4AeRHTHhwnrJnKnXaVHe/5o+s5c2T6KnSg8vG K8b4iWjk2s6mzXoeT73vqw== 0000892569-97-000821.txt : 19970329 0000892569-97-000821.hdr.sgml : 19970329 ACCESSION NUMBER: 0000892569-97-000821 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-24392 FILM NUMBER: 97567369 BUSINESS ADDRESS: STREET 1: 410 N 44TH ST STREET 2: STE 700 CITY: PHOENIX STATE: AR ZIP: 85008 BUSINESS PHONE: 6022206666 MAIL ADDRESS: STREET 1: 410 NORTH 44TH STREET STREET 2: SUITE 700 CITY: PHOENIX STATE: AZ ZIP: 85008 10-K405 1 FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-24392 DOUBLETREE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0762415 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 410 NORTH 44TH STREET SUITE 700 PHOENIX, ARIZONA 85008 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (602) 220-6666 Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the Registrant on March 3, 1997: $1,002,251,685 The number of shares of the Registrant's Common Stock outstanding as of March 3, 1997 was 39,559,658. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1997 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 2, 1997 ARE INCORPORATED BY REFERENCE INTO PART III AS SET FORTH HEREIN. ================================================================================ TOTAL PAGES 55 EXHIBIT INDEX ON PAGE 53 2 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES Doubletree Corporation (the "Company" or "Doubletree") is one of the largest full service hotel operating companies in the United States. At December 31, 1996, the Company managed, leased, or franchised 241 hotels with an aggregate of 56,037 rooms in 39 states, the District of Columbia, the U.S. Virgin Islands and Mexico. This represents a 108% and 83% increase in number of hotels and aggregate room count, respectively, for the fiscal year ended December 31, 1996 as compared to fiscal year ended December 31, 1995. Excluding the Red Lion Acquisition and the RFS Acquisition (each of which is defined below), this growth was 21% and 18%, respectively. The Company provides hotel owners with management and franchise services under its Doubletree Hotels, Doubletree Guest Suites, Doubletree Club Hotels and Club Hotels by Doubletree (collectively "Club Hotels") brand names, as well as management services for Red Lion hotels and other non-Doubletree brand hotels. At December 31, 1996, the Company's portfolio of hotels included 58 Doubletree Hotels, 36 Doubletree Guest Suites, 16 Club Hotels, 56 Red Lion hotels and 75 hotels operated by Doubletree under third party brand names or as independent hotels. In late 1995 and 1996, the Company announced several strategic developments -- the acquisitions of RFS, Inc. and Red Lion Hotels, Inc., the formation of a joint venture in Candlewood Hotel Company, L.L.C. ("Candlewood"), the formation of a strategic alliance with Patriot American Hospitality, Inc. and the introduction of the Club Hotel by Doubletree concept, each of which is discussed in more detail in the "Recent Developments" section below. Unless the context indicates otherwise, the discussion herein addresses the Company as of December 31, 1996. HISTORY The Company's current hotel management and franchise business was formed on December 16, 1993 with the acquisition of Doubletree Hotels Corporation ("DHC") by Guest Quarters Hotel Partnership ("GQHP"), a general partnership, which was renamed Doubletree Partners upon such acquisition (the "Combination Transaction"). The Company was incorporated in Delaware in May 1994 to succeed to the business of Doubletree Partners. Unless the context indicates otherwise, all references herein to the "Company" or "Doubletree" refer to Doubletree Corporation and its consolidated subsidiaries. On June 30, 1994 (immediately prior to the initial public offering of the Company's common stock (the "Common Stock")) the partners of Doubletree Partners, other than Samantha Hotel Corporation ('Samantha") contributed their general partnership interests to the Company and the owners of Samantha contributed Samantha to the Company in consideration for 15,500,000 shares of Common Stock in proportion to their partnership interests in Doubletree Partners prior to such transfer (the "Reorganization"). As a result of the Reorganization, the Company succeeded to all the assets, liabilities and business operations of Doubletree Partners. The principal executive offices of the Company are located at 410 North 44th Street, Suite 700, Phoenix, Arizona 85008, telephone (602) 220-6666. RECENT DEVELOPMENTS Doubletree recently has taken the following steps to implement and further its business and growth strategies: Acquisition of Red Lion. On November 8, 1996, the Company, through the merger of a wholly-owned subsidiary of the Company with and into Red Lion Hotels, Inc. ("Red Lion"), acquired all of the outstanding stock of Red Lion in a transaction valued at approximately $1.2 billion. The Company paid $695.0 million in cash, repaid $124.0 million of existing Red Lion indebtedness, issued 7,381,588 shares of Common Stock (the "Red Lion Acquisition Shares") with a fair value of approximately $292.0 million and assumed net liabilities of $90.0 million (the "Red Lion Acquisition"). As a result of the Red Lion Acquisition, Red Lion became a wholly-owned subsidiary of the Company. The Board of Directors of the Company was expanded to 1 3 include two additional members designated by Red Lion, a California Limited Partnership (the "Partnership"), an entity affiliated with Kohlberg Kravis Roberts & Co. References herein to the Partnership include its wholly-owned subsidiaries. See "The Red Lion Acquisition." At December 31, 1996, the Company operated 56 full-service Red Lion hotels, 17 of which were owned, eight of which were operated pursuant to joint venture agreements and 17 of which were leased pursuant to a long-term lease with the Partnership. The remaining 14 hotels were operated pursuant to management contracts, with 10 of such managed hotels owned by Red Lion Inns Limited Partnership (the "MLP"), the general partner of which is a wholly-owned subsidiary of the Company. As a result of the Red Lion Acquisition, the Company expanded its size and geographic presence which the Company believes will enhance Doubletree's national brand awareness. The consolidation of the Company and Red Lion is progressing as planned. The Company has integrated its management team with Red Lion's and is in the process of adopting the best practices of each organization. The Company intends to convert 40 to 45 of the Red Lion hotels to the Doubletree brand. Four Red Lion hotels were converted to the Doubletree brand in the first quarter of 1997 and the remainder are anticipated to be converted at a rate of approximately 15 hotels per quarter. The Company believes that due to Doubletree's national brand recognition, marketing strength, and higher average daily rate ("ADR") as 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. Management believes that the Red Lion Acquisition has created a combined entity with the resources to compete more effectively on a national basis; however, the Company will continue to be subject to the competitive and economic factors associated with the lodging industry. For a more detailed discussion of the Red Lion hotels, see "Hotels -- Red Lion Hotels." Acquisition of RFS Management. In February 1996, Doubletree significantly expanded its portfolio of non-Doubletree brand hotels with the acquisition (the "RFS Acquisition") of RFS, Inc., a privately held hotel operator ("RFS Management"). As a result of the RFS Acquisition, RFS Management became a wholly-owned subsidiary of the Company. With the RFS Acquisition, Doubletree acquired an independent hotel management company with experienced hotel management personnel and an established infrastructure, which has allowed Doubletree to pursue further non-Doubletree brand management contract and lease opportunities. At December 31, 1996, RFS Management operated 64 hotels (the "RFS Hotels"), 52 of which were leased and operated by RFS Management, four of which were leased by RFS Management and operated by third party management, and eight of which were managed for owners other than RFS Partnership, L.P., a limited partnership (the "Landlord"). The RFS Hotels principally operate in the limited-service and the extended stay segments of the lodging industry, comprise 10,120 rooms and are operated under such franchise brands as Holiday Inn, Holiday Inn Express, Residence Inn by Marriott, Hampton Inn, Sheraton, Ramada and Comfort Inn. See "Hotel Operations -- Non-Doubletree Brand Franchise Agents." In addition, in connection with the RFS Acquisition, Doubletree entered into an arrangement with RFS Hotel Investors, Inc., a leading hotel real estate investment trust (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 additions to Doubletree's hotel portfolio. In 1996, eight hotels joined the Doubletree portfolio as a result of the Right of First Refusal. At December 31, 1996, the REIT had five 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 Hotel Company, L.L.C. (the "Candlewood LLC"). The Candlewood LLC was formed to develop, own, manage and franchise hotels containing fully furnished studio units designed to serve the value-oriented extended stay guest. Mr. Jack DeBoer, the founder of Residence Inns and whom the industry credits with creating the extended stay concept, was the President and Chief Executive Officer of the Candlewood LLC. In August 1996, Candlewood Hotel Company, Inc. ("Candlewood") was formed to succeed to the business of the Candlewood LLC. In November 1996, Candlewood completed an initial public offering of its common stock. In connection with the offering, Doubletree's interest in the Candlewood LLC was converted into an equivalent interest in Candlewood. Doubletree currently is entitled to nominate two directors out of a six 2 4 person board of directors, and currently owns approximately 29% of the outstanding common stock of Candlewood. Mr. DeBoer is the President and Chief Executive Officer of Candlewood. At December 31, 1996, there was one Candlewood hotel in operation, eight Candlewood hotels under construction and 29 sites under contract or letter of intent to become Candlewood hotels. Doubletree believes that Candlewood provides it with an opportunity to participate in a quickly expanding and high demand segment of the lodging industry. Candlewood is in the preliminary 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 American Hospitality, Inc. ("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/or managed by Doubletree. Patriot and Doubletree have committed to invest an aggregate of approximately $180.0 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/or lease opportunities. As of December 31, 1996, the joint venture had successfully completed the acquisition of six hotels that are or will be Doubletree brand hotels and as of December 31, 1996, the Company had funded approximately $10.7 million of the $20.0 million commitment to the strategic alliance. In the first quarter of 1997, the joint venture completed the acquisition of two more hotels. Patriot recently announced that it is acquiring, and will be converting into, a "paired-share" REIT, which, once completed, will allow it to manage properties on its own behalf. Patriot and the Company have reached an agreement in principle in which (i) the six existing leases will be converted into management contracts in connection with the Patriot "paired-share" transaction and (ii) pending and future transactions will be operated by Doubletree under management contracts rather than leases. The two transactions in the first quarter of 1997 closed under this new management arrangement. Despite these acquisitions, there can be no assurance of the joint venture strategic alliance's 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. 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 utilizing an innovative co-branding approach with Steelcase, Au Bon Pain and Kinko's. Subsequent to the brand launch, Doubletree and Kinko's decided to end Kinko's involvement in the brand. Doubletree expects to announce the substitution of a new nationally branded business product service and supply provider to replace Kinko's. Each hotel features a multipurpose Business Club ranging from 3,000 to 5,000 square feet in size. One portion of the Business Club is dedicated to the nationally branded state of the art business center and contains equipment, such as computer printers, fax machines, photocopiers and office and shipping supplies. Each Business Club features private mini offices and small conference rooms designed by Steelcase, and features an Au Bon Pain bakery cafe, where guests may enjoy breakfast, lunch or dinner. Doubletree plans to grow the Club Hotels by Doubletree brand through the acquisition of management contracts of underperforming hotels in target locations, a focused franchising program and the conversion of certain existing Doubletree Club Hotels. The first two conversions of hotels to Club Hotels by Doubletree, containing fully operational Business Clubs, opened in Jacksonville, Florida and San Antonio, Texas in August 1996 and September 1996, respectively. At December 31, 1996, there were nine additional hotels in the process of converting, or under contract to become, Club Hotels by Doubletree. 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. 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 an 3 5 estimated 1.4% in 1993, 1.5% in 1994, 1.6% in 1995 and 2.1% in 1996. Increases in occupancy rates (measured by occupied rooms) increased an estimated 3.1% in 1993, 4.0% in 1994, 2.9% in 1995 and 2.9% in 1996. Average daily room rates increased an estimated 2.8%, 4.8%, 4.9% and 4.5%, respectively, during the same periods. Due to the cyclical nature supply and demand in the lodging industry, there can be no assurance that such increases will continue. Industry Segments Industry segments within the lodging industry are principally based on levels of service, guest amenities, room size, room configuration and price. The Company's Doubletree brand hotels currently compete in three segments of the lodging industry: full-service hotels, all-suite hotels, and mid-price 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. Mid-price hotels typically do not include services such as extensive meeting and banquet facilities or extensive food and beverage facilities. Red Lion hotels compete mostly in the full-service segment of the lodging industry. The Company's other 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. HOTELS Doubletree 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, 1996 for Doubletree's full-service hotels was derived approximately 41% from group meetings, 36% from business travelers, and 23% from leisure travelers. Doubletree believes these percentages are consistent with other full-service hotel brands in the industry. At December 31, 1996, Doubletree's full-service hotels included 58 hotels in 22 states, the District of Columbia, U.S. Virgin Islands and Mexico, with a total of 17,590 guest rooms. The hotels range in size from 120 to 632 rooms. Room rates generally range from $45 to $280 per night depending upon location, time of year and day of the week. These 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. The following table sets forth certain information regarding the Doubletree full-service hotels at December 31, 1996:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels(1).................................... 38 12,233 Franchised Hotels(2)................................. 15 4,117 Leased Hotels(3)..................................... 5 1,240 == ====== Total...................................... 58 17,590
- --------------- (1) The Company owns a minority joint venture interest in nine of such hotels. (2) The Company owns a minority joint venture interest in one of such hotels. (3) The Company owns a minority joint venture interest in one of such hotels. Doubletree Guest Suite Hotels The Doubletree Guest Suite 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. Doubletree's all-suite hotels are targeted 4 6 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, 1996 for Doubletree's all-suite hotels was derived approximately 45% from business travelers, 29% from group meetings and 26% from leisure travelers. At December 31, 1996, Doubletree's all-suite hotels included 36 Doubletree Guest Suite hotels in 18 states and the District of Columbia, with a total of 7,773 guest rooms. The hotels range in size from 55 to 460 guest suites. Suite rates generally range from $60 to $250 per night. Each guest suite has a separate living room and dining/work area, with a color television, refrigerator and wet bar. The following table sets forth certain information regarding the Doubletree Guest Suite all-suite hotels at December 31, 1996:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels(1)...................................... 24 5,495 Franchised Hotels...................................... 11 2,039 Owned Hotels........................................... 1 239 == ===== Total........................................ 36 7,773
- --------------- (1) The Company owns a minority joint venture interest in one of such hotels. Club Hotels Club Hotels are moderately-priced hotels primarily targeted at individual business travelers. The total guest room revenue for the year ended December 31, 1996 was derived approximately 53% from business travelers, 23% from group meetings and 24% from leisure travelers. At December 31, 1996, the portfolio of Club Hotels included 16 hotels (two of which were Club Hotels by Doubletree) in 10 states, with a total of 3,333 guest rooms. These hotels range in size from 158 to 399 rooms with room rates generally ranging from $50 to $135 per night. The following table sets forth certain information regarding Doubletree's Club Hotels at December 31, 1996:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels(1)...................................... 3 512 Franchised Hotels...................................... 11 2,313 Leased Hotels(2)....................................... 2 508 == ===== Total........................................ 16 3,333
- --------------- (1) The Company owns a minority joint venture interest in one of such hotels. (2) The Company owns a minority joint venture interest in two of such hotels. Doubletree plans to grow its Club Hotels by Doubletree brand through the acquisition of management contracts of unaffiliated underperforming hotels, a focused franchising program and the conversion of certain existing Doubletree Club Hotels. See "Recent Developments -- Introduction of Club Hotels by Doubletree." Red Lion Hotels The Company's Red Lion brand hotels are targeted at business travelers, group meetings and leisure travelers. The total guest room revenue for the year ended December 31, 1996 for Red Lion hotels was derived approximately 56% from business travelers, 33% from group meetings and 11% from leisure travelers. 5 7 At December 31, 1996, the Company's Red Lion hotels included 56 hotels in 10 states with a total of 14,859 guest rooms. These hotels range in size from 58 to 850 rooms. Room rates generally range from $45 to $200 per night depending upon location, time of year and day of the week. Red Lion 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. The following table sets forth certain information regarding the Red Lion hotels at December 31, 1996:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels......................................... 14 4,519 Owned Hotels........................................... 17 3,755 Leased Hotels.......................................... 17 3,989 Joint Venture Hotels................................... 8 2,596 == ====== Total........................................ 56 14,859
The Company is in the process of converting most of the Red Lion hotels to one of the Doubletree brands. See "Recent Developments -- Acquisition of Red Lion." Other Non-Doubletree Brand Hotels At December 31, 1996, Doubletree managed or leased 75 hotels under non-Doubletree brands with a total of 12,482 rooms in 26 states, including luxury, full-service, limited-service and extended stay hotels. Many of these hotels became a part of the Doubletree hotel portfolio as a result of the RFS Acquisition. See "The RFS Acquisition." These non-Doubletree brand hotels are operated under brand names such as Hampton Inn, Residence Inn by Marriott, Sheraton, Ramada, Holiday Inn, Holiday Inn Express and Comfort Inn or as independent hotels. See "Hotel Operations -- Non-Doubletree Brand Franchise Agreements." The following table sets forth certain information regarding the Company's other non-Doubletree brand hotels at December 31, 1996:
NUMBER OF NUMBER OF HOTELS ROOMS --------- --------- Managed Hotels(1)...................................... 17 4,314 Leased Hotels.......................................... 58 8,168 == ====== Total........................................ 75 12,482
- --------------- (1) The Company owns a minority joint venture interest in one of such hotels. 6 8 All Hotel Properties The following table presents as of December 31, 1996 certain comparative information with respect to the Company's hotel properties:
OTHER NON- DOUBLETREE DOUBLETREE ---------------------------------------- RED LION BRAND FULL-SERVICE GUEST SUITES CLUB HOTELS HOTELS HOTELS TOTAL ------------ ------------ ------------ --------- ---------- --------- Number of Hotels(1)................. 58 36 16 56 75 241 Total Number of Rooms(1)............ 17,590 7,773 3,333 14,859 12,482 56,037 Average Number of Rooms Per Hotel(1).......................... 303 216 208 265 166 232 Percentage of all Doubletree Rooms............................. 31 14 6 27 22 100 Occupancy Percentage(2)(3) Year 1994......................... 70.5 % 73.7 % 65.9 % 72.1 % 69.8 % 71.6 % Year 1995......................... 71.3 74.8 66.2 72.7 71.8 72.4 Year 1996......................... 73.2 76.1 65.9 71.8 72.7 72.8 Average Daily Rate(2)(3) Year 1994......................... $ 78.59 $ 95.49 $ 63.10 $ 70.52 $ 71.90 $ 76.44 Year 1995......................... 82.96 99.79 66.42 75.17 75.46 80.86 Year 1996......................... 88.97 107.67 71.24 80.65 81.09 86.94 REVPAR(2) Year 1994......................... $ 55.38 $ 70.38 $ 41.59 $ 50.85 $ 50.16 $ 54.74 Year 1995......................... 59.16 74.66 43.99 54.64 54.20 58.56 Year 1996......................... 65.12 81.93 46.94 57.87 58.96 63.26
- --------------- (1) Includes all owned, leased, managed, franchised and properties operated pursuant to joint venture agreements as of December 31, 1996. (2) For the years ended 1994, 1995 and 1996, includes only information for hotels continuously managed by Doubletree, RFS Management and Red Lion since January 1, 1994. (3) Based upon rooms occupied, excluding complimentary rooms. 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, at December 31, 1996, Doubletree leased office space in Vancouver (Washington), Memphis, Washington, D.C., Chicago, San Francisco, Los Angeles, Cincinnati 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. MARKETING AND SALES To enhance Doubletree's brand image, recognition and national presence, the Company launched its multi-million dollar "Sweet Dreams" marketing campaign in February 1995. The "Sweet Dreams" campaign continues to evolve and is intended to increase awareness among business travelers of Doubletree's distinguishing characteristics and features Doubletree's chocolate chip cookie -- a symbol of Doubletree's commitment to provide warm and caring service to its guests. According to Nationwide Surveys, Inc., 1996 brand awareness of the Doubletree brand name in the business travel segment was at an all-time high of 82%. 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. 7 9 Subject to the receipt of necessary third party approvals, Doubletree is in the process of converting most of the Red Lion hotels to one of the Doubletree brands by the end of 1997, thereby significantly increasing its market coverage for Doubletree's full service product, particularly in the western United States. Based on its examination of the Red Lion hotels, Doubletree believes that such properties are generally in well maintained condition and of high quality. The Company intends to convert 40 to 45 of the Red Lion hotels to the Doubletree brand. Four Red Lion hotels were converted to the Doubletree brand in the first quarter of 1997 and the remainder are anticipated to be converted at a rate of approximately 15 hotels per quarter. Doubletree is currently assessing the future of the Red Lion hotels which do not convert to the Doubletree brand name as well as the future of the Red Lion brand name. Doubletree provides a simple and cost effective means for making reservations through its toll free telephone service. Doubletree operates reservation centers in Vancouver (Washington) and Phoenix. Doubletree has commenced the integration of Doubletree's reservation system into Red Lion's -- capitalizing on its state of the art technology. Doubletree promotes its hotels to reservation makers, including all major airline systems and over 115,000 travel agencies globally. Doubletree's marketing and sales objective for 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 non-Doubletree brand franchised hotel, each such hotel takes advantage of the advertising and promotional strength of its particular franchise organization. Doubletree's National Sales Organization includes offices in Chicago, Los Angeles, Sacramento, San Francisco, Philadelphia, Washington, D.C., Phoenix, Vancouver (Washington) and Mexico City. Additionally, Doubletree is represented internationally through marketing alliances. 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 and regional associations. HOTEL OPERATIONS Management Contracts Under the Company's management contracts, the Company operates or supervises all aspects of the hotel's operations, including guest services, hiring and training of hotel staff (who generally are employees of the Company), local sales and marketing, purchasing and budgeting. In exchange for these services, the Company receives a base fee, typically tied to the hotel's revenues. In addition, certain of the Company's management contracts provide for the Company to receive an incentive fee based on achieving specified operating performance goals. Pursuant to the management contracts, the Company also typically provides certain centralized corporate services for which it is reimbursed at cost, including reservations, national sales and marketing, public relations, centralized accounting services, management information systems, internal audit and specialized training. The hotel owner may purchase hotel supplies from the Company, including brand-specific products, for which the Company earns a profit. Additionally, the Company has capitalized on opportunities which leverage its buying power by implementing several purchasing agreements that lower the cost of products to the hotel owner while concurrently providing the Company with a fee for administering the program. The Company 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. The Company may be responsible for certain liabilities, such as workers compensation, environmental and general tort liability, associated with a hotel's operations. The Company carries general liability insurance to protect itself from most potential liability claims. See "Insurance." Upon assumption of the management of a hotel, the Company 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 its management, the Company 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. 8 10 At December 31, 1996 the Company operated 10 Red Lion brand hotels pursuant to a management contract with Red Lion Inns Limited Partnership (the "MLP") expiring in 2062, including all renewal options. A wholly-owned subsidiary of the Company is the general partner of the MLP. The Company'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. Beginning January 1, 1998, federal tax regulations mandate that the MLP become subject to corporate taxes on its income. The MLP is not currently a taxable entity. The payment of income taxes by the MLP will not reduce cash available for payment of any fees, including the incentive management fee, due to the Company under the MLP management contract. The payment of income taxes by the MLP will, however, directly reduce cash available for distributions to the partners in the MLP and cash available to repay advances owed to the Company. Distributions to partners after December 31, 1997 will be considered taxable dividends. The general partner of the MLP is currently assessing alternatives relating to this change in tax status, but no assurance can be provided that any actions taken will lessen the impact of such taxes. The balance of the Company's management contracts are with a variety of different owners, the largest portfolio of which is seven hotels managed on behalf of one owner or its affiliates. The average remaining terms of the Company's management contracts (excluding the MLP management contract) is approximately 11 years. Management of the Company's hotels is coordinated from Doubletree's headquarters in Phoenix, with a regional operations office in Vancouver (Washington) and an accounting office in Cincinnati. Doubletree Franchise Agreements Doubletree's franchised hotels are licensed under the Doubletree, Doubletree Guest Suites and Club Hotels brands and include hotels in the full-service, all-suite and mid-priced segments of the hotel industry. At December 31, 1996, Doubletree franchised 37 hotels, representing 8,469 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 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 remaining terms of approximately 10 years. Many of Doubletree's franchisees purchase hotel supplies from Doubletree, including brand-specific products. Non-Doubletree Brand Franchise Agreements Of the 75 non-Doubletree brand hotels, 69 are licensed to operate under franchise agreements, including 17 hotels licensed as Hampton Inn hotels, 12 hotels licensed as Residence Inn by Marriott hotels, 11 hotels licensed as Holiday Inn hotels, nine hotels licensed as Holiday Inn Express hotels, eight hotels licensed under other brands, seven hotels licensed as Comfort Inn hotels, and five hotels licensed as Sheraton hotels. 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. Sheraton is a 9 11 registered trademark of ITT Corporation. The Company as lessee holds the franchise license for each hotel it operates and is responsible for paying the franchise fees. Generally, each franchise agreement gives the Company and/or the hotel's owner the right to operate the particular hotel under a franchise for an initial term of between 10 and 20 years. The franchise agreements typically provide for termination at the franchisor's option upon the occurrence of certain events. With respect to most of the franchise agreements the Company and/or the hotel's owner is entitled to terminate the franchise agreement by giving at least 12 months notice and paying a specified amount of liquidated damages. The franchise agreements under which the Company is a franchisee generally impose similar obligations on Doubletree as those the Company imposes on its franchisees. Owned Hotels At December 31, 1996, the Company owned and managed 18 hotels, 17 of which were Red Lion brand hotels and one of which was a Doubletree Guest Suite hotel, representing 3,994 rooms. The Company is responsible for all aspects of these hotels, including, without limitation, all of the costs associated with their operation. The Company also receives substantially all of the revenues generated by its owned hotels. The Company is subject to varying degrees of risk generally related to owning real estate. In addition to general risks related to the lodging industry, these risks include, among others, changes in national, regional and local economic conditions, inflation and its effect on operating costs, 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 Company. Moreover, real estate investments are relatively illiquid, which means that the ability of the Company to vary its portfolio of hotels in response to changes in economic and other conditions may be limited. It is the Company's goal not to be the long-term owner of real estate. The Company intends to improve the operating results of the Company's owned hotels and realize their appreciated value through their sale over approximately the next 18 months. Leases Under the Company's leases, the Company leases the hotel from its owner and is responsible for all aspects of the hotel's operations, once again including guest services, staffing at the hotel, sales and marketing, accounting functions, purchasing and budgeting. As the lessee of a hotel, the Company recognizes all revenues and substantially all expenses associated with the hotel's operations. Typically, other than real estate taxes, casualty insurance costs, maintenance of underground utilities and structural elements costs, furniture, fixtures and equipment and other capital improvements costs, each of which are the landlord's obligation, the Company is required to pay all of the costs associated with operating the hotel, including rent, personal property taxes, utility costs, employee liability costs, liability insurance costs and the like. The Company is entitled to retain all revenues derived from the operation of a leased hotel, subject to the payment of its obligations under the lease, including rent. 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. There can be no assurance that any particular lease will be profitable for the Company after the payment of its obligations under the lease. In addition, most of the Company's leases typically provide that the Company indemnify its landlord against certain liabilities resulting from the leasing, operation or use of the hotel. Examples of these liabilities may include (i) injury to persons or property at the hotel, (ii) environmental liability caused by the Company and (iii) liability resulting from the sale of, consumption of alcoholic beverages at the hotel. 10 12 The Percentage Leases At December 31, 1996, the Company leased 56 hotels, representing 7,982 rooms, pursuant to substantially similar leases (the "Percentage Leases") with the Landlord (see, "The RFS Acquisition"). Four of the hotels leased pursuant to Percentage Leases are managed by third parties. Each of the Percentage Leases 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 1996, the base rent component of the Percentage Lease expense was approximately 42% of total Percentage Lease expense. Top percentage rents ranged from 50% to 76.5% of incremental room revenue. For the year ended December 31, 1996, room revenue for each of the hotels subject to the Percentage Leases exceeded the amount required to trigger the top tier of percentage rent. If the Landlord enters into an agreement to sell a hotel, it may terminate a 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. 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 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. The Landlord has indemnified RFS Management against undisclosed matters and certain environmental liabilities, other than RFS Managements' acts or grossly negligent failures to act. The Partnership Lease At December 31, 1996, the Company leased 17 Red Lion brand hotels, representing 3,989 rooms, pursuant to a long-term lease with the Partnership (the "Partnership Lease"), which was entered into on August 1, 1995. The initial term of the Partnership Lease is 15 years from August 1995, 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, the Company has the option to extend the Partnership Lease on a hotel-by-hotel basis for five additional five year periods on the same terms. Rental payments under the Partnership Lease consist of base rent, payable quarterly, and additional rent payable annually, if applicable. The base rent for all of the hotels is $15.0 million per year. The additional rent for the 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 hotels for the given year exceeds the aggregate Operating Revenues at all such hotels for the twelve month period ended September 30, 1996. This long-term arrangement allows the Company 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 the right to sell all of its hotels to one or more third parties, subject to the terms of the Partnership Lease. Upon any sale of a hotel by the Partnership, the hotel would be leased under a stand alone lease which would be modified to provide, among other things, for a calculation of additional rent based on the Gross Revenues (as defined in the Partnership Lease) of that hotel alone. The Partnership has informed the Company that it has entered into an agreement to sell all of the hotels subject to the Partnership Lease to a third party buyer. The Partnership has acknowledged in writing the Company's intention to change the name of each of the hotels to a Doubletree brand name and confirmed that such action would not constitute a breach of the Partnership Lease. Other Leases At December 31, 1996, the Company leased nine hotels, pursuant to leases other than the Percentage Leases and the Partnership Lease. Such leases contain varying terms, but are generally "triple net" leases, the terms of which are in substantial conformity to the general description above in "Hotel Operations -- Leases". 11 13 Joint Ventures At December 31, 1996, the Company owned at least a 50% interest in eight joint ventures (five of which it controls), each of which owns a hotel, representing 2,596 rooms. In addition, at December 31, 1996, the Company owned a minority non-controlling interest in eight joint ventures which own, directly or indirectly, 16 hotels, representing 4,424 rooms. In addition to its ownership interest in the joint ventures, the Company is responsible for the day-to-day operations of the hotels owned by the joint ventures (with the exception of one franchised hotel with 374 rooms) and receives management fees for operating the hotels. Under each joint venture agreement or separate management contract with respect to a hotel, the Company's compensation is comprised of either an annual base management fee, an annual incentive management fee (based on a percentage of cash flow or operating profit) or both. The Company has made significant advances to certain of the joint ventures. Repayment of these advances receives priority distribution from the cash flow distributable to the joint venture's partners. INVESTMENTS AND COMMITMENTS The Company makes selective debt and equity investments (collectively "Investments") in the underlying hotels that it leases or manages as a means of obtaining and enhancing the profitability of its leases or management contracts. For many of these same purposes, the Company 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. The Company may make Investments in hotels in a variety of forms, including through partnerships, corporations and limited liability companies, which typically are minority and illiquid positions. The Company may also make guarantees of hotel performance to an owner, which guarantees normally are limited in time or amount. The Company may also make payments directly to the hotel owner, normally in consideration of special financial or other accommodations to the Company in management contract terms and conditions, which payments are capitalized and amortized. The Company 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; however, such Investments and commitments often are characterized by enhanced risk. At December 31, 1996, the Company had minority/non-controlling interests in 16 partnerships, the majority of which own hotels and the remainder of which own retail or industrial properties. The Company's percentage of ownership in such partnerships ranges from less than 1% to 50% and at December 31, 1996, had an aggregate book value of $58.2 million. At such date, the Company also had loans outstanding to certain hotel owners with an aggregate book value of $45.1 million, and had guaranteed certain mortgages, leases and construction bonds for hotel owners up to $4.9 million ($1.0 million is collateralized by letters of credit). Additionally, the Company has approximately $5.5 million of bonds outstanding as collateral for the payment of claims arising out of workers' compensation claims at its leased or managed hotels. As a result of the Red Lion Acquisition the Company will now be required to invest substantially in the renovation and general upkeep of its owned hotels and the hotels in which it has a controlling joint venture interest. Additionally, the Company anticipates spending $10.0 million to $15.0 million during 1997 to convert the majority of the Red Lion hotels to the Doubletree brand name. Accordingly, investments in property and equipment will increase substantially in 1997 as compared to historical levels of capital expenditures made when the Company principally managed or leased hotel properties. At December 31, 1996, the Company had commitments relating to capital improvement projects aggregating approximately $3.9 million. The Company 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 December 31, 1996, the Company 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, the Company had 12 14 investments in the REIT's common stock and partnership units of the Landlord with a net book value of $1.5 million. At such date, the Company had a commitment to invest, subject to certain conditions, an additional $2.0 million in Thayer Hotel Investors II ("Thayer"), a limited partnership which invests in hotel properties and for which the Company manages certain hotels. The Company has a 4.35% limited partnership interest in Thayer. The terms of the Company's investment in Thayer do not assure that the Company will be offered the opportunity to manage hotels acquired by Thayer, but the Company anticipates that at least 50% of the properties acquired by Thayer will either be managed or franchised by the Company. The Company may also make Investments in other lodging industry companies for strategic reasons and to enhance the Company's value. Commencing in November 1995 and continuing through November 1996, the Company made investments in the Candlewood LLC. Prior to Candlewood's initial public offering in November 1996 the Company's investment in the Candlewood LLC was structured as an equity contribution with the Company earning a preferred return. In connection with the initial public offering, the Company's contributions in excess of $200,100 and its preferred return were converted to an interest bearing note in the amount of approximately $12.1 million plus interest (the "Candlewood Note"). In addition, the Company agreed to extend to Candlewood a five-year, $15 million subordinated credit facility of which amounts outstanding under the Candlewood Note constitute a part. Amounts outstanding under the credit facility and the Candlewood Note bear interest at rates of 7% per annum for the first 12 months following contribution, 10% per annum for second 12 months following contribution and 15% per annum thereafter. At December 31, 1996, the aggregate amount outstanding under the credit facility (including the Candlewood Note) was approximately $12.5 million. In addition, in August 1996 the Company 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. In providing such credit support, the Company's maximum exposure on any one Candlewood franchise will be approximately $1.0 million, with the aggregate amount of exposure for all such credit support capped at between $20.0 million and $30.0 million. At December 31, 1996, the loan facility had not been utilized. Also in August 1996, the Company formed a joint venture strategic alliance with Patriot, pursuant to which the Company and Patriot will seek to identify hotels potentially suitable for acquisition by Patriot and to be operated as the Company brand hotels or luxury non-Doubletree brand hotels, in each case to be leased and/or managed by the Company. The Company 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. As of December 31, 1996, the Company had invested $10.7 million in the joint venture. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." THE RED LION ACQUISITION On November 8, 1996, the Company consummated the Red Lion Acquisition. As a result of the Red Lion Acquisition, Red Lion became a wholly-owned subsidiary of the Company. The Red Lion Acquisition presented the Company with the opportunity to augment its management team with individuals from Red Lion's management team. As a result of the Red Lion Acquisition, the Board of Directors of the Company was expanded to include Messrs. Edward A. Gilhuly and Michael W. Michelson, who were designated by the Partnership. At December 31, 1996, the Company operated 56 full-service Red Lion brand hotels, 17 of which were owned, eight of which were operated pursuant to joint venture agreements and 17 of which were leased pursuant to the Partnership Lease. The remaining 14 hotels were operated pursuant to management contracts, and 10 of such managed hotels are owned by the MLP, the general partner of which is a wholly-owned subsidiary of the Company, and are managed by the Company pursuant to a management agreement with the MLP. See "-- Management Contracts." To raise the funds required to consummate the Red Lion Acquisition, the Company (i) borrowed $493.2 million under a term loan and revolving credit facility committed by Morgan Stanley Senior Funding, Inc. and the Bank of Nova Scotia (the "New Credit Facility"); (ii) raised approximately $210.7 million from an equity offering of 5,600,000 shares of the Company's Common Stock; (iii) raised $100.0 million through an equity investment by the Trustees of General Electric Pension Trust ("GEPT") whereby GEPT purchased 13 15 2,627,533 shares of Common Stock and was issued warrants to purchase 262,753 shares of Common Stock in return for its $100.0 million investment (the "GEPT Equity Investment"); and (iv) utilized $34.2 million of existing cash on hand. Prior to the consummation of the Red Lion Acquisition, the Partnership owned 66.7% of the then outstanding shares of common stock of Red Lion. As a result of the Red Lion Acquisition, the Partnership received 4,836,260 shares of the Company's Common Stock as well as approximately $445.2 million in cash, for a total of approximately $636.5 million in aggregate consideration. THE RFS ACQUISITION On February 27, 1996, Doubletree acquired all of the outstanding stock of RFS Management in exchange for 2,727,811 shares of Doubletree Common Stock. At December 31, 1996, RFS Management operated 64 hotels 52 of which were leased and operated by the Company, four of which were leased and operated by third party management, and eight of which were managed for owners other than the Landlord. The sole general partner and approximately 98.6% owner of the Landlord is the REIT. The 64 hotels, principally operating in the limited-service and extended stay segments of the market, comprise approximately 10,120 rooms and are operated under such franchise brands as Holiday Inn, Holiday Inn Express, Residence Inn by Marriott, Comfort Inn, Hampton Inn, Ramada and Sheraton. 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 closing of the RFS Acquisition, the Landlord must pay 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. In November 1996, the REIT engaged in a financing transaction collateralized by the Landlord's interest in certain of the Percentage Leases. In connection with such transaction, the Landlord transferred its lessor interest in 15 of the Percentage Leases into a bankruptcy remote subsidiary, and at the request of the REIT, the Company also transferred its lessee interest under such Percentage Leases (as well as the management contracts relating to such hotels) into a bankruptcy remote subsidiary of the Company. THE RENAISSANCE TRANSACTION On January 5, 1997, the Company entered into a Memorandum of Understanding for the acquisition of Renaissance Hotel Group N.V. ("Renaissance") in a transaction valued at $890.0 million including assumed debt of $70.0 million. The Memorandum of Understanding provided that in the event Renaissance entered into a merger or acquisition agreement with a party other that the Company within four months, the Company 14 16 was to receive a breakup fee of $15.0 million. In February 1997, Renaissance pursued discussions with another party and on February 20, 1997, the Company received the $15.0 million breakup fee. After payment of expenses associated with the Company's acquisition efforts, the balance at the cash received will be available for general corporate purposes. COMPETITION The Company's managed and franchised hotels are in competition for guests with a wide range of lodging facilities offering full-service, limited-service and all-suite 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. There can be no assurance that new or existing competitors will not significantly expand or improve facilities in a market in which the Company's hotels compete, thereby adversely affecting the Company's operations. The Company also competes for management contracts, leases and franchise agreements with other hotel management companies and national brand franchisers. Some of the larger hotel chains with which the Company competes include Marriott, Sheraton, Hyatt, Hilton, Westin, Wyndham and Embassy Suites. In addition, many of its competitors are hotel management companies that do not have their own brand. The Company believes its ability to offer both hotel management services and a recognized brand name gives it an advantage over its competitors without their own brand because hotel owners who contract with such competitors are required to pay two separate fees, which the Company believes are, in most cases, in excess of the Company's single fee. The Company also believes that some of its larger competitors are constrained in pursuing new management contract opportunities in certain areas by the proximity of their own existing hotels. The Company is large enough to benefit from a nationally recognized brand; however, there are still a significant number of available markets in which the Company is not yet represented. GOVERNMENT REGULATION 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 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 Company is also 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 Company. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. The Company believes that the hotels that it owns or that are under its 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 Company in bringing these hotels into compliance. These and other initiatives could adversely affect the Company as well as the hotel industry in general. ENVIRONMENTAL MATTERS 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 15 17 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 the Company, the Company may be potentially liable for any such costs; there can be no assurance that there are no environmental liabilities or claims of which the Company is unaware or that the current condition of the Company's properties have not been or will not be affected by the historical or current uses of such properties or the activities in the vicinity of such properties or that liability resulting from non-compliance or other claims relating to environmental matters will not have a material adverse effect on the Company. Pursuant to the Partnership Lease, the Partnership and its affiliates are indemnified for any matter arising by reason of or in connection with 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 hotels subject to the Partnership Lease, and certain exposures to Hazardous Materials (as such terms are defined in the Partnership Lease) which exist at or are released from any of such hotels prior to or during the term of the Partnership Lease. Such indemnities will survive the termination of the Partnership Lease. In addition, the Partnership and its affiliates were indemnified by Red Lion 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 by it in the formation of Red Lion. Pursuant to a partnership services agreement among Doubletree, Red Lion and certain affiliates at Red Lion, Doubletree has agreed to guarantee Red Lion's indemnity obligation to the Partnership following the effective time of the Red Lion Acquisition. Some of the Red Lion hotels 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. Monitoring wells have been installed at some of these sites. In addition, certain of the Red Lion hotels 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 the Red Lion 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 the Company will not be required in the future to investigate or remediate any contamination resulting from the landfill. 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," "Red Lion," "Red Lion Inn," "Red Lion Hotel" and related marks and logos are material to the Company's business. The Company, as well as its franchisees, actively use these marks. All of the Company's material marks are registered, or are on application for registration, with the United States Patent and Trademark Office. In connection with the sale of Red Lion in 1985, the use of the Red Lion trademark and central reservations system was licensed 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, the Company licenses the Red Lion name and Red Lion central reservation system to two hotels in Nevada and a hotel in Wyoming (which are not included in the 56 Red Lion hotels) for which the Company 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 a Red Lion hotel is opened 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. The Company 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. 16 18 INSURANCE The Company 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 and property, earthquake and business interruption insurance, that it believes is appropriate for a company in the hotel business. While management believes that its insurance coverage is adequate, if the Company were held liable for amounts exceeding the limits of its insurance coverage or for claims outside of the scope of its insurance coverage, the Company's business, results of operations and financial condition could be materially and adversely affected. EMPLOYEES At December 31, 1996, the Company had approximately 23,200 full-time employees and 5,800 part-time employees. Of these full-time employees, approximately 800 of these employees are employed at the corporate level and approximately 22,400 employees are employed at the hotel properties. The wages and salaries, health insurance and other employee benefits of persons employed at the Company's hotels are paid out of the operations of the hotel property. Corporate personnel are paid directly by the Company. Employees at four of the Company's managed hotels are members of labor unions. The Company believes its ongoing labor relations are good. ITEM 3. LEGAL PROCEEDINGS The Company is not party to any litigation, other than routine litigation incidental to the business of the Company. The Company believes that such litigation is not material to the business of the Company, either individually or in the aggregate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's initial public offering of Common Stock was effected as of July 1, 1994. The Company's Common Stock is listed on the Nasdaq National Market under the symbol "TREE." The following table sets forth, for the calendar periods indicated, the rage of high and low closing prices for the Common Stock, as reported by the Nasdaq National Market:
1995 1996 ------------------ ----------------- HIGH LOW HIGH LOW ------ ------- ------ ------ 1st Quarter.................................... $20.25 $ 16.25 $28.50 $22.75 2nd Quarter.................................... $22.00 $ 18.75 $35.75 $26.50 3rd Quarter.................................... $24.75 $18.938 $40.38 $30.75 4th Quarter.................................... $26.38 $ 20.50 $47.50 $39.25
The closing sales price of the Company's Common Stock on March 3, 1997 was $41.50. The approximate number of stockholders of record on March 3, 1997 was 500. The Company has not declared or paid any dividends on its Common Stock since its inception and does not currently plan to declare or pay any dividends. The payment of dividends in the future will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. The Company is currently prohibited under the New Credit Facility from paying cash dividends or other distributions. 17 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Not covered by Report of Independent Auditors) The following tables present selected historical consolidated financial information for the Company and its Predecessor (Samantha Hotel Corporation ("Samantha"), the entity which owned 92% of GQHP prior to the Combination Transaction). The 1992 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 results of operations for Red Lion have been included commencing November 8, 1996 through December 31, 1996. The following tables also present pro forma information for the years ended December 31, 1995 and 1996, giving effect to the Red Lion Acquisition as if it had occurred on January 1, 1995. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Unaudited Pro Forma Consolidated Statements of Operations". The selected historical consolidated financial information presented below as of and for the years ended December 31, 1994, 1995 and 1996 has been derived from the audited financial statements of the Company. The selected historical consolidated financial information presented below as of and for the fiscal years ended December 31, 1992 and 1993 has been derived from the audited financial statements of Samantha. (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------ PREDECESSOR(1) DOUBLETREE ----------------- ------------------------------------------------------------- ACTUAL ACTUAL PRO FORMA(3) ----------------- ------------------------------------ ---------------------- 1992 1993 1994 1995 1996(2) 1995 1996 ------- ------- -------- -------- -------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Management and franchise fees.......... $ 8,556 $10,612 $ 26,330 $ 30,082 $ 38,621 $ 41,171 $ 49,341 Owned hotel revenues................... 3,786 9,943 92 7,081 38,350 219,569 228,362 Leased hotel revenues.................. 5,932 14,923 73,769 141,942 205,163 274,154 326,594 Purchasing and service fees............ -- 329 10,746 16,487 19,848 61,611 63,365 Other fees and income.................. 419 2,547 1,545 994 2,953 1,235 3,160 ------- ------- -------- -------- -------- -------- -------- Total revenues.................. 18,693 38,354 112,482 196,586 304,935 597,740 670,822 ------- ------- -------- -------- -------- -------- -------- Operating costs and expenses: Corporate general and administrative expenses............................. 5,683 7,485 11,879 14,901 18,079 25,811 24,882 Owned hotel expenses................... 2,810 6,400 101 6,049 27,889 148,500 150,376 Leased hotel expenses.................. 4,972 14,266 68,981 132,644 190,797 242,394 287,584 Purchasing and service expenses........ -- 620 9,807 13,437 14,796 56,081 56,066 Depreciation and amortization.......... 599 1,572 2,943 4,686 12,018 47,155 48,358 Business combination expenses.......... -- 1,865 -- 2,565 -- -- -- ------- ------- -------- -------- -------- -------- -------- Total operating costs and expenses...................... 14,064 32,208 93,711 174,282 263,579 519,941 567,266 ------- ------- -------- -------- -------- -------- -------- Operating income......................... 4,629 6,146 18,771 22,304 41,356 77,799 103,556 Interest expense....................... -- (1,228) (831) (227) (6,648) (42,541) (42,290) Interest income........................ 159 254 1,630 4,147 5,561 9,217 11,113 ------- ------- -------- -------- -------- -------- -------- Income before income taxes and minority interest............................... 4,788 5,172 19,570 26,224 40,269 44,475 72,379 Minority interest share of net (income) loss................................. (372) 175 -- 35 (373) (724) (1,726) ------- ------- -------- -------- -------- -------- -------- Income before income taxes............... 4,416 5,347 19,570 26,259 39,896 43,751 70,653 Income tax expense..................... (65) (414) (6,335)(5) (8,468) (13,962) (19,426) (29,393) ------- ------- -------- -------- -------- -------- -------- Net income............................... $ 4,351 $ 4,933(4) $ 13,235(5) $ 17,791 $ 25,934 $ 24,325 $ 41,260 ======= ======= ======== ======== ======== ======== ======== Earnings per share....................... $ 0.66(5) $ 0.80 $ 1.01 $ 0.63 $ 1.04 ======== ======== ======== ======== ======== Weighted average shares outstanding...... 20,071 22,219 25,766 38,669(6) 39,834(6) ======== ======== ======== ======== ========
18 20
AS OF DECEMBER 31, -------------------------------------------------------- 1992(1) 1993(1) 1994 1995 1996 ------- ------- -------- -------- ---------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.................. $ 5,741 $ 6,826 $ 23,169 $ 32,652 $ 25,588 Total assets............................... 22,368 89,072 134,701 163,107 1,730,949 Long-term debt, net of current portion..... 5,736 25,000 -- -- 506,235 Stockholders' equity....................... 9,773 13,645 91,587 114,386 801,530
- --------------- (1) Predecessor only. (2) Includes the operating results of Red Lion Hotels, Inc. (Red Lion) for the period commencing November 8, 1996 through December 31, 1996. (3) Pro forma adjustments have been made to (a) give effect to the acquisition of Red Lion and related transactions as if such transactions had occurred on January 1, 1995, (b) exclude business combination expenses related to the Red Lion and RFS Management transactions and (c) exclude Red Lion formation expenses related to the 1995 restructuring and initial public offering of Red Lion. (4) On a pro forma basis, giving effect to the Combination Transaction and the Reorganization as if each of these events had occurred on January 1, 1993 net income and earnings per share would have been $8.6 million and $0.47, respectively. (5) 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. (6) Assumes that the 16.4 million shares issued in connection with the Red Lion Acquisition, which was accounted for as a purchase, were outstanding for both periods. 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW As of December 31, 1996, the Company had a portfolio of 241 properties, of which 204 were managed and/or leased and 37 were franchised. Of the managed properties, 18 are wholly-owned by the Company, eight are operated pursuant to joint venture agreements (in which the Company owns 50% or more of the venture), 82 are leased and 96 are managed for third party owners. The Company derives its revenues from five sources: Management and franchise fees -- As a manager of hotels, the Company is typically responsible for supervising or operating the hotel in exchange for base fees tied to revenues. In addition, the Company may also earn revenues through incentive fees based on the performance of the hotel. As a franchisor, the Company licenses its brand name to the hotel operator in exchange for a franchise fee based on revenues. Owned hotel revenues -- As the owner and manager of hotels, the Company includes as revenues the entire property's revenues. Leased hotel revenues -- As the lessee of hotels that the Company also manages, the Company exercises similar control over the operation and supervision of the hotel as is given to it as a manager, however, the Company recognizes all revenues and substantially all expenses associated with the operation of the hotel. Purchasing and service fees -- Purchasing and service fees represent fees from administering 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 -- Other fees and income primarily comprise contract termination fees and equity in income/losses of hotel partnerships and similar ventures, including gains/losses upon sale of a hotel. RESULTS OF OPERATIONS Year Ended December 31, 1996 vs. Year Ended December 31, 1995 The operating results for the year ended December 31, 1996 reflect the inclusion of the operating results of Red Lion from the date of its acquisition on November 8, 1996 through December 31, 1996. A summary of revenues and operating expenses for 1996 is as follows (in thousands):
DOUBLETREE RED LION TOTAL ---------- -------- -------- REVENUES Management and franchise fees....................... $ 37,202 $ 1,419 $ 38,621 Owned hotel revenues................................ 7,927 30,423 38,350 Leased hotel revenues............................... 187,193 17,970 205,163 Purchasing and service fees......................... 16,029 3,819 19,848 Other fees and income............................... 3,139 (186) 2,953 -------- ------- -------- Total revenues................................. 251,490 53,445 304,935 -------- ------- -------- OPERATING COSTS AND EXPENSES Corporate general and administrative expenses....... 16,613 1,466 18,079 Owned hotel expenses................................ 6,228 21,661 27,889 Leased hotel expenses............................... 173,918 16,879 190,797 Purchasing and service expenses..................... 11,253 3,543 14,796 Depreciation and amortization....................... 5,883 6,135 12,018 -------- ------- -------- Total operating costs and expenses............. 213,895 49,684 263,579 -------- ------- -------- Operating income.......................... $ 37,595 $ 3,761 $ 41,356 ======== ======= ========
20 22 Total revenues increased $108.3 million or 55% to $304.9 million for the year ended December 31, 1996 compared to $196.6 million for the year ended December 31, 1995. Revenues from management and franchise fees increased $8.5 million or 28% due to fees from new contracts (net of contracts lost) of $3.7 million ($1.4 million of which is attributable to Red Lion Acquisition), higher incentive fees of $3.5 million and increased fees from comparable hotels of $1.3 million. The increase in incentive fees and 11% increase in fees from comparable hotels resulted from the improved operating performance at certain hotels. Owned hotel revenues increased $31.3 million and the margin increased $9.4 million in 1996 as compared to 1995 of which $30.4 million and $8.8 million, respectively is attributable to the Red Lion Acquisition. Prior to the acquisition of Red Lion, the Company owned one hotel in Southfield, Michigan. Revenues from the Southfield property increased $0.9 million or 12% over the 1995 period due to a significantly improved occupancy rate. Leased hotel revenues increased $63.2 million or 45% principally due to an increase in the size of the Company's leased hotel portfolio in 1996 as compared to 1995 and improved occupancy and average daily rates. The margin on leased hotel operating results increased 55% to $14.4 million. Excluding the impact of the Red Lion Acquisition, revenues increased $45.3 million or 32% and the margin on leased hotels increased $4.0 million or 43% reflecting the net addition of properties and an improvement in the operating margin from 6.6% to 7.1%. Purchasing and service fees increased $3.4 million in 1996 or 20% to $19.8 million. Excluding the impact of the Red Lion Acquisition, revenues decreased nominally while the margin increased from $3.1 million in 1995 to $4.8 million in 1996 or 57% reflecting a shift in mix from high volume, low margin bulk purchasing programs (whereby the Company purchases goods and resells such goods to its hotel owners) to preferred vendor programs (whereby the Company earns fees for administering the programs). Other fees and income increased $2.0 million from $1.0 million in 1995 to $3.0 million in 1996 due to a gain of $1.3 million realized on the sale of a hotel in which the Company had an equity interest and $1.2 million of dividends from the investment in the convertible preferred stock of the REIT. These increases were offset by equity losses of $0.5 million principally attributable to the Company's equity investment in Candlewood. General and administrative expenses increased $3.2 million to $18.1 million in 1996. Excluding the impact of the Red Lion Acquisition, expenses increased $1.7 million or 11% primarily due to the addition of new employees and higher travel and professional fees, all of which is attributable to the Company's growth. Depreciation and amortization increased $7.3 million from $4.7 million in 1995 to $12.0 million reflecting the additional depreciation of assets and amortization of goodwill resulting from the Red Lion Acquisition. Business combination expenses of $2.6 million in 1995 were attributable to legal, professional and accounting fees, due diligence and certain other expenses incurred in connection with the Company's acquisition of RFS Management. Operating income was $41.4 million, an increase of $19.1 million or 85% from 1995. Excluding the charge for business combination expenses in 1995 and the impact of the Red Lion Acquisition in 1996, operating income would have increased $12.7 million or 51% from the prior period. The Company incurred net interest expense of $1.1 million in 1996 compared to generating $3.9 million of net interest income in 1995. The increase in net interest expense resulted from interest expense on the debt incurred in the Red Lion Acquisition. The increase of $0.4 million in the minority interest share of net income reflects the profits allocable to third party owners of certain consolidated joint ventures of Red Lion. The provision for income taxes reflects a 35% effective tax rate for 1996 compared to a 32.2% effective tax rate for 1995. The lower effective tax rate for 1995 reflects the election by RFS Management to be taxed as a 21 23 Subchapter S corporation effective January 1, 1995. Accordingly, the earnings of RFS Management were generally not subject to federal income taxes. Net income and earnings per share for the year ended December 31, 1996 were $25.9 million and $1.01, respectively, compared to net income of $17.8 million and $0.80, respectively, in 1995. On a pro forma basis, net income for the year ended December 31, 1996 increased 70% from $24.3 million in 1995 to $41.3 million in 1996 and earnings per share was $1.04 in 1996 as compared to $0.63 in 1995, an increase of 65%. Year Ended December 31, 1995 vs. Year Ended December 31, 1994 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 represent the revenues derived from 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 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, the net addition of new properties and increases in revenues from existing properties. The margin from purchasing and service fees increased $2.1 million to $3.1 million or 210% principally reflecting the implementation of several purchasing agreements that lower the price of products to the hotel owner while concurrently providing the Company with a fee in return for negotiating and administering 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. The Company subsequently entered into management contracts with the new owners of these two hotels. General and administrative expenses increased $3.0 million or 25%, $2.2 million of which was attributable to the growth of RFS Management, which added 31 hotels in 1994, and $0.8 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 property 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 in connection with the Company's acquisition of RFS Management. 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 the Company's then existing 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 the Company prior to its initial public offering in July 1994 offset by a slightly 22 24 higher rate on the earnings of RFS Management. The provision in 1995 reflects a combined 32.2% effective tax rate which is lower than the Company's effective tax 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 $13.2 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company's balance sheet reflected negative working capital of $60.4 million, $39.2 million of which represents the current maturity of a note payable related to one of the properties acquired from Red Lion. The note matures in July 1997 and the Company is in the process of refinancing the note. In the event the Company is unsuccessful in refinancing the note, the Company's New Credit Facility makes available additional borrowings of up to $40.0 million to refinance the existing note and extend the repayment date beyond 1997. The commitment under the New Credit Facility expires June 30, 1997. In February 1997, the Company received $15.0 million in cash from Renaissance Hotel Group N.V. (Renaissance) as a break-up fee in accordance with the terms of a memorandum of understanding between Renaissance and the Company. After payment of expenses associated with the Company's acquisition efforts, the balance of the cash received will be available for general corporate uses. Additionally, during 1996 the Company generated cash from operating activities of $42.7 million as compared to $24.5 million in 1995. The increase was principally due to increases in net income and expenses (depreciation and amortization) not requiring the use of cash. Giving effect to the Red Lion Acquisition, operating income, on a pro forma basis, before depreciation and amortization was $151.9 million for the year ended December 31, 1996. Accordingly, management does not believe that the negative working capital position will adversely impact its results of operations or liquidity in the future. Historically, the Company required 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. Excluding the net cash of $819.0 million used for the acquisition of Red Lion, the Company used $60.6 million of cash during 1996 for investing activities. In February 1996, the Company contributed $18.5 million to RFS Management which subsequently invested in 973,684 shares of convertible preferred stock in RFS Hotel Investors, Inc. (the "REIT Preferred Shares"). In conjunction with obtaining management and/or lease agreements for the underlying hotel property, the Company invested $13.2 million in hotel partnerships and ventures and loaned $8.9 million to owners of hotels. The Company has committed to contribute up to $15.0 million to Candlewood, of which $12.3 million has been funded as of December 31, 1996 ($11.1 million during 1996). The balance of the commitment is anticipated to be contributed during the next year and will be used for general corporate purposes as well as funding a portion of the development/construction costs of certain hotels. In August 1996, the Company 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 is General Motors Acceptance Corporation Mortgage Group. In providing such credit support, the Company's maximum exposure on any one Candlewood franchise will be approximately $1.0 million, with the aggregate amount of exposure 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, the Company and Patriot American Hospitality, Inc. ("Patriot") formed a joint venture wherein the Company will invest up to $20.0 million of capital ($10.7 million of which had been invested as of 23 25 December 31, 1996) to be combined with up to $180.0 million of capital from Patriot to be used for the acquisition of hotels. The Company has a 10% interest in the venture. The Company has guaranteed certain mortgages, leases and construction bonds up to $4.9 million ($1.0 million of which is collateralized by a letter of credit). Additionally, the Company has approximately $5.5 million of bonds outstanding as collateral for payment of claims arising out of workers' compensation claims and has committed to contribute an additional $2.0 million to an investment partnership formed for the purpose of acquiring hotel properties. The Company has a 4.35% limited partnership interest in the venture. 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 $0.5 million in June 1996 in connection with a shortfall at one hotel. There were no shortfall funding payments in 1995 or 1994. With the acquisition of the 17 Red Lion owned hotels, the Company will now be required to invest substantially in the renovation and general upkeep of the hotel properties. Additionally, the Company anticipates spending $10.0 to $15.0 million during 1997 to convert the majority of the Red Lion hotels to the Doubletree brand name. Accordingly, investments in property and equipment will increase substantially in 1997 as compared to historical levels of capital expenditures made when the Company principally managed hotel properties. As of December 31, 1996, the Company had commitments relating to capital improvement projects aggregating approximately $3.9 million. In connection with the Red Lion Acquisition, the Company terminated its existing facility and entered into a new $633.2 million credit facility (New Credit Facility). The New Credit Facility has three components: (1) a $100.0 million revolving credit facility, (2) a $362.2 million term loan (Term Loan A), and (3) a $171.0 million term loan (Term Loan B). At the option of the Company, interest rates may be based on either (a) the higher of the federal funds rate plus 1/2% or the prime rate or (b) the Eurodollar rate plus an interest rate margin which ranges from 1.125% to 2.000% with respect to the revolving line of credit and Term Loan A and 2.25% to 2.50% with respect to Term Loan B. The interest margins at any time are related to the financial condition and performance of the Company. The $100.0 million revolving credit facility can be used for general corporate purposes, matures in 2002 and was undrawn as of December 31, 1996. Term Loan A is a fully amortizing loan and makes available additional borrowings of up to $40.0 million to refinance an existing hotel mortgage (the commitment for which expires June 30, 1997). As of December 31, 1996, the principal balance outstanding was $300.7 million and the interest margin was 1.375%. Principal payments are due quarterly, increasing from approximately $1.0 million per quarter in 1997 to $18.8 million quarterly in 2002, at which time the term loan matures. Term Loan B requires quarterly principal payments of approximately $376,000 through 2002 and then increases to approximately $25.3 million quarterly through maturity in May 2004. As of December 31, 1996, the principal balance outstanding was $160.9 million and the interest margin was 2.25%. The Company entered into interest rate swap agreements in order to reduce its exposure to interest rate fluctuations. As of December 31, 1996, the Company had three agreements which have converted $250.0 million of debt from floating rates (5.625% at December 31, 1996) to a fixed rate of 5.92% (prior to the applicable margin). The agreements expire March 31, 1999. The New Credit Facility contains numerous covenants which place restrictions on additional indebtedness, mergers, acquisitions, the payment of dividends and investments and requires the Company to maintain certain financial ratios. Additionally, the Company is required to make mandatory principal payments with the proceeds from excess cash flow from operations (as defined) or equity offerings and the sale of assets or refinancing of certain indebtedness. All obligations are guaranteed and secured by substantially all of the assets of the Company and its significant subsidiaries. Depending on the timing and magnitude of the Company's future investments (either in the form of debt or equity), the working capital necessary to satisfy current obligations is anticipated to be generated from 24 26 operations. To the extent the Company identifies significant acquisition and/or investment opportunities in excess of its available cash, the Company may borrow under the credit facility or may seek additional sources of capital to fund such investments. Management believes that a combination of its existing cash and cash equivalents, net cash provided from operations, and its borrowing ability under the New Credit Facility will be sufficient to fund its operations, capital outlays and commitments. SEASONALITY The operating results of hotels are affected by seasonality. Though the Company's hotels are distributed throughout the United States, revenues and profitability are typically higher in summer periods than in winter periods. IMPACT OF INFLATION Operation of the Company can be impacted by inflation. Though operators of hotels possess the ability to adjust room rates periodically, inflation can also cause increases in operating costs and impact the travel patterns of guests. ACCOUNTING STANDARDS NOT YET ADOPTED BY THE COMPANY The Financial Accounting Standards Board has issued several Statements of Financial Accounting Standards for which the required implementation date has not yet become effective. None of these accounting standards will have a material impact on the Company's consolidated financial statements. 25 27 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS The following Unaudited Pro Forma Consolidated Statements of Operations for the years ended December 31, 1995 and 1996 present the consolidated results of operations of the Company (including RFS Management) as if Red Lion had been acquired at the beginning of 1995. The following information is not necessarily indicative of the results of operations of the Company as they may be in the future or as they might have been had the Red Lion Acquisition been consummated at the beginning of the period shown. The Unaudited Pro Forma Consolidated Statements of Operations should be read in conjunction with the audited historical Consolidated Financial Statements of the Company and notes thereto. (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------- ---------------------------------------------------- DOUBLETREE, DOUBLETREE, AS PRO FORMA AS PRO FORMA REPORTED RED LION ADJUSTMENTS TOTAL REPORTED(1) RED LION(2) ADJUSTMENTS TOTAL ---------- -------- ----------- -------- ---------- ----------- ----------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Management and franchise fees..... $ 30,082 $ 11,388 $ (299)(a) $ 41,171 $ 38,621 $ 10,910 $ (190)(a) $ 49,341 Owned hotel revenues........... 7,081 185,414 27,074(a) 219,569 38,350 175,432 14,580(a) 228,362 Leased hotel revenues........... 141,942 132,212 -- 274,154 205,163 121,431 -- 326,594 Purchasing and service fees....... 16,487 45,124 -- 61,611 19,848 43,517 -- 63,365 Other fees and income............. 994 241 -- 1,235 2,953 207 -- 3,160 -------- -------- -------- -------- -------- -------- -------- -------- Total revenues.... 196,586 374,379 26,775 597,740 304,935 351,497 14,390 670,822 -------- -------- -------- -------- -------- -------- -------- -------- Operating costs and expenses: Corporate general and administrative expenses........... 14,901 10,910 -- 25,811 18,079 6,803 -- 24,882 Owned hotel expenses........... 6,049 121,913 20,538(a) 148,500 27,889 111,033 11,454(a) 150,376 Leased hotel expenses........... 132,644 109,750 -- 242,394 190,797 96,787 -- 287,584 Purchasing and service expenses... 13,437 42,644 -- 56,081 14,796 41,270 -- 56,066 Depreciation and amortization....... 4,686 19,328 23,141(b) 47,155 12,018 17,001 19,339(b) 48,358 Business combination expenses........... 2,565 14,662 (17,227)(c) -- -- 8,369 (8,369)(f) -- -------- -------- -------- -------- -------- -------- -------- -------- Total operating costs and expenses.... 174,282 319,207 26,452 519,941 263,579 281,263 22,424 567,266 -------- -------- -------- -------- -------- -------- -------- -------- Operating income....... 22,304 55,172 323 77,799 41,356 70,234 (8,034) 103,556 Interest expense..... (227) (19,408) (22,906)(d) (42,541) (6,648) (15,118) (20,524)(d) (42,290) Interest income...... 4,147 5,070 -- 9,217 5,561 5,552 -- 11,113 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes and minority interest............. 26,224 40,834 (22,583) 44,475 40,269 60,668 (28,558) 72,379 Minority interest share of net (income) loss...... 35 (759) -- (724) (373) (1,353) -- (1,726) -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes................ 26,259 40,075 (22,583) 43,751 39,896 59,315 (28,558) 70,653 Income tax expense... (8,468) (7,325) (3,633)(e) (19,426) (13,962) (23,087) 7,656(e) (29,393) -------- -------- -------- -------- -------- -------- -------- -------- Net income............. $ 17,791 $ 32,750 $ (26,216) $ 24,325 $ 25,934 $ 36,228 $ (20,902) $ 41,260 ======== ======== ======== ======== ======== ======== ======== ======== Earnings per share..... $ 0.80 $ 0.63 $ 1.01 $ 1.04 ======== ======== ======== ======== Weighted average shares outstanding.......... 22,219 38,669 25,776 39,834 ======== ======== ======== ========
- --------------- (1) Includes the results of operations of Red Lion for the period commencing November 8, 1996 through December 31, 1996. (2) Reflects the results of operations of Red Lion for the period January 1, 1996 through the date of acquisition by Doubletree on November 8, 1996. 26 28 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS 1. ASSUMPTIONS On November 8, 1996, the Company acquired all of the outstanding common stock of Red Lion in a transaction valued at approximately $1.2 billion. The Company paid $695 million in cash, repaid $124 million of existing Red Lion indebtedness, issued 7.4 million shares of common stock to the shareholders of Red Lion with a fair value at the date of closing of $292 million and assumed net liabilities of $90 million. The acquisition has been accounted for as a purchase and the results of operations of Red Lion have been included in the consolidated financial statements since November 8. The purchase price was allocated to the net assets acquired based upon their estimated fair market values. The excess of the purchase price over the estimated fair value of the net assets acquired of $365 million was recorded as goodwill to be amortized over a 40 year life. 2. RECLASSIFICATIONS Reclassifications have been made to the previously issued financial statements of Red Lion to conform with the financial statement presentation used by Doubletree. 3. PRO FORMA ADJUSTMENTS The following adjustments have been made to the Unaudited Pro Forma Consolidated Statements of Operations: (a) Red Lion acquired three hotels in April 1996, July 1996 and September 1996. The pro forma results of operations include the operating results of these hotels as if they were all acquired on January 1, 1995. Hotel management fees from the hotel acquired in September 1996 (which was previously managed) have been eliminated. (b) To reflect the increase in depreciation and amortization resulting from the application of purchase accounting. (c) To exclude $2.6 million of business combination expenses incurred by Doubletree related to the RFS Acquisition and $14.7 million of formation expenses incurred by Red Lion related to the 1995 restructuring and initial public offering of Red Lion. (d) To reflect increased interest expense associated with the New Credit Facility, including agency and commitment fees and the amortization of loan fees. An interest rate of 7.05% was assumed for all periods on borrowings under the New Credit Facility. The annual effect of a 1/8 percent change in the interest rate would be approximately $0.6 million. (e) To reflect an effective tax rate of 40% on all pro forma adjustments except for amortization of goodwill. (f) To exclude $8.4 million of business combination expenses (principally investment banking, accounting and legal fees) incurred by Red Lion in connection with the acquisition by Doubletree. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is filed as a separate part of this Report (see page 30). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is hereby incorporated herein by reference the information appearing under the caption "Proposal 1 Election of Directors" and under the caption "Executive Officers of the Company" of the Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 11. EXECUTIVE COMPENSATION There is hereby incorporated herein by reference the information appearing under the caption "Executive Compensation" of the Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated herein by reference the information appearing under the caption "Voting Securities and Principal Holders Thereof" of the Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed with the Securities and Exchange Commission on or before April 30, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated herein by reference the information appearing under the caption "Certain Transactions" of the Registrant's definitive Proxy Statement for its 1997 Annual Meeting to be filed with the Securities and Exchange Commission on or before April 30, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements 1. The financial statements contained in the accompanying Index to Consolidated Financial Statements covered by the Independent Auditors' Report are filed as part of this Report (see page 30). 2. Financial Statement Schedules None. 3. Exhibits The list of exhibits contained in the Index to Exhibits are filed as part of this Report (see page 53). (b) Reports on Form 8-K The Company filed the following Current Reports on Form 8-K during the fourth quarter of 1996: (i) on October 16, 1996, the Company reported the issuance of a press release regarding, among other things, the consolidated financial conditions of the Company and its subsidiaries as of September 30, 1996 and the results of operations thereof for the period then ended; and (ii) on November 21, 1996, the Company reported (A) the completion of its acquisition of Red Lion Hotels, Inc., (B) the appointment of Richard M. Kelleher as President and Chief Executive Officer of the Company, (C) the announcement of the appointment of William L. Perocchi as a director of the Company and (D) on November 21, 1996, the Company announced the appointment of Edward A. Gilhuly and Michael W. Michelson as directors of the Company. 28 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunder duly authorized, on March 28, 1997. DOUBLETREE CORPORATION By /s/ RICHARD M. KELLEHER ------------------------------------ Richard M. Kelleher President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------- --------------------------------------- --------------- * Co-Chairman of the Board and Director March 28, 1997 - --------------------------------- (Principal Executive Officer) Richard J. Ferris * Co-Chairman of the Board and Director March 28, 1997 - --------------------------------- (Principal Executive Officer) Peter V. Ueberroth /s/ RICHARD M. KELLEHER President and Chief Executive Officer March 28, 1997 - --------------------------------- and Director Richard M. Kelleher (Principal Executive Officer) /s/ WILLIAM L. PEROCCHI Executive Vice President and Chief March 28, 1997 - --------------------------------- Financial Officer and Director William L. Perocchi (Principal Financial and Accounting Officer) * Director March 28, 1997 - --------------------------------- William R. Fatt * Director March 28, 1997 - --------------------------------- Dale F. Frey * Director March 28, 1997 - --------------------------------- Ronald K. Gamey * Director March 28, 1997 - --------------------------------- Edward A. Gilhuly * Director March 28, 1997 - --------------------------------- Norman B. Leventhal * Director March 28, 1997 - --------------------------------- Michael W. Michelson * Director March 28, 1997 - --------------------------------- John H. Myers *By /s/ DAVID L. STIVERS - --------------------------------- David L. Stivers Attorney-in-Fact
29 31 DOUBLETREE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE ---- Independent Auditors' Report.......................................................... 31 Consolidated Financial Statements: Balance Sheets as of December 31, 1996 and 1995..................................... 32 Statements of Operations for the years ended December 31, 1994, 1995 and 1996....... 33 Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996....... 34 Statements of Stockholders' Equity for the years ended December 31, 1994, 1995, and 1996............................................................................. 35 Notes to Consolidated Financial Statements............................................ 36 Financial Statement Schedules All financial statement schedules have been omitted as the information is either included in the consolidated financial statements and notes thereto, is not applicable or is not required.
30 32 INDEPENDENT AUDITORS' REPORT The Board of Directors Doubletree Corporation: We have audited the consolidated financial statements of Doubletree Corporation and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Doubletree Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Phoenix, Arizona March 17, 1997 31 33 DOUBLETREE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER DECEMBER 31, 31, 1995 1996 ------------ ---------- ASSETS Cash and cash equivalents.......................................... $ 32,652 $ 25,588 Accounts receivable, net of allowance for doubtful accounts of $295 and $557, respectively........................................... 17,907 46,845 Due from Red Lion MLP.............................................. -- 4,094 Current portion of notes receivable including amounts due from affiliates of $500 in 1996....................................... 390 590 Other.............................................................. 2,694 10,545 ------------ ---------- Total current assets.......................................... 53,643 87,662 ------------ ---------- Notes receivable, including amounts due from affiliates of $10,775 and $25,935, respectively........................................ 24,185 44,499 Due from Red Lion MLP.............................................. -- 24,405 Investments........................................................ 5,070 77,676 Property and equipment, net........................................ 14,540 635,473 Management contracts, net.......................................... 49,634 459,325 Goodwill, net...................................................... 15,431 378,326 Deferred costs and other assets.................................... 604 23,583 ------------ ---------- $163,107 $1,730,949 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses.............................. $ 29,710 $ 101,105 Accrued interest payable........................................... 23 2,213 Current portion of notes payable................................... 672 44,747 Income taxes payable............................................... 585 3 ------------ ---------- Total current liabilities..................................... 30,990 148,068 ------------ ---------- Deferred income taxes.............................................. 15,625 264,812 Other long-term obligations........................................ 2,106 10,304 Notes payable...................................................... -- 506,235 ------------ ---------- 48,721 929,419 ------------ ---------- Commitments and contingencies (Notes 3, 5, 6, 7 and 14) Stockholders' equity: Common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding 22,099,186 and 39,565,058 shares, respectively.................................................. 221 396 Additional paid-in capital....................................... 100,462 761,273 Unrealized gain on marketable equity securities.................. 22 176 Unearned employee compensation................................... (211) (141) Retained earnings................................................ 13,892 39,826 ------------ ---------- 114,386 801,530 ------------ ---------- $163,107 $1,730,949 ========== =========
See accompanying notes to consolidated financial statements. 32 34 DOUBLETREE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- Revenues: Management and franchise fees............................ $ 26,330 $ 30,082 $ 38,621 Owned hotel revenues..................................... 92 7,081 38,350 Leased hotel revenues.................................... 73,769 141,942 205,163 Purchasing and service fees.............................. 10,746 16,487 19,848 Other fees and income.................................... 1,545 994 2,953 -------- -------- -------- Total revenues........................................ 112,482 196,586 304,935 -------- -------- -------- Operating costs and expenses: Corporate general and administrative expenses............ 11,879 14,901 18,079 Owned hotel expenses..................................... 101 6,049 27,889 Leased hotel expenses.................................... 68,981 132,644 190,797 Purchasing and service expenses.......................... 9,807 13,437 14,796 Depreciation and amortization............................ 2,943 4,686 12,018 Business combination expenses............................ -- 2,565 -- -------- -------- -------- Total operating costs and expenses.................... 93,711 174,282 263,579 -------- -------- -------- Operating income...................................... 18,771 22,304 41,356 -------- -------- -------- Interest expense......................................... (831) (227) (6,648) Interest income.......................................... 1,630 4,147 5,561 -------- -------- -------- Income before income taxes and minority interest...... 19,570 26,224 40,269 Minority interest share of net (income) loss............... -- 35 (373) -------- -------- -------- Income before income taxes................................. 19,570 26,259 39,896 Income tax expense....................................... (6,335) (8,468) (13,962) -------- -------- -------- Net income....................................... $ 13,235 $ 17,791 $ 25,934 ======== ======== ======== Earnings per share......................................... $ 0.66 $ 0.80 $ 1.01 ======== ======== ======== Weighted average common and common equivalent shares outstanding.............................................. 20,071 22,219 25,766 ======== ======== ========
See accompanying notes to consolidated financial statements. 33 35 DOUBLETREE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------- 1994 1995 1996 -------- -------- --------- Cash flow from operating activities: Net income.............................................. $ 13,235 $ 17,791 $ 25,934 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization........................ 3,013 4,686 12,018 Equity in (earnings) loss of partnerships............ (373) 91 671 Gain on termination of management contracts.......... (500) -- -- Minority interest share of net loss.................. -- (35) (2) Other non-cash expenses.............................. 189 281 607 Deferred income taxes................................ 3,394 3,375 6,337 Net withdrawals from restricted cash................. 1,179 535 -- Increase in accounts receivable...................... (3,407) (6,187) (5,499) Increase in other current assets..................... (648) (1,234) (442) Increase in accounts payable and accrued expenses.... 6,680 5,225 3,040 -------- -------- --------- Net cash provided by operations................. 22,762 24,528 42,664 -------- -------- --------- Cash flow from investing activities: Cash acquired at purchase of Red Lion................... -- -- 17,126 Purchase of Red Lion and related costs.................. -- -- (836,151) Purchases of property and equipment..................... (13,006) (2,708) (3,976) Investments in partnerships and ventures................ (1,021) (2,531) (31,717) Distributions from partnerships and ventures............ 603 514 1,576 Advances to Red Lion MLP................................ -- -- (2,471) Investments in management contracts..................... (6,607) (7,181) (2,511) Proceeds from terminations of management contracts...... 2,188 562 1,377 Loans to owners of managed hotels and Candlewood........ (4,935) (7,367) (20,054) Deposits in hotels to obtain management contracts....... (280) 250 (150) Purchase of marketable securities....................... -- (516) -- Increase in deferred costs and other assets............. 76 (43) (2,626) -------- -------- --------- Net cash used in investing activities........... (22,982) (19,020) (879,577) -------- -------- --------- Cash flow from financing activities: Proceeds from issuance of common stock, net of costs.... 40,261 6,620 368,144 Proceeds from exercise of common stock options.......... -- 249 815 Cash distributions to stockholders...................... (34) (2,055) -- Purchase of common and redeemable preferred stock....... (182) -- -- Proceeds from borrowings................................ -- -- 498,200 Principal payments on notes payable..................... (25,414) (839) (37,310) -------- -------- --------- Net cash provided by financing activities....... 14,631 3,975 829,849 -------- -------- --------- Net increase (decrease) in cash and cash equivalents...... 14,411 9,483 (7,064) Cash and cash equivalents at beginning of year............ 8,758 23,169 32,652 -------- -------- --------- Cash and cash equivalents at end of year.................. $ 23,169 $ 32,652 $ 25,588 ======== ======== =========
See accompanying notes to consolidated financial statements. 34 36 DOUBLETREE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
UNREALIZED GAIN ON RETAINED ADDITIONAL UNEARNED MARKETABLE EARNINGS COMMON PAID-IN TREASURY EMPLOYEE EQUITY (ACCUMULATED STOCK CAPITAL STOCK COMPENSATION SECURITIES DEFICIT) TOTAL ------ ---------- -------- ------------ ---------- ------------ -------- 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 sale of 952,300 shares of common stock to the public, net of offering costs of $1,045............... 10 27,362 -- -- -- -- 27,372 Proceeds from sale of 9,067,534 shares of common stock, net of offering costs of $1,500................................. 91 340,681 -- -- -- -- 340,772 Issuance of 7,381,588 shares to the shareholders of Red Lion............... 74 291,499 -- -- -- -- 291,573 Exercise of common stock options......... -- 815 -- -- -- -- 815 Tax benefits attributable to common stock options exercised...................... -- 454 -- -- -- -- 454 Amortization of unearned employee compensation........................... -- -- -- 70 -- -- 70 Marketable equity securities unrealized gain................................... -- -- -- -- 154 -- 154 Net income............................... -- -- -- -- -- 25,934 25,934 ---- -------- ---- ---- ---- -------- -------- Balances at December 31, 1996.............. $396 $761,273 $ -- $ (141) $176 $ 39,826 $801,530 ==== ======== ==== ==== ==== ======== ========
See accompanying notes to consolidated financial statements. 35 37 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 December 31, 1996, the Company had a portfolio of 241 properties, of which 204 were managed and/or leased and 37 were franchised. Of the managed and/or leased properties, 18 are wholly-owned by the Company, eight are operated pursuant to joint venture agreements (in which the Company owns 50% or more of the venture), 82 are leased and 96 are managed for third party owners. 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 were 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. 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. On November 8, 1996, the Company acquired Red Lion Hotels, Inc. (Red Lion) in a business combination accounted for as a purchase. Accordingly, the accounts of Red Lion and its subsidiaries are only included from the date of the acquisition, November 8, 1996. The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. 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. Certain financial statement items from prior years have been reclassified to be consistent with the current year financial statement presentation. 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. 36 38 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (b) Property and Equipment Property and equipment consist of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 ------- -------- Land and improvements........................... $ 556 $ 91,163 Buildings and improvements...................... 7,791 460,407 Furnishings and equipment....................... 9,524 87,907 Construction in progress........................ -- 3,916 ------- -------- 17,871 643,393 Accumulated depreciation........................ (3,331) (7,920) ------- -------- $14,540 $635,473 ======= ========
Property and equipment are stated at cost. Buildings are being depreciated over 39 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 (15 years) or the terms of the related leases. Office furniture and equipment is depreciated over 3 to 10 years. Repairs and maintenance are charged to operations as incurred. (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% and the Company does not exercise control over the venture. 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 is included in other fees and income. All other investments are accounted for using the cost method with the exception of five joint ventures which are consolidated as the Company exercises control over the venture. 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. (d) Management Contracts and Goodwill Management contracts acquired in the acquisitions of DHC and Red Lion represent the estimated present value of net cash flows expected to be received over the estimated lives of the contracts and are being amortized using the straight-line method over the estimated weighted average contract life which ranges from 25 years to 41 years. Costs incurred to acquire individual management contracts are being amortized using the straight-line method over the life of the respective contract. Management contracts are carried net of accumulated amortization of $4,554,000 and $7,655,000 at December 31, 1995 and 1996, respectively. Goodwill arose in connection with the acquisitions of DHC and Red Lion and is amortized using the straight-line method over 40 years. Goodwill is carried net of accumulated amortization of $835,000 and $2,559,000 at December 31, 1995 and 1996, respectively. (e) Deferred Costs and Other Assets Deferred costs and other assets primarily consist of debt issuance costs and franchise application fees paid. The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt. Accumulated amortization at December 31, 1996 is $395,000. Franchise application fees paid in connection with the acquisition of RFS Management are 37 39 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 December 31, 1996 is $153,000. (f) 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 $892,000, $215,000 and $4,063,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Cash paid for income taxes amounted to $3,020,000, $4,631,000 and $12,163,000 for the years ended December 31, 1994, 1995 and 1996, respectively. (g) 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 tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) 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 and warrants which have been deemed exercised for the purpose of computing earnings per share. The Company has no other potentially dilutive securities. (i) 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. (j) Long-Lived Assets The recoverability of management contract costs, goodwill and hotel investments 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. 38 40 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (k) 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. Additionally, the Company provides a non-qualified Supplemental Employee Retirement Plan ("SERP") designed to supplement key employees whose benefits would otherwise be reduced or lost due to the statutory limits of 401(k) plans. Both of these obligations are reflected in long-term obligations. (2) ACQUISITIONS Acquisition of Red Lion Hotels, Inc. On November 8, 1996, the Company acquired all of the outstanding common stock of Red Lion in a transaction valued at approximately $1.2 billion. The Company paid $695 million in cash, repaid $124 million of existing Red Lion indebtedness, issued 7.4 million shares of common stock to the shareholders of Red Lion with a fair value at the date of closing of $292 million and assumed net liabilities of $90 million. The acquisition has been accounted for as a purchase and the results of operations of Red Lion have been included in the consolidated financial statements since November 8. The purchase price was allocated to the net assets acquired based upon their estimated fair market values. The excess of the purchase price over the estimated fair value of the net assets acquired of $365 million was recorded as goodwill to be amortized over a 40 year life. Acquisition of RFS, Inc. On February 27, 1996, the Company issued 2.7 million 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. 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. For the years ended December 31, 1994, 1995 and 1996, total revenues and net income of RFS (included in the Company's results) were $62.6 million and $0.7 million, $122.5 million and $2.1 million and $151.0 million and $6.1 million, respectively. In addition, as a result of the merger, certain of the franchisors required the payment of an application fee of $2,626,000 which is being amortized over the terms of the respective franchise agreements. Pro Forma Results The following unaudited pro forma summary presents the consolidated results of operations of the Company (including RFS) as if Red Lion had been acquired at the beginning of 1995 with pro forma adjustments to give effect to (a) amortization of goodwill, (b) additional depreciation expense as a result of a step-up in the basis of properties and equipment and investments in unconsolidated joint ventures, (c) increased interest expense on acquisition debt and (d) the operating results of three hotels acquired in 1996 and related tax effects. Additionally, pro forma adjustments have been made to exclude $2.6 million of business combination expenses related to the RFS transaction and business combination expenses incurred by Red Lion prior to its acquisition by the Company and formation expenses related to the 1995 restructuring of Red Lion. The pro forma results have been prepared for comparative purposes only and do not purport to be 39 41 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) indicative of the results of operations that would actually have resulted had the combination been in effect on the date indicated (in thousands):
YEARS ENDED DECEMBER 31, --------------------- 1995 1996 -------- -------- (UNAUDITED) Total revenues......................................... $597,740 $670,822 Operating income....................................... 77,799 103,556 Interest, net.......................................... (33,324) (31,177) Income before taxes.................................... 43,751 70,653 Net income............................................. 24,325 41,260 Net income per share................................... $ 0.63 $ 1.04
(3) LEASED HOTEL PROPERTIES As of December 31, 1994, 1995 and 1996, the Company leased 44, 52 and 82 hotels, respectively. As of December 31, 1996, 57 of these hotels are leased from RFS Hotel Investors, Inc. ("REIT") and 17 are leased from RLH Partnership. 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. Base and percentage rents were $24,617,000, $52,757,000 and $72,006,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Percentage rents included in total rental expense amounted to $10,961,000, $25,254,000 and $38,134,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 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, 1996:
YEAR ENDING DECEMBER 31, ------------------------------------------ 1997...................................... $ 43,134 1998...................................... 43,039 1999...................................... 43,001 2000...................................... 43,000 2001...................................... 42,963 Thereafter................................ 351,945 -------- Total future minimum lease payments........................... $567,082 ========
40 42 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) NOTES RECEIVABLE Notes receivable, consisting primarily of loans to owners of managed hotels, are as follows (in thousands):
DECEMBER 31, INTEREST REPAYMENT TERMS ----------------- RATE INTEREST/PRINCIPAL MATURITY 1995 1996 - ------------------ --------------------------------------------- ---------- ------- ------- SECURED: 12.0% Monthly/monthly to the extent of cash flow... 2006 $ 4,000 $ 4,500 10.0% Monthly/monthly to the extent of cash flow... 2005 2,850 2,850 8.0 - 10.0% Monthly/at maturity.......................... 2001 2,800 2,500 10.0% Quarterly/quarterly to the extent of cash flow......................................... 2003 2,600 2,575 9.0% Monthly/at maturity.......................... 2015 1,625 2,000 Prime - 1.5% Monthly/at maturity.......................... 2010 1,300 1,300 8.0% Monthly/monthly to the extent of cash flow... 2014 1,000 1,000 8.0 - 10.0% Various...................................... Upon sale 1,153 2,213 Notes repaid in full......................... 1,000 -- ------- ------- 18,328 18,938 ======= ======= UNSECURED: 7.0 - 10.0% Quarterly/at maturity........................ 2001 -- 12,065 7.5% Monthly/at maturity.......................... 2000 3,500 4,000 7.4% Monthly/at maturity.......................... 2000 1,250 3,000 10.0% Monthly/annually............................. 2000 -- 3,000 8.0% Monthly/at maturity.......................... 2001 -- 1,000 LIBOR + 2.65% Monthly/at maturity.......................... 2006 -- 1,000 10.0% Quarterly/quarterly.......................... 2002 720 625 5.75% - 10% Various...................................... Upon sale 777 1,461 ------- ------- 6,247 26,151 ------- ------- Total notes and other receivables............ 24,575 45,089 Less: current portion........................ 390 590 ------- ------- Non-current portion.......................... $24,185 $44,499 ======= =======
Repayment of notes receivable are generally due upon the earlier of termination of the management contract or sale of the hotel. At December 31, 1996, the Company does not consider any of its notes receivable to be impaired. (5) INVESTMENTS Investments consist of the following (in thousands):
DECEMBER 31, ------------------ 1995 1996 ------ ------- Hotel partnerships........................................ $3,746 $58,538 REIT convertible preferred stock.......................... -- 18,500 REIT common shares........................................ 538 1,533 Candlewood................................................ 1,098 (581) Other..................................................... (312) (314) ------ ------- $5,070 $77,676 ====== =======
41 43 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1996, the Company and its subsidiaries have non-controlling general and/or limited partnership interests in 16 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 RFS and three were acquired in the acquisition of Red Lion. The company's percentage of ownership in such partnerships ranges from less than 1% to 50.0%. The partnership investments include an investment in a partnership that is a majority owned subsidiary of the REIT. This investment is convertible into common stock of the REIT. The aggregate carrying value of the partnership interests as of December 31, 1996 exceeds the proportionate share of aggregate net assets of such partnerships by approximately $20.0 million reflecting the allocation of a portion of the purchase price of Red Lion to the fair value of the partnership interests acquired. The increase in the Company's investment is being amortized over 30 years. In October 1995, the Company acquired a 50% interest in Candlewood Hotel Company, L.L.C. ("Candlewood"). Candlewood is competing 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, $12,265,000 has been funded as of December 31, 1996 ($1,200,000 at December 31, 1995). Prior to Candlewood's initial public offering, the investment was structured as an equity contribution with the Company earning a preferred return. In connection with the initial public offering of Candlewood in November 1996, the Company's contributions in excess of $200,000 and its preferred return were converted to an interest bearing note receivable in the amount of $12,065,000. The Company's remaining investment consists of 2,587,500 shares of Candlewood's common stock, the fair value of which (based on the quoted market price as of December 31, 1996) was $24,905,000. 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. The Company, through the acquisition of Red Lion, is the general partner of Red Lion Inns Limited Partnership, a publicly-traded limited partnership (Red Lion MLP). The Company manages 10 hotels under a long-term management agreement with Red Lion MLP. (6) 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, 1994, 1995 and 1996 amounted to approximately $1,402,000, $1,597,000 and $1,803,000. 42 44 DOUBLETREE CORPORATION AND SUBSIDIARIES 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, 1996:
YEAR ENDING DECEMBER 31, -------------------------------------------- 1997........................................ $2,220 1998........................................ 1,390 1999........................................ 1,112 2000........................................ 1,115 2001........................................ 1,141 Thereafter.................................. 2,105 ------ Total future minimum lease payments.... $9,083 ======
(7) NOTES PAYABLE Notes payable consist of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 ------- -------- Term Loan A with interest at variable rates payable quarterly (7.0% at December 31, 1996), principal due quarterly in varying amounts through maturity in November 2002............................................. $ -- $300,700 Term Loan B with interest at variable rates payable quarterly (7.875% at December 31, 1996), principal due in equal quarterly amounts of $376,374 through November 2002 and quarterly thereafter in equal amounts to fully amortize the balance at maturity in May 2004......... -- 160,900 Mortgages with variable interest rates ranging from 6.56% to 7.18% payable through 1998.................................................. -- 84,257 Note payable with an imputed rate of 8.69%, payable through 2022........ -- 5,125 Other notes............................................................. 672 -- -------- -------- 672 550,982 Less: current portion................................................... (672) (44,747) -------- -------- $ -- $506,235 ======== ========
Annual maturities of notes payable are as follows (in thousands): 1997................................................. $ 44,747 1998................................................. 86,463 1999................................................. 53,092 2000................................................. 60,571 2001................................................. 73,031 Thereafter........................................... 233,078 -------- $550,982 ========
To finance a portion of the cost of the acquisition of Red Lion, the Company executed a new senior credit agreement ("New Credit Facility") in November 1996 and borrowed $493.2 million of which $31.6 million was repaid on November 13 with certain of the proceeds from the Company's sale of common stock. The New Credit Facility consists of two term loans, provides for a $100.0 million revolving line of credit, and makes available additional borrowings of up to $40.0 million under Term Loan A to refinance an existing 43 45 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) hotel mortgage, the commitment for which expires June 30, 1997. At the option of the Company, interest rates may be based on either (a) the higher of the federal funds rate plus 1/2% or the prime rate or (b) the Eurodollar rate plus a margin which ranges from 1.125% to 2.000% with respect to Term Loan A and the revolving line of credit and 2.25% to 2.50% with respect to Term Loan B. The interest margins applicable at any time are related to the financial condition and performance of the Company. The credit agreement requires the payment of a quarterly commitment fee of 0.375% of the unutilized commitments. The credit agreement has various covenants which place restrictions on additional indebtedness, mergers and acquisitions, the payment of dividends and investments based on the financial condition of the Company. All obligations are guaranteed and secured by substantially all of the assets of the Company and its significant subsidiaries. The Company entered into interest rate swap agreements in order to reduce its exposure to interest rate fluctuations. As of December 31, 1996, the Company had three interest rate swap agreements outstanding which have converted $250.0 million of debt from floating rates (5.625% at December 31,1996) to a fixed rate of 5.92% (prior to the applicable margin). The agreements expire March 31, 1999. Additional interest expense for the year ended December 31, 1996 was approximately $31,000. These agreements are with major commercial banks and management does not anticipate a credit loss due to nonperformance. (8) 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 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 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 shares of Company common stock, 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. In connection with the acquisition of Red Lion, the Company issued 6,440,000 shares and 2,627,534 shares to the public and to a subsidiary of General Electric Pension Trust (GEPT), respectively. Additionally, GEPT was granted 262,753 warrants to acquire common stock of the Company at an exercise price of $38.06, which approximated the fair value at the date of the agreement. The net cash proceeds to the Company, after expenses and giving effect to the underwriters discount, were $340,772,000. Additionally, the Company issued 7,381,588 shares to the shareholders of Red Lion as part of the consideration paid for Red Lion. 44 46 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) STOCK OPTIONS At December 31, 1996, the Company had one stock based compensation plan which is described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. No compensation cost has been recognized for its stock based compensation plan (which is a fixed stock option plan). Had compensation cost for the Company's stock based compensation plan been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
YEAR ENDED DECEMBER 31, ------------------- 1995 1996 ------- ------- Net income................................................. As reported $17,791 $25,934 Pro forma 17,719 25,076 Primary earnings per share................................. As reported $ 0.80 $ 1.01 Pro forma $ 0.80 $ 0.97
The Company's stock based compensation plan is a fixed 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 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, restricted stock or other awards. Activity in the stock option plan is as follows:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------- 1994 1995 1996 ---------------------- ---------------------- ---------------------- WTD. AVG. WTD. AVG. WTD. AVG. EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- Options outstanding, beginning of year..................... -- -- 967,500 $ 13.69 1,103,500 $ 14.81 Granted....................... 1,099,500 $ 13.61 193,000 $ 19.89 1,590,000 $ 34.45 Exercised..................... -- -- (19,375) $ 13.00 (61,250) $ 13.90 Canceled...................... (132,000) $ 13.00 (37,625) $ 13.00 (67,500) $ 18.73 --------- ------ --------- ------ --------- ------ Options outstanding, end of year........................ 967,500 $ 13.69 1,103,500 $ 14.81 2,564,750 $ 26.91 ========= ====== ========= ====== ========= ====== Number of options exercisable................. -- 243,750 445,500 Number of shares available for future issuance............. 1,032,500 877,125 654,625 Weighted average fair value of options granted............. $ 4.01 $ 5.89 $ 10.26
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1994, 1995 and 1996, respectively: risk-free interest rates of 6 percent for all years; dividend yield of 0 percent for all years, expected lives of four years for all options prior to being exercised, and a 40 percent volatility factor for all years. 45 47 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE ----------- ---------------- ---------------- ----------- ---------------- $13.00-$18.75......... 921,900 7.55 $14.07 426,900 13.94 $19.13-$23.50......... 77,600 8.53 $21.56 18,600 21.65 $25.50-$37.88......... 690,250 9.18 $27.64 -- N/A $40.31-$40.75......... 875,000 9.86 $40.33 -- N/A --------- ---- ------ ------- ----- $13.00-$40.75......... 2,564,750 8.81 $26.91 445,500 14.27 ========= ==== ====== ======= =====
(10) 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, 1995 and 1996. Shares issued in connection with the acquisition of Red Lion are outstanding from November 8, 1996. The common equivalent shares include employee stock options and warrants 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. (11) TRANSACTIONS WITH RELATED PARTIES Revenues and expenses include amounts derived from or paid to entities in which affiliates of the Company own interests and, in general, exercise operational control. A summary of these transactions is as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- REVENUES Management fees and franchise fees.......................... $15,051 $15,241 $20,617 Share of partnership income................................. 243 388 671 Interest income............................................. 847 1,674 1,987 Purchasing and service fees................................. 4,436 6,288 5,390 EXPENSES Hotel rent.................................................. -- 2,031 7,975 Administrative office rent.................................. 312 73 64
Additionally, the Company was reimbursed for costs 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:
YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- Marketing and central reservations............................ $11,129 $11,020 $10,861 Accounting, data processing, internal audit and training...... 2,084 1,781 2,706 ------- ------- ------- $13,213 $12,801 $13,567 ======= ======= =======
46 48 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts due from affiliates included in accounts receivable at December 31, 1995 and 1996 are $4,318,000 and $7,849,000, respectively. Non-current amounts due from affiliates included in other assets at December 31, 1995 and 1996 are $147,000 and $321,000, respectively. Amounts due to affiliates included in accounts payable at December 31, 1995 and 1996 amounted to $105,000 and $24,000, 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 $175,000 in total through December 31, 1996. (12) EMPLOYEE BENEFIT PLANS The Company maintains three 401(k) retirement savings plans. Employees who are over 21 years of age and have completed one year of service are eligible to participate in the plans. Depending on the plan, the Company matches employee contributions up to 6% of an employee's eligible compensation. The aggregate expense under the plans amounted to $218,000, $563,000 and $855,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company 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. Red Lion provides group health benefits through a fully-insured medical plan. The Company also has a non-qualified supplemental employee retirement plan ("SERP"). The SERP was designed to complement the 401(k) plan for employees of Red Lion by restoring benefits otherwise lost by certain employees due to the statutory limits in the 401(k) plan. Expense under the SERP amounted to $47,000 for the period from November 8, 1996 to December 31, 1996. (13) INCOME TAXES The components of income tax expense consist of the following (in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 1994 1995 1996 ------ ------ ------- FEDERAL: Current............................................... $1,559 $3,561 $ 4,982 Deferred.............................................. 3,476 2,832 5,544 ------ ------ ------- 5,035 6,393 10,526 ------ ------ ------- STATE: Current............................................... 1,382 1,532 2,643 Deferred.............................................. (82) 543 793 ------ ------ ------- 1,300 2,075 3,436 ------ ------ ------- $6,335 $8,468 $13,962 ====== ====== =======
47 49 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, ---------------------- 1994 1995 1996 ---- ---- ---- Income tax expense at Federal statutory rate................... 34.0% 34.0% 35.0% Goodwill and permanent differences............................. 1.1 0.7 2.0 State income taxes............................................. 4.3 5.5 4.7 RFS, Inc. S Corp. earnings not taxed........................... -- (2.8) -- Decrease in valuation allowance................................ (8.3) (5.2) (6.3) Other.......................................................... 1.3 -- (0.4) ---- ---- ---- 32.4% 32.2% 35.0% ==== ==== ====
The income tax benefit attributable to the use of net operating loss carryforwards ("NOLs") in the year ended 1994 was $47,000. As a result of the acquisition of the common stock of Red Lion, the allocation of the purchase price to the assets and liabilities for book purposes significantly exceeds the tax basis carried over from Red Lion. Accordingly, the acquisition created substantial temporary differences. 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, ---------------------- 1995 1996 -------- --------- Deferred tax assets: Net operating loss carryforwards............................ $ 15,288 $ 7,551 Passive activity loss carryforwards......................... 834 -- Reserves.................................................... 3,335 1,560 Accruals and other liabilities.............................. 3,979 16,998 Valuation allowance......................................... (22,605) (19,647) -------- --------- Total deferred tax assets................................ 831 6,462 -------- --------- Deferred tax liabilities: Management contracts........................................ (13,982) (180,280) Real estate................................................. -- (75,860) Investments................................................. (2,474) (10,897) Other....................................................... -- (4,237) -------- --------- Total deferred tax liabilities........................... (16,456) (271,274) -------- --------- Net deferred tax liability.................................... $(15,625) $(264,812) ======== =========
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, 1996, the amount of the valuation allowance subject to this treatment is approximately $6,000,000. During 1995 and 1996, $1,530,000 and $458,000 was used and credited to goodwill, respectively. None of this NOL was recognized in 1994. 48 50 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's federal NOLs of $18,611,000 expire as follows (in thousands):
YEAR OF AMOUNT OF EXPIRATION FEDERAL NOLS -------------------------------------------------------- ------------ 2008.................................................... $ 6,128 2009.................................................... 12,483 ------- $ 18,611 =======
Total NOLs for state purposes are less than the amounts stated above due primarily to shorter carryforward periods. (14) COMMITMENTS AND CONTINGENCIES On January 5, 1997, the Company entered into a memorandum of understanding for the proposed acquisition of Renaissance Hotel Group N.V. (Renaissance) in a transaction valued at approximately $890.0 million, including the assumption of $70.0 million in debt. The memorandum of understanding contained a provision that in the event Renaissance entered into a merger or acquisition agreement with a party other than the Company within four months, Doubletree would receive a break-up fee of $15.0 million. In February 1997, Renaissance pursued discussions with another company and on February 20, 1997, Doubletree received $15 million. 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 $487,000 in June 1996 in connection with a shortfall at one hotel. There were no shortfall funding payments in 1995 or 1994. The Company has guaranteed certain mortgages, leases and construction bonds up to $4,900,000 ($1,000,000 of which is collateralized by a letter of credit). Additionally, the Company has approximately $5,500,000 of bonds outstanding as collateral for payment of claims arising out of workers' compensation claims. The Company also had commitments relating to capital improvement projects aggregating approximately $3,912,000 at December 31, 1996. In August 1996, Doubletree committed to provide 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 is 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 for all such credit support capped at between $20.0 to $30.0 million. As of December 31, 1996, the facility has not been used. In August 1996, Doubletree and Patriot American Hospitality, Inc. (Patriot) formed a joint venture wherein Doubletree will invest up to $20.0 million of capital ($10.7 million of which had been invested as of December 31, 1996) to be combined with up to $180.0 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 $2.0 million 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. 49 51 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. (15) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 ------- -------- Payroll and related..................................... $ 5,544 $ 29,842 Business combination accruals........................... 2,756 21,791 Accounts payable........................................ 5,793 11,213 Lease payable........................................... 6,743 8,305 Insurance............................................... 1,401 5,555 Sales taxes............................................. 1,331 4,614 Advance deposits........................................ 208 3,382 Utilities............................................... 649 1,753 Property taxes.......................................... 521 1,716 Marketing costs......................................... 2,340 1,572 Other................................................... 2,424 11,362 ------- -------- $29,710 $101,105 ======= ========
(16) REIMBURSABLE COSTS The Company is reimbursed for costs associated with providing central reservations, sales and marketing, advertising, 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. 50 52 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (17) MANAGEMENT CONTRACTS An analysis of management contract activity follows (in thousands): 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 at acquisition of Red Lion................... 418,000 Contracts acquired.............................................. 2,511 Contract conversions and terminations........................... (6,005) Amortization.................................................... (4,815) -------- Balance at December 31, 1996...................................... $459,325 ========
(18) 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 receivable, investments, accounts payable and accrued expenses, accrued interest payable, notes payable and income taxes payable, each as included in the consolidated balance sheets under such captions. With the exception of notes receivable, notes payable, interest rate swap agreements 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 and notes payable 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. The fair value of the Company's interest rate swap agreements is approximately $315,000. 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 approximately $1.5 million at December 31, 1996. (19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for the years ended December 31, 1995 and 1996, restated to reflect the acquisition of RFS Management, is presented below (in thousands except per share data). Additionally, pro forma information is presented to (a) give effect to the acquisition of Red Lion and related transactions as if they had occurred on January 1, 1995, and (b) exclude $2.6 million of business combination expenses related to the RFS transaction in December 1995, business combination expenses incurred by Red Lion prior to its acquisition by the Company and formation expenses related to the 1995 restructuring of Red Lion. The sum of the individual quarterly data may not equal the annual data due to rounding. 51 53 DOUBLETREE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1995
QUARTER ENDED ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- --------- ------------ ----------- ACTUAL Total revenues.............................. $ 40,580 $ 50,771 $ 52,891 $ 52,344 Net income.................................. 3,645 5,742 5,606 2,798 Earnings per share.......................... $ 0.17 $ 0.26 $ 0.25 $ 0.12 Weighted average common and common equivalent shares outstanding............. 21,910 22,057 22,443 22,472 PRO FORMA Total revenues.............................. $130,100 $ 155,985 $157,835 $ 153,820 Net income.................................. 1,953 8,144 10,330 3,898 Earnings per share.......................... 0.05 $ 0.21 $ 0.27 $ 0.10 Weighted average common and common equivalent shares outstanding............. 38,360 38,507 38,893 38,922
1996
QUARTER ENDED ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- --------- ------------ ----------- ACTUAL Total revenues.............................. $ 53,835 $ 63,546 $ 68,582 $ 118,972 Net income.................................. 4,878 7,549 8,021 5,486 Earnings per share.......................... $ 0.22 $ 0.33 $ 0.34 $ 0.16 Weighted average common and common equivalent shares outstanding............. 22,584 23,173 23,879 33,516 PRO FORMA Total revenues.............................. $153,158 $ 174,008 $178,786 $ 164,870 Net income.................................. 4,726 12,523 15,235 8,776 Earnings per share.......................... $ 0.12 $ 0.32 $ 0.38 $ 0.22 Weighted average common and common equivalent shares outstanding............. 39,034 39,623 40,329 40,489
52 54 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------- ---------------------------------------------------------------------------------- 2.1(4) Agreement and Plan of Merger, dated as of February 1, 1996, by and among Doubletree Corporation, RFS, Inc., Seedling Merger Subsidiary, Inc., Robert M. Solmson, H. Lance Forsdick, Sr., William Lovelace and Michael J. Pascal. 2.2(5) Agreement and Plan of Merger dated as of September 12, 1996, by and among Doubletree Corporation, RLH Acquisition Corp. and Red Lion Hotels, Inc. 3.1(1) Certificate of Incorporation of Doubletree Corporation. 3.2(1) By-Laws of Doubletree Corporation. 3.3(3) First Amendment of By-Laws of Doubletree Corporation, dated as of June 30, 1994. 9.1(3) Stockholders Agreement dated as of June 30, 1994, among Doubletree Corporation, GQ Owners, L.P., Canadian Pacific Hotels (U.S.) Inc., MetPark Funding, Inc., The Ueberroth Family Trust, The Ueberroth Investment Trust, Ridge Partners, L.P. and GEHOP. 10.1(1) Incorporation and Registration Rights Agreement, dated as of December 16, 1993, among Doubletree Partners, GQ Owners, L.P., Canadian Pacific Hotels (U.S.) Inc., MetPark Funding, Inc., The Ueberroth Family Trust and Mr. Richard J. Ferris. 10.2(1) Tax Matters Agreement, dated as of December 16, 1993, among Canadian Pacific Limited, Canadian Pacific Hotels (U.S.) Inc. and GQ Owners, L.P. 10.3(1) Acquisition Agreement, dated as of November 15, 1990, among Metropolitan Life Insurance Company, MetHotels, Inc., Canadian Pacific Hotels Corporation and CP Hotels Merger Co. 10.4(1) Assignment, Assumption and Modification Agreement, dated as of December 16, 1993, among Metropolitan Life Insurance Company, Canadian Pacific Hotels Corporation, Doubletree Hotels Corporation and Doubletree Partners. 10.5(3) Employment Agreement of Richard M. Kelleher, dated as of January 13, 1995. 10.6(2) 1994 Equity Participation Plan of Doubletree Corporation. 10.7(2) Hotel Chain Combination Agreement, dated as of December 8, 1993, among Canadian Pacific Hotels (U.S.) Inc., MetPark Funding, Inc. and GQ Owners, L.P. 10.8(2) Amendment to the Hotel Chain Combination Agreement, dated as of June 30, 1994. 10.9(2) Amendment to the Incorporation and Registration Rights Agreement, dated as of June 30, 1994. 10.10(2) Amendment to the Tax Matters Agreement, dated as of June 30, 1994. 10.11(1) Form of Indemnification Agreement. 10.12(1) Form of Management Agreement between Metropolitan Life Insurance Company and the Company. 10.13(1) Promissory Note, dated January 1, 1993, in principal amount of $4.0 million by Boston HSR Limited Partnership in favor of Guest Quarters Hotels Partnership. 10.14 Modification of Promissory Note dated February 29, 1996. 10.15(3) Agreement Regarding Liquidation of GQ Owners, L.P., dated as of November 30, 1994, among GEHOP, Ridge Partners, L.P., The Ueberroth Family Trust, The Ueberroth Investment Trust and GQ Equities Limited. 10.16(3) Form of First Amendment to the 1994 Equity Participation Plan of Doubletree Corporation. 10.17(3) Amended and Restated Agreement of Limited Partnership of Thayer Hotel Investors II L.P., dated as of December 9, 1994, by and among Thayer Hotel Investments L.P., Doubletree Hotels Corporation and other Limited Partners.
53 55
EXHIBIT NUMBER DESCRIPTION - -------- ---------------------------------------------------------------------------------- 10.18(3) First Amendment to Amended and Restated Agreement of Limited Partnership of Thayer Hotel Investors II L.P., dated as of February 2, 1995, by and among Thayer Hotel Investments L.P., Doubletree Hotels Corporation and other Limited Partners. 10.19(4) Master Agreement, dated as of February 1, 1996, by and among RFS Partnership, L.P., Doubletree Corporation, RFS Hotel Investors, Inc., Seedling Merger Subsidiary, Inc. and RFS, Inc. 10.20 First Amendment to Master Agreement dated November 21, 1996. 10.21(4) Preferred Stock Purchase Agreement, dated as of February 1, 1996, by and among RFS Hotel Investors, Inc., Seedling Merger Subsidiary, Inc. and Doubletree Corporation. 10.22(4) Second Amendment to Incorporation and Registration Rights Agreement, dated as of February 27, 1996, by and among Doubletree Corporation, Robert M. Solmson, individually and in his capacity as representative of others, H. Lance Forsdick, Sr., William Lovelace and Michael J. Pascal. 10.23(4) Consolidated Lease Amendment, dated as of February 27, 1996, by and between RFS, Inc. and RFS Partnership, L.P. 10.24(6) Securities Purchase Agreement dated as of October 31, 1996 by and between the Company and the Trustees of General Electric Pension Trust. 10.25(6) Warrants to purchase 262,753 shares of Common Stock of Doubletree Corporation. 10.26(6) Credit Agreement dated as of November 8, 1996 by and among the Company, Morgan Stanley Senior Funding, Inc., as syndication agent and arranger thereunder, The Bank of Nova Scotia, as administrative agent thereunder, and the lenders identified therein. 10.27(6) Amendment No. 3 to the Incorporation and Registration Rights Agreement dated as of November 8, 1996 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 Hotel Holdings (U.S.) Inc. and Red Lion, a California Limited Partnership. 10.28(6) Partnership Services Agreement dated as of November 8, 1996 by and among Doubletree Corporation, Red Lion Hotels, Inc., Red Lion, a California Limited Partnership and the affiliates thereof identified therein. 10.29(6) Guaranty of Lease Obligations dated as of November 8, 1996 by and among Doubletree Corporation, Red Lion Hotels, Inc. and RLH Partnership, L.P. 10.30(6) Master Lease dated August 1, 1995 between RLH Partnership, L.P. and Red Lion Hotels, Inc. 10.31(7) Note Purchase Agreement dated as of November 8, 1996 by and among the Company, Morgan Stanley Group, Inc., The Bank of Nova Scotia, First Union Corporation and Societe Generale Investment Corporation. 10.32 Management Agreement dated April 6, 1987 between Red Lion Inn Operating L.P. and Red Lion, a California Limited Partnership. 10.33 Assignment and Assumption Agreement dated August 1, 1995 between Red Lion, a California Limited Partnership and Red Lion Hotels, Inc. 10.34 Red Lion Supplemental Employee Retirement Plan. 10.35 Second Amendment to the 1994 Equity Participation Plan. 10.36 Stockholders Agreement dated as of September 30, 1996 between the Company, Jack Deboer, the Alexander John DeBoer Trust dated March 14, 1995, the Christopher Scott DeBoer Trust dated March 14, 1995 and the Warren D. Fix Family Partnership, L.P. 10.37 Credit Facility Agreement dated November 11, 1996 between the Company and Candlewood Hotel Company, Inc.
54 56
EXHIBIT NUMBER DESCRIPTION - -------- ---------------------------------------------------------------------------------- 10.38 Subordinated Promissory Note dated November 11, 1996 by Candlewood Hotel Company, Inc. in favor of the Company. 10.39 Guaranty Agreement, dated December 31, 1996, by Doubletree Corporation in favor of GMAC Commercial Mortgage Corporation. 11.1 Computation of Earnings Per Share. 21.1 Subsidiaries of Doubletree Corporation. 23.1 Consent of Independent Auditors. 24.1 Powers of Attorney. 27.1 Financial Data Schedule. 99.1 Agreement to Furnish Exhibits and Schedules.
- --------------- (1) Previously filed as exhibit to the Registrant's Registration Statement No. 33-79188 and incorporated herein by reference. (2) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference. (3) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. (4) Previously filed as an exhibit to the Registrant's Current Report on Form 8-K, dated February 27, 1996 and incorporated herein by reference. (5) Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated September 12, 1996 and incorporated herein by reference. (6) Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated November 21, 1996 and incorporated herein by reference. (7) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-4 (File No. 333-13159) and incorporated herein by reference. 55 EX-10.14 2 MODIFICATION OF PROMISSORY NOTE DATED 2/29/96 1 EXHIBIT 10.14 MODIFICATION OF PROMISSORY NOTE DATE: February 29, 1996 PARTIES: Maker: BOSTON HSR LIMITED PARTNERSHIP, a Massachusetts limited partnership Payee: DOUBLETREE PARTNERS, a Delaware partnership, formerly known as GUEST QUARTERS HOTELS PARTNERSHIP, a Delaware partnership RECITALS: A. Payee has extended to Maker a loan in the principal amount of $4,000,000.00, as evidenced by the Promissory Note dated as of January 1, 1993 ("Note"). B. Maker has requested that Payee modify the Note as provided herein. Payee is willing to so modify the Note subject to the terms and conditions herein. AGREEMENTS: For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Maker and Payee agree as follows: 1. Maker acknowledges the accuracy of the Recitals. 2. The Note is modified as follows: The principal amount of the Note is $4,500,000.00 to evidence the increase in the amount of the loan made by Payee to Maker. 3. Maker hereby accepts the modification and agreements herein contained and hereby promises to pay the unpaid principal balance of the Note as modified, together with interest thereon at the rate or rates per annum therein provided, and to pay and perform all other obligations of Maker, all pursuant to the terms of the Note as modified. 4. Maker hereby represents and warrants to Payee that: (a) each representation of Maker in the Note or in any other agreement, document or instrument evidencing, securing, or otherwise relating to Maker's indebtedness to Payee (collectively referred to as the "Loan Documents") is true and correct on the date hereof; (b) no default or event of default under the Note or any other Loan Document, nor any event which, with the giving of notice or the passage of time or both, would be a default thereunder, has 2 occurred and is continuing; and (c) Maker has no claims, counterclaims, defenses, or set-offs with respect to the indebtedness evidenced by the Note. 5. The Note and other Loan Documents are ratified and affirmed by Maker and shall remain in full force and effect as modified herein. IN WITNESS WHEREOF, Maker has executed and delivered this Modification to Note on the day and year first above written. BOSTON HSR LIMITED PARTNERSHIP, a Massachusetts limited partnership By: /s/ Edwin Sidman -------------------------- Name: A General Partner 2 EX-10.20 3 FIRST AMENDMENT TO MASTER AGREEMENT 1 EXHIBIT 10.20 FIRST AMENDMENT TO MASTER AGREEMENT THIS FIRST AMENDMENT TO MASTER AGREEMENT ("Agreement") is made as of the 21st day of November 1996, among Doubletree Corporation, a Delaware corporation ("Tree"), RFS, Inc., a Tennessee corporation (the "Lessee"), RFS Hotel Investors, Inc., a Tennessee corporation ("RFSI"), RFS Partnership, L.P., a Tennessee limited partnership (the "Lessor"), RFS Leasing, Inc., a Tennessee corporation and a wholly-owned subsidiary of the Lessee (the "Additional Lessee"), RFS Financing Partnership, L.P., a Tennessee limited partnership (the 'Additional Lessor") and DTR RFS Lessee, Inc., a California corporation ("DTR Lessee"). RECITALS A. The Lessor and the Lessee are parties to that certain Consolidated Lease Amendment dated as of February 27, 1996 (the "Existing Lease"), which Existing Lease represents (as of the date hereof) forty-eight (48) separate leases (the "Existing Leases"). B. The Lessor and DTR Lessee are parties to that certain Lease Agreement dated as of May 30, 1996 (the "Existing DTR Lease"). C. The Lessor currently owns forty-eight (48) hotel properties described in Exhibit A that are leased under the Existing Lease to the Lessee and owns the hotel property described in Exhibit B (the "Del Mar Hotel") that is leased under the Existing DTR Lease to DTR Lessee. D. The Lessor is transferring to the Additional Lessor as of the date hereof its fee interest in 15 of the hotel properties (the "Transfer Hotels"), identified on Exhibit A and Exhibit B as Transfer Hotels, and in connection with such transfer the Lessor desires to assign to the Additional Lessor all of its rights under (1) the 14 leases represented by the Existing Lease 2 relating to all of the Transfer Hotels other than the Del Mar Hotel (the "14 Existing Leases") and (2) the Existing DTR Lease relating to the Del Mar Hotel. E. In connection with the transfer of the Transfer Hotels to the Additional Lessor, at the request of the Lessor and the Additional Lessor, (1) the Lessee has agreed to assign to the Additional Lessee all of its rights under the 14 Existing Leases and (2) DTR Lessee has agreed to assign to the Additional Lessee the Existing DTR Lease relating to the Del Mar Hotel. F. The Additional Lessor and the Additional Lessee desire to amend certain provisions of the 14 Existing Leases and the Existing DTR Lease. G. The Lessor and the Lessee desire to amend certain provisions of the Existing Lease relating to the 34 hotel properties (the "Remaining Hotels") identified on Exhibit A as Remaining Hotels. H. The parties hereto desire to amend the Master Agreement dated as of February 1, 1996 (the "Original Master Agreement") among Tree, Seedling Merger Subsidiary, Inc. (which was subsequently merged into the Lessee), the Lessee, RFSI and the Lessor, to make certain amendments and other agreements with respect to the foregoing and the Original Master Agreement. AGREEMENTS NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Certain Definitions. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Original Master Agreement. Unless the context otherwise 2 3 requires, (a) references to the singular shall include the plural and vice versa, (b) references to gender shall include all genders, (c) references to designated "Sections " or other subdivisions are references to the designated Sections or other subdivisions of this Amendment or the Original Master Agreement, as applicable, (d) all accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with GAAP and, if applicable, the Uniform System of Accounts (as defined in the Existing Lease) and (e) the words 'herein," "hereof," and "hereunder" and other words of similar import refer to this Amendment or the Original Master Agreement, as applicable, as a whole and not to any particular Section or other subdivision. 2. Assignment and Assumption of the 14 Existing Leases and the Existing DTR Lease. a. By the Lessor and the Additional Lessor: (i) The Lessor hereby (A) assigns to the Additional Lessor all of its right, title and interest in and to the 14 Existing Leases and the Existing DTR Lease and (B) conveys, transfers and assigns to the Additional Lessor all of its interest in and to any fixtures, equipment and other personal property used in connection with the Transfer Hotels. (ii) The Additional Lessor hereby (A) accepts the assignments, conveyances and transfers in paragraph (i) above and (B) assumes all of the obligations of the Lessor under the 14 Existing Leases and the Existing DTR Lease accruing from and after the date hereof. (iii) The Lessor hereby agrees to hold the Additional Lessor harmless from the obligations and liabilities of the "Lessor" under the 14 Existing Leases 3 4 and the Existing DTR Lease arising from or relating to events or circumstances occurring prior to the date hereof. The Additional Lessor hereby agrees to hold the Lessor harmless from the obligations and liabilities of the "Lessor" under the 14 Existing Leases and the Existing DTR Lease arising from or relating to events or circumstances occurring on or after the date hereof. b. By the Lessee, DTR Lessee and the Additional Lessee: (i) The Lessee hereby (A) assigns to the Additional Lessee all of its right, title and interest in and to the 14 Existing Leases and (B) conveys, transfers and assigns to the Additional Lessee all of its interest in and to any fixtures, equipment and other personal property used in connection with the Transfer Hotels other than the Del Mar Hotel. (ii) DTR Lessee hereby (A) assigns to the Additional Lessee all of its right, title and interest in and to the Existing DTR Lease and (B) conveys, transfers and assigns to the Additional Lessee all of its interest in and to any fixtures, equipment and other personal property used in connection with the Del Mar Hotel. (iii) The Additional Lessee hereby (A) accepts the assignments, conveyances and transfers in paragraphs (i) and (ii) above and (B) assumes all of the obligations of the Lessee under the 14 Existing Leases and of DTR Lessee under the Existing DTR Lease, in each case accruing from and after the date hereof. 4 5 (iv) Each of the Lessee and DTR Lessee hereby agrees to hold the Additional Lessee harmless from the obligations and liabilities of the "Lessee" under the 14 Existing Leases and the Existing DTR Lease, respectively, arising from or relating to events or circumstances occurring prior to the date hereof. The Additional Lessee hereby agrees to hold harmless the Lessee and the DTR Lessee from the obligations and liabilities of the "Lessee" under the 14 Existing Leases and the Existing DTR Lease, respectively, arising from or relating to events or circumstances occurring on or after the date hereof. c. The Lessor agrees to look solely to the Lessee with respect to the obligations of the "Lessee" under the 14 Existing Leases accruing, or arising from or relating to events or circumstances occurring, prior to the date hereof and solely to the DTR Lessee with respect to the obligations of the "Lessee" under the Existing DTR Lease accruing, or arising from or relating to events or circumstances occurring, prior to the date hereof; and the Additional Lessor agrees that it will have no rights or claims with respect thereto. The Additional Lessor agrees to look solely to the Additional Lessee with respect to the obligations of the "Lessee" under the 14 Existing Leases and the Existing DTR Lease accruing, or arising from or relating to events or circumstances occurring, from and after the date hereof; and the Lessor agrees that it will have no rights or claims with respect thereto. d. The Lessee and the DTR Lessee agree to look solely to the Lessor with respect to the obligations of the "Lessor" under the 14 Existing Leases and the Existing DTR Lease, respectively, accruing, or arising from or relating to events or circumstances 5 6 occurring, prior to the date hereof; and the Additional Lessee agrees that it will have no rights or claims with respect thereto. The Additional Lessee agrees to look solely to the Additional Lessor with respect to the obligations of the "Lessor" under the 14 Existing Leases and the Existing DTR Lease, respectively, accruing, or arising from or relating to events or circumstances occurring, from and after the date hereof; and the Lessee and the DTR Lessee each agrees that it will have no rights or claims with respect thereto. 3. Modification and Amendment of the Existing Lease and the Existing DTR Lease a. Contemporaneously with the execution of this Agreement, the Additional Lessor and the Additional Lessee shall execute the Second Consolidated Lease Amendment pursuant to which the 14 Existing Leases and the Existing DTR Lease shall be restated and amended, effective as of the date hereof. b. Contemporaneously with the execution of this Agreement, the Lessor and the Lessee shall execute the Third Consolidated Lease Amendment pursuant to which the 34 leases represented by the Existing Lease relating to the Remaining Hotels shall be restated and amended, effective as of the date hereof. 4. Amendments to the Original Master Agreement. The following amendments to the Original Master Agreement shall be effective as of the date hereof: a. Section 1 of the Original Master Agreement shall be amended hereby as follows: (i) the definition of "Current Hotels" shall be deleted in its entirety and the following substituted therefor: 6 7 CURRENT HOTELS - shall mean the hotels leased by the Lessee from the Lessor as of the Closing Date, plus the Del Mar Hotel. (ii) the definition of "Default by the Lessee" shall be deleted in its entirety and the following substituted therefor: DEFAULT BY THE LESSEE - shall have the meaning set forth in Section 15a. (iii) the definition of "Percentage Lease" shall be deleted in its entirety and the following substituted therefor: PERCENTAGE LEASE - shall mean, (A) with respect to a Current Hotel that is a Transfer Hotel, the percentage lease with respect to such hotel represented by the Second Consolidated Lease Amendment between the Additional Lessor and the Additional Lessee, (B) with respect to a Current Hotel that is not a Transfer Hotel, the percentage lease with respect to such hotel represented by the Third Consolidated Lease Amendment between the Lessor and the Lessee and (C) with respect to each Additional Hotel, the percentage lease entered into between the Lessor and the Lessee with respect to such hotel. (iv) the definition of "Percentage Rent" shall be amended hereby by inserting the clause "or Additional Lessee's" after the word "Lessee's." b. Section 4(b) of the Original Master Agreement shall be amended by inserting the following at the end of Section 4(b): 7 8 Notwithstanding any provisions of this Section 4(b) to the contrary, the Additional Lessor and the Additional Lessee shall have the same rights and obligations as the Lessor and the Lessee, respectively, under this Section 4(b), provided, however, that such rights and obligations are and shall remain subject to the terms of the Consolidated Lease Estoppel, Subordination, Attornment and Non-Disturbance Agreement dated as of November 21, 1996 (the "SND Agreement") among the Additional Lessor, the Additional Lessee and LaSalle National Bank for so long as the SND Agreement remains in effect. Section 5(a) of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: a. Net Worth. At all times during the terms of the Percentage Leases relating to the Remaining Hotels and the Additional Hotels, Tree shall cause the Lessee to maintain and the Lessee shall maintain , a Net Worth in an amount at least equal to $11,000,000. At all times during the terms of the Percentage Leases relating to the Transfer Hotels, Tree and the Lessee shall cause the Additional Lessee to maintain and the Additional Lessee shall maintain, a Net Worth in an amount at least equal to $4,000,000. The Lessee shall at all times maintain an adequate amount of Working Capital to operate the Remaining Hotels and the Additional Hotels. The 8 9 Additional Lessee shall at all times maintain an adequate amount of Working Capital to operate the Transfer Hotels. d. Section 7(a) of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: a. Changes in Structure. Tree represents that as of November 21, 1996, the Additional Lessee is a wholly-owned subsidiary of the Lessee and the Lessee is a wholly-owned subsidiary of Tree and Tree will have the sole economic and voting interest in the Lessee. Until the earlier to occur of (i) the expiration of ten years following the Closing Date or (ii) the date of redemption or conversion of the Preferred Stock, without the prior written consent following not less than 60 days prior written notice to the Lessor or the Additional Lessor, as the case may be, which consent shall not be unreasonably withheld, Tree, the Lessee and the Additional Lessee shall not permit any merger, sale of its stock or sale, transfer or conveyance of all or substantially all of the assets of the Lessee or the Additional Lessee if, as a result thereof, the Lessee or the Additional Lessee, or the surviving entity, would cease to be controlled, directly or indirectly, by Tree. After the date described in the preceding sentence, any merger, sale of stock, transfer or conveyance of all or substantially all of the assets of the Lessee or the Additional Lessee which results in the Lessee 9 10 or the Additional Lessee ceasing to be controlled, directly or indirectly, by Tree shall require the prior written consent of the Lessor or the Additional Lessor, as the case may be, which consent shall not be unreasonably withheld and which shall be granted by the Lessor or the Additional Lessor, as the case may be, if the party proposed to acquire control of the Lessee or the Additional Lessee or its assets obtains the approval of the Franchisors to serve as franchise licensee for the affected Hotels and, if applicable, of liquor licensing authorities for the affected Hotels, and either (x) has substantial experience in the leasing and/or managing of hotels of the type then owned by the Lessor or the Additional Lessor, as the case may be, and in the operation of hotels licensed by one or more of the Franchisors, or (y) provides reasonable assurance to the Lessor or the Additional Lessor, as the case may be, that such party will maintain the senior management organization of the Lessee or the Additional Lessee, as the case may be, materially intact, or (z) enters into management arrangements for the operation of the affected Hotels under terms satisfactory to the Lessor or the Additional Lessor, as the case may be, during the remainder of the terms of the Percentage Lease, by an entity that satisfies either (x) or (y) above. Prior to any transaction otherwise permissible under the preceding sentence, 10 11 Tree, the Lessee or the Additional Lessee, as the case may be, and the proposed transferee shall acknowledge and agree in writing with the Lessor or the Additional Lessor, as the case may be, with respect to the restrictions on change in control set forth herein and shall agree that no further transfer of capital stock or assets may be made by such transferee except pursuant to the provisions of this Section. e. Section 7(c) of the Original Master Lease Agreement shall be amended hereby by inserting the clause "and the Additional Lessee" after the word "Lessee." f. Sections 8, 9 and 10 of the Original Master Agreement shall be deleted in their entirety and the following substituted therefor: 8. Financial Statements; Indemnification; Due Diligence; Confidential. a. Financial Disclosure. During the term of any Percentage Lease, Tree, the Lessee and the Additional Lessee agree: (i) to make available to RFSI, the Lessor and the Additional Lessor, (A) not more than 30 days following the end of the first three calendar quarters of each year, quarterly unaudited financial statements, including balance sheet, statement of operations, statement of 11 12 shareholders' equity, statement of cash flows and schedules for each of the Lessee and the Additional Lessee for the most recently ended calendar quarter and the comparable prior year period prepared in conformity with GAAP; (B) not more than 60 days after the end of each calendar year, audited annual financial statements and schedules for each of the Lessee and the Additional Lessee for the most recently ended calendar year prepared in accordance with GAAP, audited by a national accounting firm reasonably acceptable to RFSI, the Lessor and the Additional Lessor; (C) any historical financial information necessary to re-state historical financial information to conform to the presentation of each of the Lessee's and the Additional Lessee's audited and unaudited financial statements at any future time; and (D) on a timely basis, any other information reasonably requested by RFSI, the Lessor or the Additional Lessor to permit RFSI, the 12 13 Lessor or the Additional Lessor to meet their filing and reporting requirements under the 1934 Act and to file and have declared effective registration statements under the 1933 Act, including providing information necessary to complete the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of RFSI's 1934 Act reports and 1933 Act registration statements as it may relate to the Lessee, the Additional Lessee or the Hotels. (ii) to provide to RFSI, the Lessor and the Additional Lessor operating and financial reports described on Exhibit E hereto. (iii) that the Lessee and the Additional Lessee shall bear the cost of obtaining, preparing and providing all information required to be furnished to the Lessor, the Additional Lessor and RFSI under this Section 8(a), including the cost and related expenses of the annual audit of the financial statements of the Lessee and the Additional Lessee, except as provided in Section 5 of the First Amendment to Master Agreement. 13 14 b. Indemnification. RFSI and the Lessor agree, jointly and severally, to indemnify, defend (with counsel acceptable to the Lessee), and hold harmless the Lessee, the Additional Lessee and their respective officers, directors and controlling persons from and against any losses, claims, damages, expenses or liabilities (or actions in respect thereof) to which the Lessee, the Additional Lessee and their respective officers, directors or controlling persons may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities or actions in respect thereof arise out of or are based upon the 1934 Act reports or 1933 Act registration statements of RFSI or the Lessor, except to the extent any such claims, liabilities, losses, damages, expenses, or liabilities (or actions in respect thereof) result from any untrue statement of a material fact or omission of any material fact in the information provided by the Lessee or the Additional Lessee to RFSI, the Lessor or the Additional Lessor pursuant to subsections (i) and (ii) of this Section 8(a). The Lessee and Tree agree, jointly and severally, to indemnify, defend (with counsel acceptable to RFSI and the Lessor) and hold harmless RFSI, the Lessor and the Additional Lessor, and their respective officers, directors and controlling persons from and against any losses, claims, damages, expenses or liabilities (or actions in respect thereof) to which RFSI, the Lessor or the Additional Lessor or their respective officers, directors or controlling 14 15 persons may become subject under the 1933 Act, the 1934 Act or otherwise, insofar as such losses, claims, damages, expenses or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement of a material fact or omissions of any material fact in any information furnished by the Lessee or the Additional Lessee to RFSI, the Lessor or the Additional Lessor pursuant to subsections (i)(A), (B) and (C) of this Section 8(a). C. Due Diligence. During the term of any Percentage Lease, Tree, the Lessee and the Additional Lessee agree: (i) to permit the Lessor, the Additional Lessor and RFSI, together with their independent public accountants, counsel, financial advisors, underwriters, underwriters' counsel, rating agencies, lenders and others having a legitimate interest in the Lessee's, the Additional Lessee's or the Hotels' financial condition and results of operations, during regular business hours, upon reasonable notice and at the sole cost of the Lessor, the Additional Lessor and RFSI (provided there shall be no charge by the Lessee or the Additional Lessee to the Lessor, the Additional Lessor or RFSI for the time of the Lessee's or the Additional Lessee's officers or employees), to interview 15 16 officers and employees of the Lessee or the Additional Lessee and to have access to and review: (A) the general accounting records of the Lessee or the Additional Lessee or any Hotel for purposes of performing an audit of the Lessee or the Additional Lessee or any Hotel in accordance with generally accepted auditing standards and to conduct reasonable due diligence with respect to the Lessee or the Additional Lessee and their respective business activities and the Hotels; and (B) the Lessee's or the Additional Lessee's corporate records, minutebooks, contracts and other documents, agreements or items relating to the operation of the Hotels and the Lessee's or the Additional Lessee's financial condition. (ii) to cooperate promptly and fully with the Lessor, the Additional Lessor and RFSI, upon request and at the cost of Lessor and the Additional Lessor (except with respect to the cost of obtaining, preparing and providing the information required to be furnished to RFSI, the Lessor and the Additional Lessor under Section 8(a) above and any costs relating to the time of employees or officers 16 17 of the Lessee, the Additional Lessee or Tree, other than as provided in Section 5 of the First Amendment to Master Agreement), in making available such information with respect to the Lessee, the Additional Lessee or the Hotels as may be required by any regulatory agency, including the Commission and the National Association of Securities Dealers, Inc., the Nasdaq Stock Market or any stock exchange on which RFSI's, the Lessor's or the Additional Lessor's securities may be registered, listed or traded. (iii) to use their best efforts to cause the independent public accountants preparing audits of the Lessee or the Additional Lessee to provide RFSI, the Lessor or the Additional Lessor, at the sole cost of the Lessor, the Additional Lessor and RFSI with all consents of such accountants required for RFSI's, the Lessor's or the Additional Lessor's filings under the 1933 Act or the 1934 Act or to have RFSI's, the Lessor's or the Additional Lessor's registration statements be declared effective under the 1933 Act. d. Confidentiality. To the extent Lessor, the Additional Lessor or RFSI on the one hand, or the Lessee, the Additional Lessee or Tree on the other, obtains information or 17 18 becomes aware of material information concerning the other that is not disclosed in a public announcement or filing under the 1933 Act or the 1934 Act by Tree or RFSI, each party agrees that it shall not improperly disclose or unlawfully utilize such information or otherwise act unlawfully with respect thereto. 9. REIT Requirements. a. Tree, the Lessee and the Additional Lessee understand that, in order for RFSI to qualify as a REIT, the following requirements (the "REIT Requirements") must be satisfied: (i) The average of the adjusted tax bases of the Lessor's or the Additional Lessor's personal property that is leased to the Lessee or the Additional Lessee under a lease at the beginning and end of a calendar year cannot exceed 15% of the average of the aggregate adjusted tax bases of all of the Lessor's or the Additional Lessor's property that is leased to the Lessee or the Additional Lessee under such lease at the beginning and end of such calendar year. (ii) Neither the Lessee nor the Additional Lessee can sublet the property that is leased to it by the Lessor or the Additional Lessor, or enter into any similar arrangement, on any basis such that the rental or other 18 19 amounts paid by the sublessee thereunder would be based, in whole or in part, on either (i) the net income or profits derived by the business activities of the sublessee or (ii) any other formula such that any portion of the rent paid by the Lessee or the Additional Lessee to the Lessor or the Additional Lessor would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code. (iii) Neither the Lessee nor the Additional Lessee can sublease the property leased to it by the Lessor or the Additional Lessor to, or enter into any similar arrangement with, any person in which RFSI owns, directly or indirectly, a 10% or more interest, within the meaning of Section 856(d)(2)(B) of the Code. (iv) RFSI cannot own, directly or indirectly, a 10% or more interest in the Lessee or the Additional Lessee, within the meaning of Section 856(d)(2)(B) of the Code. (v) No person can own, directly or directly, capital stock of RFSI that exceeds the "Limit" (as defined in RFSI's Charter, as amended and restated). 19 20 b. Tree, the Lessee and the Additional Lessee agree, and agree to use reasonable efforts to cause their Affiliates, to use their best efforts to permit the REIT Requirements to be satisfied. Tree, the Lessee and the Additional Lessee agree, and agree to use reasonable efforts to cause their Affiliates, to cooperate in good faith with RFSI, the Lessor and the Additional Lessor to ensure that the REIT Requirements are satisfied, including but not limited to, providing RFSI with information about the ownership of Tree, the Lessee, the Additional Lessee and their Affiliates to the extent that such information is reasonably available. Tree, the Lessee and the Additional Lessee agree, and agree to use reasonable efforts to cause their Affiliates, upon request by RFSI, and, where appropriate, at RFSI's expense, to take reasonable action necessary to ensure compliance with the REIT Requirements. Immediately after becoming aware that the REIT Requirements are not, or will not be, satisfied, Tree, the Lessee or the Additional Lessee shall notify, or use reasonable efforts to cause their Affiliates to notify, RFSI of such noncompliance. 10. Termination of REIT Status. Notwithstanding anything herein or in any Percentage Lease to the contrary, in the event RFSI terminates its status as a real estate investment trust for federal income tax purposes, the Lessor and the Additional Lessor may elect to terminate all then-existing Percentage Leases and terminate the Right of First Refusal by providing the Lessee or the Additional 20 21 Lessee, as the case may be, at least 30 days prior written notice, or such longer notice as may be required by statute or regulation to comply with the WARN Act or other similar or successor federal or state laws, and by satisfying the following requirements: (i) if such terminations occur prior to sale, redemption or conversion of all of the Preferred Stock, RFSI shall purchase from the Lessee within twenty (20) business days after the date of such terminations, all of the then-outstanding Preferred Stock then owned by the Lessee at a price per share equal to the greater of (A) the Stated Value plus all accrued and unpaid dividends at the date of such redemption or (B) the product of (1) the weighted average of the sales prices of RFSI's common stock for all transactions reported on the Nasdaq Stock Market or principal exchange on which RFSI's common stock is then traded during the ten (10) business days preceding the second business day preceding the date of purchase of the Preferred Stock or, if RFSI's common stock is no longer traded on the Nasdaq Stock Market or a recognized exchange, the fair market value thereof as mutually agreed by RFSI and the Lessee, or if RFSI and the Lessee cannot so agree, by appraisal by an independent third party designated by RFSI and the Lessee or by their respective designees multiplied by (2) the number of shares of Common Stock into which a share of Preferred Stock then held by the 21 22 Lessee would be convertible, if converted on the business day preceding the date of the redemption; and (ii) if such terminations occur prior to the tenth (10th) anniversary of the Closing Date, the Lessor shall pay to the Lessee an amount equal to $5,000,000, which amount shall be reduced by $41,667 for each calendar month which has expired during the ten (10) year period following the Closing Date; and (iii) the Lessor or the Additional Lessor shall pay the Lessee or the Additional Lessee, as the case may be, the fair market value of the Percentage Leases based on the then-remaining terms of the Percentage Leases determined in the manner set forth in Article XXXVII of the Form Percentage Lease. The Lessor and the Additional Lessor must elect to terminate both the Right of First Refusal and all then- existing Percentage Leases in exercising their rights under this Section 10. g. The first sentence of Section 14 of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: From and after the date of the First Amendment to Master Agreement, (i) an Event of Default (as defined in the Percentage Leases) by the Additional Lessee under a Percentage Lease with respect to a Transfer Hotel will continue to create an Event of Default under the Percentage Leases with respect to all other Transfer Hotels and (ii) an Event of Default by the Lessee under a Percentage Lease with respect to 22 23 a Remaining Hotel will continue to create an Event of Default under the Percentage Leases with respect to all other Remaining Hotels. From and after the date of the First Amendment to Master Agreement, (i) a default or an Event of Default under a Percentage Lease with respect to a Transfer Hotel shall not constitute a default or an Event of Default under a Percentage Lease with respect to any Remaining Hotel and (ii) a default or an Event of Default with respect to a Remaining Hotel shall not constitute a default or an Event of Default under a Percentage Lease with respect to a Transfer Hotel. h. Section 15a of the Original Master Agreement shall be deleted in its entirety and the following substituted therefor: Default. a. A "Default by the Lessee" shall exist under this Agreement if any of the following occur: (i) Minimum Net Worth. During the term of any Percentage Lease, (a) the Additional Lessee fails to maintain a minimum Net Worth as set forth in Section 5 and does not cure any deficiency within 30 days following written notice thereof from the Additional Lessor or (b) the Lessee fails to maintain a minimum Net Worth as set forth in Section 5 and does not cure any deficiency within 30 days following written notice thereof from the Lessor. 23 24 (ii) Default Under Percentage Leases. An Event of Default occurs under any of the Percentage Leases. (iii) Other Breaches. The Lessee or the Additional Lessee fails to comply with any other provision of this Agreement for a period of 30 days after being notified by the Lessor or the Additional Lessor in writing of the provisions of this Agreement with which the Lessee or the Additional Lessee, as the case may be, has failed to comply; provided that if such default (other than a failure to pay any rent under any Percentage Lease when due (after any applicable cure period), which shall be subject to the provisions set forth in the Percentage Leases, and any failure to maintain the minimum Net Worth, which shall be subject to the provisions of subsection 15a(i) above) cannot with due diligence be cured within a 30 day period, such period shall be extended for such reasonable time as the Lessee or the Additional Lessee, as the case may be, promptly and with due diligence commences and continues the cure thereof but in no event for a period of more than 90 days following the date of notice from the Lessor or the Additional Lessor, as the case may be. i. Section 16 of the Original Master Agreement shall be amended such that notices made to the Additional Lessee shall be made in the same manner in which notices are required to be made to the Lessee and notices made to the 24 25 Additional Lessor shall be made in the same manner in which notices are required to be made to the Lessor. 5. Certain Expenses Associated with the Additional Lessee. a. The Additional Lessor and the Lessor jointly and severally agree that they shall be responsible for the following costs and expenses related to the organization and on-going maintenance of the Additional Lessee. (i) the costs and expenses of incorporating and organizing the Additional Lessee in Tennessee and qualifying the Additional Lessee to do business in each of the states in which a Transfer Property is located, including all filing fees, reasonable counsel fees and other fees with respect thereto; (ii) all costs and expenses incurred in connection with transferring the 14 Existing Leases and the Existing DTR Lease to the Additional Lessee, including (A) costs and expenses incurred in connection with transferring the related franchise licenses and any other licenses and permits from the Lessee or DTR Lessee to the Additional Lessee, (B) the preparation, negotiation and execution of the Second Consolidated Lease Amendment and Third Consolidated Lease Amendment, the First Amendment to Master Agreement, the management agreements between the Additional Lessee and affiliated managers, the Consolidated Lease Estoppel, Subordination, Attornment and Non-Disturbance Agreement relating to the Transfer Hotels and any other 25 26 documents entered into by the Additional Lessee in connection with the transfer of the Transfer Properties and (C) reasonable fees and costs of counsel relating to the foregoing; (iii) the ongoing fees, annual business taxes and similar amounts required to be paid to governmental authorities by the Additional Lessee in order to maintain its corporate existence and be qualified to do business and remain in good standing in each of the states in which the Transfer Properties are located (net of such amounts, if any, by which Lessee's or DTR Lessee's obligations have been reduced as a result of the assignment of the 14 Existing Leases and the DTR Lease to the Additional Lessee, taking into account the fact that the Lessee will be required to maintain its qualification to do business in all of the states in which the Transfer Hotels covered by the 14 Existing Leases are located because, incident to the assignment of the 14 Existing Leases by the Lessor to the Additional Lessor and by the Lessee to the Additional Lessee, at the request of the Additional Lessor, the Lessee has been engaged to manage such Hotels); and (iv) The incremental cost with respect to the ongoing administration and accounting of the Additional Lessee to the extent such cost, together with the related costs of the Lessee, exceed the costs that the Lessee and DTR Lessee would otherwise have incurred (A) if the 14 Existing Leases and the Existing DTR Lease had not been transferred to 26 27 the Additional Lessee and the Additional Lessee had not been formed, and (B) if the Lessee had not been engaged to manage the Transfer Hotels covered by the 14 Existing Leases. (b) In the event the Lessee or the Additional Lessee pays any of the costs or fees for which the Additional Lessor and the Lessor are responsible pursuant to paragraph (a) above, the Lessor and/or the Additional Lessor shall reimburse the Lessee or the Additional Lessee, as applicable, for such costs or fees no later than 30 days following receipt of satisfactory evidence that such amounts were paid. (c) The Lessee and the Additional Lessee agree to cooperate with the Additional Lessor in determining what amounts are payable by the Lessor and the Additional Lessor to the Lessee or the Additional Lessee pursuant to paragraph (a) above and agree that neither the Lessor nor the Additional Lessor shall be responsible for any costs or expenses with respect to the items listed in paragraph (a) above to the extent the Lessee or DTR Lessee would otherwise have been responsible for such costs and expenses (A) if the 14 Existing Leases and the Existing DTR Lease had not been transferred to the Additional Lessee and the Additional Lessee had not been formed, and (B) if the Lessee had not been engaged to manage the Transfer Hotels covered by the 14 Existing Leases. 6. Transfer of Licenses and Permits. The parties acknowledge that in order to meet the timing requirements of the Lessor and the Additional Lessor in connection with the transfer of the Transfer Hotels by the Lessor to the Additional Lessor and, incident thereto, the transfer 27 28 to the Additional Lessee of the interest of the Lessee and the DTR Lessee in the 14 Existing Leases and the Existing DTR Lease, respectively, there has not been sufficient time in which to also effect the transfer of certain licenses and other governmental authorizations (including, in the case of certain of the Transfer Hotels, liquor licenses) with respect to the operation of the Transfer Hotels from the Lessee and the DTR Lessee to the Additional Lessee and to obtain all requisite governmental approvals with respect thereto (collectively, the "Governmental Transfer Approvals"). Accordingly, the parties agree that (a) notwithstanding anything to the contrary contained in the Second Consolidated Lease Amendment (including, without limitation, Sections 8.1 and 8.2 thereof), the absence of the Governmental Transfer Approvals until such time that such Governmental Transfer Approvals initially are obtained shall not constitute a default or an Event of Default under the Second Consolidated Lease Amendment or a "Default by the Lessee" under the Original Master Agreement, as amended hereby, except to the extent the Additional Lessee is in breach of its obligations under paragraph (c) below which breach continues uncured beyond the expiration of the notice and grace periods provided for in Section 16.1(d) of the Second Consolidated Lease Amendment and in Section 15a of the Original Master Agreement, as amended hereby; (b) the Lessor and the Additional Lessor agree, jointly and severally, to indemnify, defend (with counsel reasonably acceptable to the Additional Lessee), and hold harmless the Additional Lessee and its officers, directors and controlling persons from and against any losses, claims, damages, expenses or liabilities (or actions in respect thereof) to which the Additional Lessee or its officers, directors or controlling persons may become subject by reason of the absence of the Governmental Transfer Approvals; and (c) at the expense of the Lessor and the Additional Lessor as set forth in Section 5 above, the Additional Lessee shall 28 29 promptly apply for and diligently seek the Governmental Transfer Approvals and the Lessor, the Additional Lessor, the Lessee, the DTR Lessee and the Additional Lessee shall cooperate with each other in order to expeditiously obtain the Governmental Transfer Approvals. 7. Recording the SND Agreement. The parties acknowledge that the form in which the SND Agreement has been executed was not appropriate to permit the recording of the SND Agreement in all jurisdictions in which the Transfer Hotels are located. Accordingly, contemporaneously with the execution of this Amendment, counterparts of the SND Agreement are being recorded in some but not all of the jurisdictions in which the Transfer Hotels are located. The Lessor and the Additional Lessor agree that, promptly following the execution of this Amendment, they will have counterparts of the SND Agreement re-executed by all parties thereto in form sufficient to permit, and shall promptly thereafter effect, the recording of the SND Agreement in each jurisdiction in which a Transfer Hotel is located in which the SND Agreement has not previously been recorded. * * * As amended hereby, the Original Master Agreement is ratified, confirmed and approved. 29 30 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. RFS HOTEL INVESTORS, INC. By: /s/ Michael J. Pascal -------------------------- Name: Michael J. Pascal ------------------------ Title: CEO\Secretary\Treasurer ----------------------- RFS PARTNERSHIP, L.P. By: RFS Hotel Investors, Inc., general partner By: /s/ Michael J. Pascal -------------------------- Name: Michael J. Pascal ------------------------ Title: CEO/Secretary/Treasurer ----------------------- RFS FINANCING PARTNERSHIP By: RFS Financing Corporation, general partner By: /s/ Michael J. Pascal -------------------------- Name: Michael J. Pascal ------------------------ Title: V.P. ----------------------- DOUBLETREE CORPORATION By: /s/ David L. Stivers -------------------------- Name: David L. Stivers ------------------------ Title: SR. V.P. ----------------------- 31 RIFS, INC. By: /s/ Larry Russell -------------------------- Name: Larry Russell ------------------------ Title: Secretary ----------------------- DTR RPS LESSEE, INC. By: /s/ David A. Heuck -------------------------- Name: David A. Heuck ------------------------ Title: V.P. ----------------------- RFS LEASING, INC. By: /s/ Larry Russell -------------------------- Name: Larry Russell ------------------------ Title: Secretary ----------------------- EX-10.32 4 MANAGEMENT AGREEMENT DATED APRIL 6,1987 1 Exhibit 10.32 MANAGEMENT AGREEMENT DATED APRIL 6, 1987 BETWEEN RED LION INNS OPERATING L.P., a Delaware limited partnership AND RL ACQUISITION COMPANY, a California limited partnership 2 MANAGEMENT AGREEMENT DATED APRIL 6, 1987 BETWEEN RED LION INNS OPERATING L.P., a Delaware limited partnership AND RL ACQUISITION COMPANY, a California limited partnership TABLE OF CONTENTS SECTION PAGE RECITALS................................................................... 1 DEFINITIONS................................................................ 1 ARTICLE I - REPRESENTATIONS AND WARRANTIES........................... 5 1.1 Representations and Warranties of Manager............. 5 1.2 Representations and Warranties of Owner............... 6 ARTICLE II - GENERAL MANAGEMENT AND OPERATION......................... 6 2.1 General Management Services........................... 6 2.2 Operating Plan and Budget............................. 7 2.3 Maintenance, Repairs and Capital Improvements......... 8 2.4 Books and Records, Financial Statements and Internal Audits....................................... 10 2.5 Personnel............................................. 11 2.6 Special Projects...................................... 12 2.7 Communications........................................ 12 2.8 Sales and Reservations................................ 14 2.9 Manager's Computer Software........................... 14 2.10 Manager's Charge Card................................. 15 2.11 Hotel Retail Space.................................... 15 2.12 Affiliated Companies.................................. 16 2.13 Costs and Expenses.................................... 16 ARTICLE III - MANAGEMENT FEES AND REIMBURSABLE EXPENSES................ 17 3.1 Definitions of Gross Revenue, Gross Operating Profit, Adjusted Gross Operating Profit and Cash Flow Available for Incentive Fee........................... 17 3.2 Management Fees....................................... 21 3.3 Place of Payment...................................... 22 (i) 3 SECTION PAGE 3.4 Owner's Obligation to Provide Funds to Pay Fees and Expenses; Financing Program............................. 22 3.5 Hotel Bank Accounts................. 22 3.6 Withdrawals from Hotel Bank Accounts............................ 23 3.7 Remittances to Owner................ 23 ARTICLE IV -- TERM AND TERMINATION.................... 23 4.1 Term of Agreement................... 23 4.2 Events of Termination............... 23 4.3 Replacement of Red Lion Properties, Inc., as General Partner............ 25 4.4 Actions to be Taken on Termination.. 25 ARTICLE V -- INSURANCE............................... 26 5.1 Insurance by Manger................. 26 5.2 Parties Insured, Amount of Coverage, Etc. ..................... 27 5.3 Evidence of Insurance, Etc. ........ 28 5.4 Reports by Manager.................. 28 5.5 Review of Limits.................... 29 5.6 Limitation on Scope of Services..... 29 ARTICLE VI -- SUBORDINATION; MORTGAGES................ 29 6.1 Authorization to Mortgage Hotels.... 29 6.2 Subordination....................... 30 6.3 Rights of Mortgages................. 30 6.4 Estoppel Certificates............... 31 ARTICLE VII -- DESTRUCTION............................. 32 7.1 Owner to Restore After Insured Casualty............................ 32 7.2 Termination After Substantial Insured Casualty.................... 32 7.3 Uninsured Casualty - Owner's Option to Terminate or Restore............. 33 7.4 Commencement and Completion of Casualty Restoration................ 33 7.5 Proceeds of Business Interruption Insurance........................... 33 ARTICLE VIII -- CONDEMNATION............................ 34 8.1 Permanent Taking.................... 34 8.2 Taking for Temporary Use............ 34 (ii) 4 SECTION PAGE ARTICLE IX -- ASSIGNMENTS, ETC. ...................... 36 9.1 By Manager.......................... 36 9.2 By Owner............................ 37 9.3 Sale of Hotels...................... 37 ARTICLE X -- MISCELLANEOUS........................... 39 10.1 Complimentary/Discount Policies..... 39 10.2 Manager Identification, Names of Hotels.............................. 39 10.3 Compliance with Law................. 40 10.4 Governing Law....................... 40 10.5 No Waiver of Breach................. 40 10.6 Notices............................. 40 10.7 Successors and Assigns.............. 41 10.8 Indemnification..................... 41 10.9 Limitation on Pledging Owner's Credit.............................. 41 10.10 Entire Agreement.................... 42 10.11 Counterparts........................ 42 10.12 Captions, Etc. ..................... 42 10.13 No Partnership or Joint Venture..... 42 10.14 Amendment........................... 42 10.15 Limited Recourse.................... 42 10.16 Memorandum of Agreement............. 42 (iii) 5 MANAGEMENT AGREEMENT This Management Agreement ("Agreement") is entered into this 6th day of April, 1987, by and between RED LION INNS OPERATING L.P., a Delaware limited partnership ("Owner"), and RL ACQUISITION COMPANY, a California limited partnership ("Manager") (hereinafter sometimes individually referred to as the "Party" and collectively referred to as the "Parties"). RECITALS A. Owner plans to acquire from Manager all of Manager's interest in the hotels described in Exhibit A, attached hereto and incorporated herein by this reference (the "Hotels"). B. Owner desires to have Manager manage and operate the Hotels and Manager is willing to perform such services on the terms and conditions set forth herein. AGREEMENTS NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows: DEFINITIONS When used in this Agreement, the following terms shall have the following meanings: Acquisition Date shall have the meaning set forth in Section 4.1. Adjusted Gross Operating Profit shall have the meaning set forth in Section 3.1(d). Applicable Operating Year shall have the meaning set forth in Section 2.2(a). Approved Mortgage shall mean the Mortgage and any other lien or encumbrance approved by Manager pursuant to Section 6.1. Approved Mortgagee shall mean the lender making the loan secured by any Approved Mortgage. Base Fee shall mean the fee calculated as provided in Section 3.2(a). 6 Capital Improvement shall mean those items (other than routine repairs and maintenance) constructed or installed as part of a Hotel (including Furniture, Fixtures and Equipment) the cost of which for accounting purposes may not be expensed but must be capitalized according to generally accepted accounting principles in effect as of the date hereof. All Capital Improvements shall be owned by Owner. Capital Improvement Plan shall mean the budget for Capital Improvements (plus additions and replacements of Furniture, Furnishings and Equipment) for a Hotel as provided in Section 2.3(c). Cash Flow Available for Debt Service shall have the meaning set forth in Section 3.1(e). Cash flow Available for Incentive Fee shall have the meaning set forth in Section 3.1(f). Casualty Restoration shall have the meaning set forth in Section 7.1. Closing Costs shall mean the total cost to Owner, including all closing costs, of: (i) purchasing the Hotels, (ii) obtaining and consummating the loan secured by the Mortgage, and (iii) entering into this Agreement. Current Priority Amount during any month shall mean an amount equal to the sum of (i) the actual interest plus amortization of principal (excluding "balloon" payments, if any) due and payable by the Owner during such month on (A) the loan secured by the Mortgage or (B) after the repayment of the loan secured by the Mortgage, the scheduled monthly debt service on the loan secured by the Mortgage during the last year of the original term thereof, (ii) interest payable on the Working Capital Line, (iii) an amount equal to $27,083.33 for Owner's administrative expenses for such month for the first thirty-six full months of the term hereof and thereafter Owner's actual administrative expenses for such month incurred for accounting and legal services and other similar expenses, not to exceed three-eighths percent (0.375%) of Gross Revenues per annum if a Manager Affiliate is not the general partner of Owner, and (iv) the Priority Return. If Manager's right to manage a Hotel pursuant to this Agreement is terminated by reason of a Disposition of one or more Hotels (the "Excluded Hotels"), the amounts described in clauses (i) and (iv) above shall each be reduced by the product of (x) such amounts existing immediately before such Disposition and (y) a fraction, the numerator of which is the Adjusted Gross Operating Profit for the immediately preceding 2 7 three calendar years (or such lesser period for which results of operation of the Hotels hereunder are available) for the Excluded Hotels and the denominator of which is the Adjusted Gross Operating Profit of all of the Hotels managed under this Agreement immediately before such Disposition for such period. DISPOSITION shall mean a Taking of a Hotel, an election by Owner not to restore a Hotel following a casualty, a sale of a Hotel or any other event which results in a Hotel no longer being managed by Manager pursuant to this Agreement. FURNITURE, FIXTURE and EQUIPMENT shall mean the furniture, furnishings, fixtures and equipment installed and used in a Hotel, including without limitation all necessary furniture and furnishings for guest rooms, public areas and non-public areas (such as kitchen, laundry and cleaning facilities, rooms for the use of employees, storage areas, front desk and administrative offices), floor and window coverings, decorative light fixtures and equipment, but excluding, however, a Hotel's major mechanical and electrical equipment and systems (for example, the elevators). All Furniture, Fixtures and Equipment shall be owned by Owner. GROSS OPERATING PROFIT shall have the meaning set forth in Section 3.1(c). GROSS REVENUE shall have the meaning set forth in Section 3.1(a). HOTEL shall have the meaning set forth in Recital A. HOTEL PERSONNEL shall have the meaning set forth in Section 2.5(a). HOTEL RETAIL SPACE shall mean any space in the Hotels other than rooms and associated space, convention facilities, restaurants and food and beverage service facilities. INCENTIVE FEE shall mean the fee calculated as provided in Section 3.2(b). INVENTORIES shall mean the inventories of food, beverage and other goods for operation of a Hotel, as defined in the Uniform System. All Inventories shall be owned by Owner. MANAGER AFFILIATES shall mean any corporation, partnership, joint venture or other entity in which manager and any Manager Affiliates have a majority ownership interest. 3 8 MORTGAGE shall mean the mortgage, deed of trust, security agreement or other encumbrance placed by Owner on the Hotels in connection with Owner's acquisition of the Hotels. MORTGAGEE shall mean the holder of the secured obligations under the Mortgage. NOTICE OF DEFAULT shall have the meaning set forth in Section 4.2(a). NOTICE OF TERMINATION shall mean the notice described in Section 4.2 or any other notice provided herein whereby a Party may terminate this Agreement. OPERATING PLAN AND BUDGET shall mean a budget prepared under Section 2.2. OPERATING PROFIT TARGET shall be as set forth on Schedule I attached hereto and incorporated herein by this reference. Upon the Disposition of a Hotel or Hotels, the Operating Profit Target shall be adjusted as follows: the Operating Profit Target existing immediately before such Disposition of a Hotel or Hotels shall be reduced by an amount equal to the product of (x) the Operating Profit Target existing immediately before such Disposition and (y) a fraction, the numerator of which is the Adjusted Gross Operating Profit for the immediately preceding three calendar years (or such lesser period for which results of operation of the Hotels hereunder are available) for the Hotel or Hotels subject to the Disposition and the denominator of which is the Adjusted Gross Operating Profit of the Hotels managed under this Agreement immediately before such sale for such period. OPERATING SUPPLIES shall mean all consumable or expendable items for operation of a Hotel, including without limitation, supplies for laundry, housekeeping, food and beverage service, engineering and accounting uses, together with paper supplies and miscellaneous general supply items, as defined in the Uniform System. All Operating Supplies shall be owned by Owner. OPERATING YEAR shall mean each calendar year or portion thereof during the term of this Agreement. PARTIES shall mean, collectively, Owner and Manager. PARTY shall mean, individually, Owner or Manager. 4 9 Priority Return shall mean one-twelfth of the product of (A) the number of Units issued on or about the Acquisition Date multiplied by (B) the following amounts divided by .9801: 12 Month Period After Effective Date Hereof Amount -------------------- ------ 1st full through 12th $2.00 13th through 24th 2.05 25th through 36th 2.10 37th through 48th 2.15 49th and thereafter 2.20 Red Lion Hotels shall mean the hotels managed by Manager or a Manager Affiliate. Taking shall mean a taking of either a fee or an easement as a result of condemnation or eminent domain, or a conveyance by Owner in lieu thereof, of or upon all or part of a Hotel. Uniform System shall mean the "Uniform System of Accounts" as adopted by the American Hotel and Motel Association, with such exceptions as may be required by the provisions of this Agreement (including, without limitation, the definitions of Gross Revenue, Gross Operating Profit, Adjusted Gross Operating Profit, and Operating Expenses). Units shall mean the ownership interests held by limited partners in Red Lion Inns, L. P., a Delaware limited partnership, the sole limited partner in Owner. Working Capital shall mean capital requirements for operating expenses of the Hotels for the day-to-day requirements of the Hotels as contemplated in this Agreement. All Working Capital shall be owned by Owner. Working Capital Line shall mean a bank line of credit obtained by Owner for the purpose of enabling Owner to meet any funding requirements imposed on it pursuant to this Agreement. ARTICLE I REPRESENTATIONS AND WARRANTIES 1.1 Representations and Warranties of Manager. Manager represents and warrants to Owner as follows: 5 10 a. Manager is a limited partnership duly organized and validly existing under the laws of the State of California. b. Manager has full power, authority and legal right to perform and observe the provisions of this Agreement. c. This Agreement constitutes a valid and binding obligation of Manager enforceable in accordance with its terms, and does not constitute a breach of or default under any other agreement to which Manager is a party or by which any of its assets are bound or affected. 1.2 Representations and Warranties of Owner. Owner represents and warrants to Manager as follows: a. Owner is a partnership duly organized and validly existing under the laws of the State of Delaware. b. Owner has full power, authority and legal right to perform and observe the provisions of this Agreement. c. This Agreement constitutes a valid and binding obligation of Owner enforceable in accordance with its terms, and does not constitute a breach of or default under any other agreement to which Owner is a party or by which any of its assets are bound or affected. ARTICLE II GENERAL MANAGEMENT AND OPERATION 2.1 General Management Services. Subject to the provisions of this Agreement, from and after the commencement of the term of this Agreement as provided for in Section 4.1, Manager shall, on behalf of Owner, manage the Hotels in a faithful and efficient manner, consistent with the standards prevailing in and with the same degree of care as other Red Lion Hotels. In furtherance thereof, Manager shall: a. provided Owner has supplied Manager with complete copies and all amendments of any Approved Mortgage and any ground leases existing as of the date hereof, do everything reasonably within its power to manage the Hotels in all material respects in accordance with the terms and conditions of any Approved Mortgage, any such ground leases and any material contracts entered into on behalf of Owner after the date hereof, 6 11 if, as a result thereof, Manager is not required to assume responsibilities in addition to or different than those provided for herein; b. subject to the terms of this Agreement, implement Manager's standard administrative, accounting, budgeting, computer systems, marketing, personnel and operational policies and practices relating to or affecting the operation of Red Lion Hotels. c. at Owner's cost and expense: (i) arrange for the Hotels to be furnished with water, electricity, gas, power, telephone, vermin extermination, trash removal, equipment maintenance, security and such other services as are necessary for the proper operation and maintenance of the Hotels as contemplated by this Agreement; provided, however, that without Owner's approval, which approval shall not be unreasonably withheld, Manager shall not cause any Hotel to enter into any agreement for any such services which is not incurred in the ordinary course of operating the Hotel; (ii) to the extent that it is within Manager's power to do so, obtain and keep in full force and effect all permits, licenses (including, without limitation, liquor licenses, restaurant licenses and business licenses) and authorizations required in connection with the conduct of the business of each Hotel; and (iii) make purchases of all Furniture, Fixtures and Equipment, all Operating Supplies and Inventories and such services and other merchandise as are necessary for the proper operation and maintenance of each of the Hotels as contemplated by this Agreement. d. review the operation and maintenance of the Hotels from time to time in accordance with Manager's established management practices and policies. 2.2 Operating Plan and Budget. In accordance with Manager's standard planning and budgeting processes Manager shall, on or about thirty (30) days before the end of each Operating Year, prepare and deliver to Owner an operating plan and budget for the next ensuing Operating Year ("Operating Plan and Budget") setting forth in reasonable detail an estimate of the revenue and expenses of each of the Hotels for the next ensuing Operating Year ("Applicable 7 12 Operating Year"). In the preparation of each Operating Plan and Budget, Manager shall take into account the operations and outlook for the advance bookings, the competition, anticipated changes in the Hotel's expenses (including, without limitation, pending union negotiations, anticipated increases in property taxes, utility costs and insurance premiums) and anticipated changes in general economic conditions. It is understood, however, that the Operating Plan and Budget is an estimate only and that the actual results of operations for any given Operating year will be determined by the actual sales, revenues, costs and expenses of the Hotels during such Operating Year. 2.3 Maintenance, Repairs and Capital Improvements. a. The Hotels shall be managed as a member of the Red Lion Hotels. The Hotels (including but not limited to the Hotel buildings, adjacent grounds, Furniture, Fixtures and Equipment, Operating Supplies and Inventories) will be maintained, repaired and improved in order to continue operation of the Hotels at a standard which will permit the Hotels to serve effectively as a member of the Red Lion Hotels and not be a detriment thereto by reason of any deficient condition thereof. In furtherance thereof, Manager shall, at Owner's cost and expense, cause the Hotels (including but not limited to the Hotels buildings, adjacent grounds, Furniture, Fixtures and Equipment, Operating Supplies and Inventories) to be maintained in good operating condition and repair, and shall, subject to the provisions of this Section 2.3, replace all such items of Furniture, Fixtures and Equipment and Operating Supplies and Inventories as Manager shall, from time to time, deem advisable, including but not limited to those which may be deemed to constitute Capital Improvements. b. Manager shall reserve funds equal to the following percentages of Gross Revenue each corresponding twelve month period during the term hereof (the "FFE Reserve") and deposit such funds in an interest bearing account to pay the cost of additions to and replacements of Furniture, Fixtures and Equipment: Twelve Month Period Percentage of Gross Revenue ------------------- --------------------------- 1st full through 12th 1.0% 13th through 24th 2.5% Thereafter 3.0% All proceeds from the sale of Furniture, Fixtures and Equipment that are replaced by Manager shall be added to 8 13 the FFE Reserve and all interest that is earned on funds in the FFE Reserve shall be added to the FFE Reserve. All funds in the FFE Reserve shall be owned by Owner. Manager may waive the actual reserving of amounts to be added to the FFE Reserve on an annual basis. Notwithstanding any such waiver (i) all fees payable hereunder shall be calculated as if amounts to be added to the FFE Reserve were in fact reserved and (ii) Manager shall be entitled to budget and expend, and Owner shall be liable for the payment of, such amounts as if they had been reserved. c. Manager shall prepare an annual Capital Improvement Plan for all Capital Improvements (including additions to and replacements of Furniture, Fixtures and Equipment) to be made in each of the Hotels during the Applicable Operating Year which shall be provided to Owner in accordance with the schedule provided for in Section 2.2. If such Capital Improvement Plan provides for the expenditure of funds in addition to all amounts in the FFE Reserve and all amounts to be added to the FFE Reserve on a current basis, such Capital Improvement Plan shall be subject to Owner's approval or disapproval within thirty (30) days after delivery of the Capital Improvement Plan to Owner. If Owner disapproves such Capital Improvement Plan, Manager shall nonetheless have, and is hereby granted, the right and authority to make any expenditures set forth of the disapproved Capital Improvement Plan and to pay the cost thereof from (1) the FFE Reserve and (2) amounts to be added to the FFE Reserve on a current basis. d. All Capital Improvements undertaken by Manager shall be subject to the following: (i) all permits, licenses and authorizations required to be procured in connection with any Capital Improvement shall be procured, or caused to be procured, by Manager as the same are required; (ii) any Capital Improvement shall be made in a good and workmanlike manner and in compliance with all applicable laws and insurance requirements; and (iii) the cost of any Capital Improvement shall be promptly paid, or caused to be paid, by Manager from the FFE Reserve or with Owner supplied funds, if applicable. 9 14 2.4 Books and Records, Financial Statements and Internal Audits. a. In accordance with Manager's standard procedures as from time-to-time in effect, Manager shall cause books of account and other records relating to or reflecting the results of the operation of the Hotels to be kept on an accrual basis in accordance with the Uniform System of Accounts for Hotels. Except for the books and records which may be kept in Manager's home office or other suitable location pursuant to the adoption of a central billing system or other centralized service, all such books of account and other records with respect to each Hotel shall at all times during the term of this Agreement be kept at each such Hotel and shall, together with any centrally maintained books and records, be available to Owner, at all reasonable times, for examination, audit, inspection and copying. Original records of sales (guest checks, folios, etc.) shall be maintained for a reasonable period of time consistent with Manager's normal policy or as prescribed by law. b. During each Operating Year, Manager shall cause to be prepared and delivered to Owner on or before the thirtieth (30th) day of the following month a reasonably detailed monthly operating report and financial statements for each Hotel and on a consolidated basis, including a profit and loss and cash flow statement, reflecting the results of operations by department, together with a supplemental schedule of revenues and expenses and a balance sheet showing cash position and results of operations for the preceding calendar month and cumulative for the Operating Year to date. The consolidated statements shall include a computation of Gross Revenue, Gross Operating Profit, Base Fee and Incentive Fee for such month and Operating Year to date. Such reports and statements shall be prepared on an accrual basis in accordance with the Uniform System of Accounts for Hotels consistently applied and shall be in a format similar to the operating reports and financial statements which are prepared for other Red Lion Hotels. c. Assuming all required information in Owner's possession is made available to Manager on a timely basis, then no later than sixty (60) days immediately following each Operating Year, Manager shall cause to be prepared and delivered to Owner, as an operating expense of the Hotels, reasonably detailed unaudited financial statements for the preceding Operating Year ("Financial Statements"), which shall consist of a balance sheet, 10 15 statement of earnings and retained earnings, statement of changes in financial position, and computation of Gross Revenue, Gross Operating Profit, the Base Fee and the Incentive Fee for such Operating Year. d. Manager shall perform internal audits of each Hotel consistent with Manager's standard audit policy, as an operating expense of the hotels. Such audit shall be conducted by Manager's personnel. Manager acknowledges that Owner may also elect to conduct internal audits of one or more Hotels from time to time at Owner's expense and Manager shall cooperate with Owner in connection therewith. e. Manager shall promptly deliver to Owner copies of any documents relating to lawsuits and claims or notices received from the holder of the Mortgage, and, to the extent they would appear to have a material adverse effect on any of the Hotels or their operations, claims or notices received from any governmental agency or any insurance carrier. 2.5 Personnel. a. Manager shall select a general manager and the department heads for each Hotel, and they, or such person or persons to whom they may delegate such authority, shall select all personnel which any of them determine to be necessary for the operation of each Hotel (collectively "Hotel Personnel"). b. All decisions with regard to the terms of employment, including but not limited to compensation, bonuses, fringe benefits, discharge and replacement of all Hotel Personnel, whether made directly by Manager or through the general manager, department heads or any of their designees, shall be at the sole discretion of Manager. c. All Hotel Personnel shall be employed at Owner's cost and expense, but all such personnel shall be employees of Manager and not employees of Owner. d. Manager shall provide all supervisory services of its corporate non-Hotel Personnel employees necessary to enable Manager to perform its obligations under this Agreement. e. Manager shall administer all necessary employee benefit programs, maintain all necessary records, file all reports, and pay all taxes with respect to the Hotel Personnel; provided that the direct costs of 11 16 administration incurred under this Section 2.5(e) shall be operating expenses of each Hotel and Manager shall be reimbursed for such payment in accordance with Section 2.13. 2.6 Special Projects. With Owner's approval, Manager may undertake special projects, including but not limited to work undertaken with respect to Capital Improvements and any other matters which (i) are not included within the scope of the general management services as contemplated in this Article II and (ii) if not provided or caused to be provided by Manager would involve Owner's engagement of a third party to perform such services (for example, special sales or marketing programs, special market reviews, assistance in opening new food and beverage preparation facilities, and special projects performed by Manager's legal, taxation, data processing, insurance, and engineering personnel). Manager agrees that any such services shall be on terms and conditions no less favorable to Owner than the terms on which such services are provided by Manager to other Red Lion Hotels. Owner shall reimburse Manager for the services of personnel assigned to such special projects at a daily per diem rate equal to 2.5 times the total costs of employment to Manager for such personnel. 2.7 Communications and Marketing. a. Manager shall provide the Hotels with such advertising, public relations and promotional services as are judged by it to be reasonably necessary and appropriate in order to promote the name and facilities of the Hotels and to maintain their identity as Red Lion Hotels. Such services shall include but not be limited to assistance in: (i) developing and implementing the Hotels' communications plan following Manager's guidelines which include planning, publicity and internal communications and organizing and bugeting the Hotels' advertising and public relations programs; (ii) selecting and providing guidance as required for the public relations personnel; (iii) preparing and disseminating news releases for trade and consumer publications; (iv) selecting an advertising agency; and (v) maintaining a coporate communications program, including Manager's corporate identity program and its national advertising programs, 12 17 coordinating the Hotels' communications program with Manager's corporate communications program, and including the Hotels in Manager's corporate identity and national advertising programs, as appropriate. b. The following costs and expenses incurred under Section 2.7(a) shall be operating expenses of the Hotels and shall be in addition to the charges referred to in Section 2.13: (i) those incurred in the implementation of the Hotels' communications plan including, without limitation, the Hotels' pro rata share of Manager's corporate communications program based on the ratio of the number of rooms in the Hotels to the total number of rooms in the Red Lion Hotels. Owner acknowledges that such basis may change during the term of this Agreement if Manager determines in its sole but good faith judgment that another basis of allocation may more fairly distribute the costs of such services, and Owner agrees to any such change provided it is applied to all other Red Lion Hotels situated in the United States and that the changes are not made on a basis which results in a discriminatory effect on the Hotels; (ii) those incurred in the production, distribution and placement of other promotional materials relating to the Hotels, including but not limited to materials for the promotion of employee relations, generally paid for by other Red Lion Hotels when materials of a similar nature are provided to them; and (iii) those incurred as a result of the attendance of Hotel Personnel at conventions, meetings, seminars, conferences and travel congresses. The above listed costs and expenses shall not include payroll costs and expenses associated with such activities which shall only be reimbursed to Manager under Section 3.4. c. Owner acknowledges that the Hotels' communications plan shall be in accordance with Manager's sales, advertising and public relations philosophies, and must adhere to Manager's corporate identity requirements. 13 18 2.8 Sales and Reservations a. Manager shall secure bookings for the Hotels through the sales and reservation offices of Manager and its affiliates, and shall encourage the use of the Hotels by tourists, special groups, travel congresses, travel agencies, airlines and other recognized sources of hotel business. Manager shall develop a sales program including personal visits by the sales staff of Manager and telephone and direct mail contracts. Manager will represent the Hotels at appropriate conventions and travel congresses, and will list the Hotels in printings of general tariff bulletins. b. Manager shall process reservations for the Hotels through Manager's reservations system. Any charges payable in connection with the securing of reservations for the Hotels shall be an operating expense of the Hotels on the basis of the reservations obtained for the Hotels. Owner acknowledges that such basis may change during the term of this Agreement if Manager determines in its sole but good faith judgment that another basis of allocation may more fairly distribute the costs of such services, and Owner agrees to any such change provided it is applied to all other Red Lion Hotels situated in the United States and that the changes are not made on a basis which results in a discriminatory effect on the Hotels. Owner agrees to honor all reservations made by Manager in the ordinary course of business even though reservations extend or are for a period of time subsequent to the termination of this Agreement; provided, however, that Owner shall be entitled to instruct Manager not to make reservations for all or some portion of the time subsequent to the termination of this Agreement and Manager shall thereafter adhere to such instruction. 2.9 Manager's Computer Software. a. Manager has developed confidential computer software programs ("Confidential Software") for use at various hotels managed by Manager. The Confidential Software is used in three of the Hotels currently and it is contemplated that this Confidential Software will be installed and utilized in the balance of the Hotels following the commencement hereof. Manager shall make additional or newly developed Confidential Software available to Owner for use at the Hotels using the Confidential Software for a user fee based on the cost of development of the Confidential Software programs which cost shall be allocated to the Hotels using the Confidential Software based on the ratio of the number 14 19 of rooms in the Hotels using the Confidential Software to the total number of rooms in the Red Lion Hotels using the Confidential Software. Owner acknowledges that such basis may change during the term of this Agreement if Manager determines in its sole but good faith judgment that another basis of allocation may more fairly distribute the costs of such services, and Owner agrees to any such change provided it is applied to all other Red Lion Hotels situated in the United States and that the changes are not made on a basis which results in a discriminatory effect on the Hotels. b. Owner acknowledges Manager's proprietary interest in the Confidential Software and neither Owner nor Owner's employees shall at any time, directly or indirectly, disclose, disseminate, reproduce, appropriate or otherwise make a claim of interest concerning such Confidential Software. Owner shall not be permitted to use said Confidential Software at any location other than the Hotels and in the event this Agreement is terminated for any reason whatsoever, this paragraph shall survive said termination. Following termination of this Agreement, Owner and its successors in interest may continue to use at the Hotels all Confidential Software in use at the Hotels immediately prior thereto for a period not to exceed six (6) months during the transition to new management. 2.10 MANAGER'S CHARGE CARD. Manager may, from time to time, at its sole discretion, implement a charge card system for the convenience of guest and for the promotion of the Red Lion Hotels. At any time when such a charge card system is in effect, Manager shall make such system available to the Hotels, and Owner hereby authorizes Manager to accept such charge card and all other charge or credit cards designated by Manager for all Hotel charges authorized in accordance with Manager's credit card billing policies, as amended from time to time. Manager shall retain the right, at any time and from time to time during the term of this Agreement, to discontinue utilization of its charge card system. 2.11 HOTEL RETAIL SPACE. Manager shall either operate the Hotel Retail Space or negotiate and sign on behalf of Owner leases, licenses and concession agreements covering the Hotel Retail Space, and shall thereafter administer said leases, licenses and concession agreements on behalf of Owner. Any Hotel Retail Space may be leased to a Manager Affiliate provided that such lease is on terms and conditions no less favorable to Owner than those which would otherwise be available from third parties. Manager shall not lease any space in the Hotels, other than Hotel Retail space, without Owner's prior written consent. 15 20 2.12 AFFILIATED COMPANIES. In providing the services required to be performed by it under this Agreement, Manager may from time to time use the services of Manager Affiliates; provided, however, that there shall be no changes in the compensation or reimbursements owing by Owner hereunder and Manager shall remain fully liable to Owner to fulfill the obligations hereunder. Subject to the immediately preceding sentence, if rather than arrange for a third party to provide goods or services for the Hotels, Manager shall contract with a Manager Affiliate for such goods or services, then any such contracts shall be on terms and conditions which are in the aggregate no less favorable than those which would otherwise be available from third parties for comparable quality. 2.13 COSTS AND EXPENSES. Owner shall pay Manager for all costs and expenses incurred by Manager under the terms and provisions of this Article II, including, but not limited to the following: a. The salaries and wages, including costs of payroll taxes, bonuses, retirement plan contributions, fringe benefits, and related payroll items incurred with respect to the Hotel Personnel assigned to the Hotels on a full-time basis and the moving and related expenses (in accordance with Manager's standard policies, as amended from time to time by Manager) incurred in connection with relocating any salaried Hotel personnel assigned to the Hotels on a full-time basis. Hotel Personnel shall be deemed to be assigned to the hotels on a full-time basis even though they may have assumed supervisory responsibilities at other hotels managed by Manager or participate in other Manager related activities on a limited basis. In the event that Hotel Personnel are assigned to work on a day-to-day basis at the Hotels and another hotel managed by Manager in a shared employee program, then the payments under this Section 2.13(a) shall be equitably prorated among said hotels on the basis of the amount of time devoted to each hotel; b. The daily per diem rate for those personnel of Manager assigned to special projects for the Hotels as provided in Section 2.6; c. Travel and out-of-pocket expenses incurred directly in connection with the management of the Hotels by Manager's operations personnel, food and beverage division personnel, rooms division personnel, marketing division personnel, systems division personnel, financial services division personnel, design and construction division personnel, insurance division 16 21 personnel, other executive staff personnel, and those personnel assigned to the special projects under Section 2.6, but only when a specific event or circumstance at a Hotel directly dictates the need for such attention, and excluding general supervision or oversight and corporate or central office administration or overhead; and d. Charges for the Hotels' pro rata cost of the standard and customary Manager group services accepted by other Red Lion Hotels, including but not limited to services provided by Manager's operations personnel, food and beverage division personnel, rooms division personnel, marketing division personnel, systems division personnel, financial services division personnel, design and construction division personnel, insurance division personnel and other executive staff personnel, attendance at Manager's annual management and other conferences, and operating handbooks, manuals and forms, but excluding general supervision or oversight and corporate or central office administration or overhead, which charges shall be allocated to the Hotels on the basis of the ratio of the number of rooms in the Hotels to the total number of rooms in the Red Lion Hotels. Owner acknowledges that such basis may change during the term of this Agreement if Manager determines in its sole but good faith judgment that another basis of allocation may more fairly distribute the costs of such services, and Owner agrees to any such change provided it is applied to all other Red Lion Hotels situated in the United States and that the changes are not made on a basis which results in a discriminatory effect on the Hotels. ARTICLE III MANAGEMENT FEES AND DISTRIBUTION OF CASH FLOW 3.1 Definitions of Gross Revenues, Gross Operating Profit, Adjusted Gross Operating Profit and Cash Flow Available for Incentive Fee. a. As used in this Agreement, the term "Gross Revenue" shall mean, in accordance with the Uniform System, all income and proceeds (whether in cash or on credit, and computed on an accrual basis) received by Owner or Manager for the use, occupancy or enjoyment of the Hotels, or any part thereof, or received by Owner or Manager for the sale of any goods, services or other items sold on or provided from the Hotels' premises in the ordinary course of the Hotels' operation, including without limitation: (a) all income and proceeds received from rental of rooms and commercial and other 17 22 space within the Hotels including net parking revenue; (b) all income and proceeds received from food and beverage operations and from catering services conducted from the Hotels even though rendered outside of the Hotels; (c) all income and proceeds from business interruption, rental interruption and use and occupancy insurance with respect to the operation of the Hotels (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); (d) all awards for condemnation for temporary use (after deducting therefrom all costs incurred in the adjustment or collection thereof); and (e) all income and proceeds from judgments, settlements and other resolutions of disputes with respect to matters which would be includable in "Gross Revenue" if received in the ordinary course of the Hotels' operation (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof). Such term shall not include: (1) gross receipts received by lessees, licensees or concessionaires of the Hotels; (2) consideration received at the Hotels for hotel accommodations, goods and services to be provided at other hotels, although arranged by, for or on behalf of Manager; (3) income and proceeds from the sale or other disposition of goods, capital assets and other items not in the ordinary course of the Hotels' operation; (4) federal, state and municipal excise, sales and use taxes collected directly from patrons or guests of the Hotels as part of or based on the sales receipts, room, admission, cabaret or equivalent taxes; (5) condemnation awards (except to the extent provided in clause (d) of this paragraph; (6) bad debt reserves, subject to adjustment; (7) gratuities collected by Hotel employees; (8) the proceeds of any financing; (9) other income or proceeds resulting other than from the use or occupancy of the Hotels, or any part thereof, or other than from the sale of goods, services or other items sold on or provided from the Hotels' premises in the ordinary course of business; and (10) interest and income on any funds standing from time to time in the Hotels' agency or reserve accounts. b. As used in this Agreement, the term "Operating Expenses" shall mean all reasonable costs and expenses of maintaining, conducting and supervising the operation of the Hotels (which costs and expenses do not include (a) depreciation and amortization except as otherwise provided in this Agreement, any rent payable by Owner either in respect of the Hotels, the Furniture, Fixtures and Equipment, the Operating Supplies, or any part of the foregoing, except as otherwise provided in this 18 23 Agreement, and the costs of any other things specified herein to be done or provided at Owner's or Manager's sole expense) incurred by Owner or by Manager directly or at Owner's or Manager's request pursuant to this Agreement or as otherwise specifically provided herein which are properly attributable to the period under consideration under Manager's system of accounting, including without limitation: i. The cost of all food and beverage sold or consumed and of all Inventories and Operating Supplies placed in use. For purposes of this provision, Inventories and Operating Supplies shall be considered to have been placed in use when they are transferred from the storerooms of the Hotels to the appropriate operating departments. ii. Salaries and wages of Hotel personnel, including costs of payroll taxes and employee benefits (which benefits may include, without limitation, a pension plan, medical insurance, life insurance, travel accident insurance and an executive bonus program) and the costs of moving executive personnel, their families and their belongings to the area in which the Hotel is located at the commencement of their employment at the Hotel and all other expenses not otherwise specifically referred to in this section which are referred to as "Administrative and General Expenses" in the Uniform System. Except as herein otherwise expressly provided with respect to employees regularly employed at the Hotels, the salaries or wages of other employees or executives of Manager shall in no event be Operating Expenses, but they shall be entitled to free room and board and the free use of all Hotel facilities at such times as they visit the Hotels exclusively in connection with the management of the Hotels. iii. The cost of all other goods and services obtained by Manager in connection with its operation of the Hotels, including, without limitation, heat and utilities, office supplies and all services performed by third parties, including leasing expenses in connection with telephone and data processing equipment and such other equipment as the parties hereto may agree upon in writing. iv. The cost of repairs to and maintenance of the Hotels. 19 24 v. Insurance premiums for insurance related to Hotel employees and for insurance required to be maintained hereunder. Premiums on policies for more than one year will be prorated over the period of insurance and premiums under blanket policies will be allocated among properties covered. vi. All taxes, assessments and other charges (other than federal, state or local income taxes and franchise taxes or the equivalent) payable by or assessed against Operator with respect to the operation of the Hotels, and water and sewer charges. Specifically excluded from this item are all taxes levied or imposed against the Hotels or their contents, such as real and personal property taxes. vii. Legal and accounting fees for services directly related to the operation of the Hotels. viii. The costs and expenses of technical consultants and specialized operational experts for specialized services in connection with nonrecurring work on operational, functional, decorating, design or construction problems and activities. ix. All expenses for advertising the Hotels and all expenses of sales promotion and public relation activities. c. As used in this Agreement, the term "Gross Operating Profit" shall mean the excess, if any, of Gross Revenue over Operating Expenses. d. As used in this Agreement, the term "Adjusted Gross Operating Profit" shall mean the excess, if any, of Gross Operating Profit over the Base Fee. e. As used in this Agreement, the term "Cash Flow Available for Debt Service" shall mean the Adjusted Gross Operating Profit from operations of the Hotels for the applicable Operating Year determined in accordance with the provisions of this Agreement less the sum of the following: (i) All taxes, including but not limited to ad valorem taxes on real property, and personal property taxes but excluding taxes based upon income of Owner; 20 25 (ii) Insurance premiums relating to fire, extended coverage and business interruption insurance policies; (iii) Rentals under any leases of real property and rentals under any leases of personal property; and (iv) Amounts added to the FFE Reserve. f. As used in this Agreement, the term "Cash Flow Available for Incentive Fee" shall mean the excess, if any, of Cash Flow Available for Debt Service over the Current Priority Amount. 3.2 Management Fees. In addition to charges and reimbursements as provided for in Section 2.13, Manager shall retain out of Gross Revenues the following fees for the services to be provided by Manager pursuant to Article II: a. An annual minimum management fee ("Base Fee") equal to three percent (3%) of annual Gross Revenue. The Base Fee for each Operating Year shall be paid monthly based upon the Gross Revenue for the Operating Year to date less the Base Fee paid to date. b. In addition to the annual Base Fee provided for in Section 3.2(a), an annual incentive management fee ("Incentive Fee") equal to the lesser of (A) fifteen percent (15%) of the Adjusted Gross Operating Profit up to the Operating Profit Target and twenty-five percent (25%) of the Adjusted Gross Operating Profits in excess of the Operating Profit Target or (B) subject to the accrual set forth in Section 3.2(c) below, the Cash Flow Available for Incentive Fee. The Incentive Fee (i) shall be paid on a cumulative basis for each Operating Year as set forth in the monthly operating statement, (ii) shall be payable only after payment of the Current Priority Amount on a cumulative basis for each Operating Year, and (iii) shall be promptly repaid by Manager if any monthly statement shows that Incentive Fee has been overpaid. c. If Cash Flow Available for Incentive Fee is, from time to time, insufficient to pay the entire Incentive Fee as calculated pursuant to Section 3.2(b)(A), then, to the extent of such deficiency, said Incentive Fee shall be accrued without interest up to a maximum accrual of $6,000,000. Such accrued Incentive Fee shall be paid by Owner to Manager from twenty-five 21 26 (25%) of the Cash flow Available for Incentive Fee remaining after payment of the current Incentive Fee. d. Upon the sale or refinancing of one or more Hotels, up to the first $6,000,000 of net proceeds of such sale or refinancing after any amounts due under any loan secured by a lien or encumbrance on the Hotel or Hotels sold or refinanced are paid ("Net Proceeds") shall be applied to accrued Incentive Fees. After the first $6,000,000 of Net Proceeds have been so applied to accrued Incentive Fees, all remaining amounts shall be distributed to Owner. 3.3 Place of Payment. All fees and payment of expenses payable to Manager under Article III shall be retained by Manager out of Gross Revenues or, with respect to payments of accrued Incentive Fee out of Net Proceeds, remitted to Manager by or on behalf of Owner as Manager shall designate in writing to Owner. 3.4 Owner's Obligation to Provide Funds to Pay Fees and Expenses; Financing Program. If, at any time during the term of this Agreement, the funds available from the operation of the Hotels for the payment of all financial requirements of the Hotels, including any of the fees and the costs and expenses specified in Articles II or III (other than accrued Incentive Fee), shall be insufficient to pay the same as they become due and payable, Owner shall make deposits of sufficient funds into the Hotels' bank accounts established under Section 3.5 in order to make such payments. If Owner fails to make such deposits and there are fees earned and expenses outstanding for which Manager and/or Manager Affiliates have not been paid, said fees and expenses shall accrue interest at the annual rate of the lesser of Manager's actual cost of funds, as such cost of funds changes from time to time, plus one percent (1%) per annum computed on the first day of each month or the maximum annual interest rate allowable under applicable law. 3.5 Hotel Bank Accounts. Manager shall select all banks with which each Hotel shall conduct its various banking affairs. All funds received in the operation of each Hotel shall be deposited into one or more special accounts bearing the name of such Hotel in a bank so selected having a branch reasonably convenient to such Hotel and having a capital and surplus of not less than Five Million Dollars ($5,000,000). Each Hotel's operating expenses shall be paid out of its special accounts or such other accounts as may be maintained for Owner, as well as Manager's fees, payroll expenses and other expenses to be paid to or reimbursed to Manager and Manager Affiliates for such Hotel in accordance with the terms and provisions of this 22 27 Agreement. Neither Manager nor Owner shall commingle any separate funds in such accounts. 3.6. WITHDRAWALS FROM HOTEL BANK ACCOUNTS. Checks or other documents of withdrawal from the Hotel bank accounts established pursuant to Section 3.5 may be made for any purpose authorized under this Agreement and shall be signed by duly authorized representatives of Manager. 3.7 REMITTANCES TO OWNER. Concurrently with delivery of the monthly statements required pursuant to Section 2.4(b), Manager shall remit to Owner all sums in the Hotels' bank accounts established pursuant to Section 3.5 in excess of the amounts required to maintain sufficient Working Capital for the Hotels for the next month. All such amounts shall be transferred to Owner's account maintained at the bank where the said account is maintained, or at such other place as Owner may from time to time designate. ARTICLE IV TERM AND TERMINATION 4.1 TERM OF AGREEMENT; OPTION TO EXTEND. The services to be provided by Manager under this Agreement shall commence on the date Owner acquires the Hotels (the "Acquisition Date") and shall terminate, unless sooner terminated as provided in this Agreement twenty-five (25) years from the Acquisition Date. Manager shall have the right to extend the term of this Agreement by not less than six (6) months' prior written notice to Owner during the then current term for up to ten (10) consecutive extended terms of five (5) years each. 4.2 EVENTS OF TERMINATION. In addition to Articles VI, VII, VIII and IX pertaining to the termination of this Agreement with respect to one or more Hotels, if at any time during the term of this Agreement any of the following events ("Event of Termination") shall occur, then the nondefaulting Party may, at its option, terminate this Agreement by giving notice to the other party ("Notice of Termination") specifying a date, not earlier than thirty (30) days after the giving of such notice, when this Agreement shall terminate: a. if Manager or Owner shall breach any material representation, warranty or covenant contained in this Agreement, or shall default in the performance of any such obligation hereunder, and such breach or default shall not be cured within thirty (30) days following notice thereof ("Notice of Default"); provided, however, that an Event of Termination shall not exist with regard thereto if such breach or default is not attributable to 23 28 a failure to pay any sums due under this Agreement and such Event is curable but it is not possible to cure such breach or default within said thirty (30) day period, so long as the defaulting party commences to cure such breach or default within said period and thereafter proceeds diligently and in good faith to complete the cure; b. if a court of competent jurisdiction has entered a final, non-appealable judgment finding Manager liable for actual fraud, gross negligence or willful and wanton misconduct in its dealings with Owner hereunder; c. if Manager or Owner shall apply for or consent to the appointment of a receiver, trustee or liquidator of all or a substantial part of its assets or make a general assignment for the benefit of its creditors, or file a voluntary petition in bankruptcy or a petition seeking reorganization, composition, arrangement with creditors, liquidation or similar relief under any present or future statute, law or regulation, or file any answer admitting the material allegations of a petition filed against it in any such preceding, or be adjudicated a bankrupt or insolvent, or take any action looking toward dissolution; d. if any final order, judgment or decree (that is, an order, judgment or decree affirmed on appeal to a court of last resort or after the expiration of any period to appeal) shall be entered without the application, approval or consent of Manager or Owner by any court of competent jurisdiction, approving a petition seeking reorganization, composition, arrangement with creditors. liquidation or similar relief under any present or future statute, law or regulation with respect to Manger or Owner, or appointing a receiver, trustee or liquidator of all or a substantial part of Manager's or Owner's assets and such order, judgment or decree shall continue unstayed and in effect for an aggregate of sixty (60) days (whether or not consecutive); or e. if a final judgment (that is, a judgment affirmed on appeal to a court of last resort or after the expiration of any period to appeal) not fully covered by insurance shall be rendered against Manager or Owner which, with other outstanding final judgments (defined as aforesaid) against such party not fully covered by insurance exceed an aggregate of One Hundred Thousand Dollars ($100,000.00), and such final judgment of judgments shall continue undischarged and unsettled 24 29 for an aggregate of sixty (60) days (whether or not consecutive). 4.3 REPLACEMENT OF GENERAL PARTNER OF OWNER. If Red Lion Properties, Inc., a Delaware corporation (the "General Partner") is removed or discharged as the sole general partner of Owner, Manager shall have the right, for a period of six (6) months from the effective date of such removal or discharge, at Manager's sole election, to terminate this Agreement upon thirty (30) days written notice to Owner. For purposes of Section 4.4(a) there shall be no defaulting party, and the costs described therein shall be borne equally by Manager and Owner. 4.4 ACTIONS TO BE TAKEN ON TERMINATION. Upon any termination of this Agreement pursuant to this Article IV, the following shall be applicable: a. The Financial Statements required pursuant to Section 2.4(c) shall be prepared as of the date of such termination, with all costs and expenses thereof to be borne by the defaulting Party. b. Within thirty (30) days after the delivery of the Financial Statements referred to in Section 4.4(a), Owner shall pay Manager all fees and other payments earned or due under the terms and provisions of this Agreement. c. Manager shall peacefully vacate and surrender the Hotels to Owner. d. Manager shall purchase from Owner, for a purchase price equal to fair market value, but not exceeding cost, all unbroken cases of Operating Supplies then on hand at the Hotels or ordered or purchased and which bear the identification of Manager. Notwithstanding the provisions of Section 10.2(b), Owner may continue to use in connection with the Hotels any and all items of Operating Supplies or other products or items then on hand bearing the identification of Manager which are not repurchased by Manager from Owner, but shall not reorder any such items. e. Manager shall assign and transfer to Owner: (i) all Owner's books and records respecting the Hotels in the custody and control of Manager, including but not limited to those provided for in Section 2.4; and 25 30 (ii) all Manager's right, title and interest in and to all liquor, restaurant and other licenses and permits, if any, used by Manager in the operation of the Hotels; provided, however, that if Manager has expended any of its own funds in the acquisition of such licenses or permits, Owner shall reimburse Manager therefore if Owner requests such assignment and transfer of such licenses and permits. f. Manager shall release and transfer to Owner any of Owner's funds held or controlled by Manager, including any funds in any Hotel bank accounts. ARTICLE V INSURANCE 5.1 INSURANCE BY MANAGER. a. Subject to Section 5.1(b), Manager shall, at all times during the term of this Agreement and at Owner's cost and expense maintain insurance coverage on the Hotels and the business conducted therein substantially similar to that maintained for other Red Lion Hotels. Such insurance includes, as of the date hereof: (i) comprehensive general liability insurance which has been endorsed to include premises operations, elevators, independent contractors, blanket contractual, products liability, personal injury (including contractual), broad form property damage, fire legal liability, host liquor liability (including the loss of means of support), liquor liability, innkeepers liability (including safety deposit box liability) and comprehensive automobile liability including all owned, hired, leased or substituted vehicles, and garagekeepers legal liability, against the claims for personal and bodily injury or death and property damage occurring upon, in or about the Hotels, or any adjoining streets and passageways thereof, or otherwise arising under this Agreement; (ii) appropriate worker's compensation and employer's liability insurance as shall be required by and be in conformance with the laws of any state where a Hotel is located for both Owner's and Manager's employees at the Hotels; 26 31 (iii) insurance against "all risks" of loss or damage, including, to the extent available at reasonable cost, earthquake and flood, available under commercial property insurance policies with licensed insurance companies in amounts not less than the then current full insurable value of each Hotel building and its contents. As used herein, the term "full insurable value" shall mean the actual replacement cost of each Hotel building and its contents; (iv) boiler and machinery insurance on boilers, pressure vessels and other machinery including power interruption coverage in amounts equal to or greater than the coverages maintained at other Red Lion Hotels or such other amounts as shall be agreed to by Manager and Owner; and (v) business interruption insurance covering risk of loss due to an insured peril described in Sections 5.1(a)(iii) and 5.2(a)(iv) hereof, including any loss or damage to a Hotel structure, its contents, boiler, pressure vessels or machinery and any resulting damage thereby rendering such Hotel premises untenantable or the services to be provided by such Hotel unmarketable causing a loss of business. b. If the insurance referred to in Section 5.1(a) could be obtained by Owner at lesser premiums and otherwise on terms and conditions more advantageous to Owner, then Owner may, upon notice to Manager, obtain such insurance for its own account. Such notice must be received by Manager at least sixty (60) days prior to the Acquisition Date if it is to become effective on the Acquisition Date, or six (6) months prior to the effective date of said insurance following the Acquisition Date, as the case may be; provided, however, that Manager shall in all events, at Owner's cost and expense, maintain appropriate worker's compensation and employer's liability insurance for Manager's employees at the Hotels as described in Section 5.1(a)(ii) and provided, further, that if Owner elects to provide the coverage under Section 5.1(a)(ii) for Owner's employees (if any) at the Hotels, Manager shall nevertheless provide the said coverage for Manager's employees at the Hotels. 5.2 Parties Insured, Amount of Coverage, Etc. All insurance policies provided for in Section 5.1 shall include: 27 32 a. Manager and Owner as parties insured thereunder, as their interests may appear; b. except as otherwise expressly stated herein, such amount of coverage and deductibles as shall be in amounts established by Manager for all Red Lion Hotels or in such greater amounts as Owner shall require to protect Owner from material risk of being a co-insurer; c. where appropriate, mortgage endorsements in favor of Mortgage(s); d. where appropriate (including but not limited to the insurance provided for in Section 5.1(a)), the insurer's waiver of subrogation rights against Manager for all insurance policies procured by Owner and the insurer's waiver of subrogation rights against Owner for all insurance policies procured by Manager; and e. a requirement that the insurer provide at least ten (10) days' notice of cancellation or material change in the terms and provisions of the policies. 5.3 EVIDENCE OF INSURANCE, ETC. a. Prior to the effective date of the applicable coverages the party obtaining the insurance coverages under Section 5.1 shall provide the other party with certified copies of policies for such insurance or certificates of insurance. Prior to the expiration date of all such policies, the party obtaining said insurance shall provide the other party with a binder, certified copies of renewal policies, or certificates of insurance. On the termination of this Agreement, there shall be an apportionment of any prepaid insurance premiums in respect of insurance policies obtained by Manager pursuant to Section 5.1(a). b. On request, each party shall furnish the other with a schedule of insurance obtained by them under Section 5.1, listing the policy numbers of the insurance obtained, the names of the companies issuing such policies, the names of the parties insured, the amounts and expiration date or dates of such policies and the risks covered thereby. 5.4 REPORTS BY MANAGER. Manager shall promptly: a. cause to be investigated all accidents and claims for damage relating to the operation and maintenance of any Hotel as they become known to Manager, and 28 33 shall report to Owner any such incident which is material; b. cause to be investigated all damage to or destruction of any Hotel as it becomes known to Manager, and shall report to Owner any such incident which is material together with the estimated cost of repair thereof; and c. prepare any and all reports required by any insurance company as the result of an incident mentioned in Sections 5.5(a) and 5.5(b). 5.5 Review of Limits. All insurance policy limits provided pursuant to this Article V shall be reviewed by the Parties each three (3) years following the Acquisition Date, or sooner if reasonably requested by either Party, to determine the suitability of such insurance limits in view of exposures reasonably anticipated over the following three (3) years; provided, however, that insurance policy limits may not be reduced to an amount lower than that in effect for all Red Lion Hotels except by mutual consent of the Parties. 5.6 Limitation on Scope of Services. Owner acknowledges that in arranging for insurance coverages under this Article V nothing contained herein or therein shall be deemed to constitute a representation or warranty by Manager or any insurance broker utilized by Manager with regard to the nature or extent of the insurance coverages which should be considered by Owner for the ownership and operation of the Hotels, and Owner is to rely exclusively on its own insurance advisors with regard thereto. ARTICLE VI SUBORDINATION; MORTGAGES 6.1 Authorization to Mortgage Hotels. Owner shall have the right to grant the Mortgage on all of the assets which comprise the Hotels, and to assign to the Mortgage, as collateral security, of Owner's right, title and interest in and to this Agreement (collectively the "Collateral"). Owner shall have the right to grant to any subsequent lender lending funds to Owner, a lien or encumbrance on all or any part of the Collateral; provided, however that either (i) such loan is in a principal amount of the loan secured by the Mortgage less any amortization of such amount through the date of closing of such new loan, or (ii) such loan has been approved in writing by Manager, which consent shall not be unreasonably withheld provided that the loan-to-value ratio is no greater than the ratio for the loan secured by the Mortgage, the Cash Flow Available for Debt 29 34 Service for the most recent full Operating Year less the Incentive Fee (without any accrual or limitation based on Cash Flow Available for Incentive Fee) is at least equal to two hundred percent (200%) of the scheduled debt service on such new loan, the new loan has a term of at least five years, and the new loan is otherwise on ordinary and normal terms for the type of lender making such loan (any mortgage, deed of trust or other encumbrance securing a loan meeting the criteria set forth in (i) or (ii) above is herein referred to as an "Approved Mortgage"). If Owner has not delivered to Manager a commitment for the refinancing of the loan secured by the Mortgage or of any loan secured by an Approved Mortgage within 60 days of the scheduled maturity of such loan, Manager shall have the right, on behalf of Owner, to seek such a commitment and to place such a loan, on arms length terms with an institutional lender regularly making real property secured loans, in an amount equal to the then outstanding principal balance of the existing loan together with reasonable closing costs, including any commitment fee. Owner shall execute any and all documents reasonably requested by Manager in connection with such placement of a new loan. Any mortgage securing such a loan obtained by Manager on behalf of Owner shall be an Approved Mortgage. Manager shall have no obligation to place such a loan on behalf of Owner. 6.2 Subordination. Manager agrees that this Agreement shall be subject and subordinate to any Approved Mortgage. 6.3 Rights of Mortgagee. If Owner or any Approved Mortgagee shall have furnished to Manager the name and address of such Approved Mortgagee, then so long as any Hotel, or any part thereof or any interest therein, shall be subject to the Approved Mortgage, the following shall be applicable: a. Manager shall, simultaneously with the giving to Owner of any Notice of Default or Notice of Termination under this Agreement, send a copy of such Notice to such Approved Mortgagee in the manner provided in Section 10.6 for the giving of notices, and no Notice of Default or Notice of Termination given by Manager to owner shall be effective unless a copy of such Notice shall have been sent as herein provided. b. If, under Section 4.2, a default by Owner shall have occurred and be continuing so as to constitute an Event of Termination, Manager shall not be entitled to terminate this Agreement so long as no other default shall have occurred and be continuing (other than those which are being cured as provided for in this Agreement), if within thirty (30) days after Manager 30 35 shall have given to Approved Mortgagee the Notice of Termination, such Approved Mortgagee shall cure such default respecting the payment of money, or for any other default, shall within such thirty (30) day period, commence and thereafter proceed with diligence and good faith to cure such other default. c. Upon reasonable advance notice from such Approved Mortgagee, Manager shall accord to it and its agents the right to enter upon any part of the Hotels at any reasonable time during the term of this Agreement for the purpose of examining, inspecting or making extracts from the books and records of the Hotels. d. If such Approved Mortgagee or any person or entity other than a person or entity who competes with Manager as described in Section 9.2(a) shall become the owner of any Hotel as a result of any foreclosure of a bona-fide conveyance in lieu of foreclosure, Manager shall have no right or power to terminate this Agreement, and shall recognize such Approved Mortgages or such other person or entity as Owner hereunder to the same extent as though it or they had been Owner hereunder as of the execution of this Agrement; provided, however, that such Approved Mortgage or such other person or entity shall agree in writing with Manager to be bound by the terms and provisions of this Agreement to the same extent as if such Approved Mortgagee or such other person or entity had been an original Party hereto. If a person or entity who competes with Manager as described in Section 9.2(a) shall become the owner of any Hotel as the result of any foreclosure or conveyance in lieu of foreclosure, then Manager's option to terminate as set forth in Section 9.2(a) shall become operative. 6.4 ESTOPPEL CERTIFICATES. Manager agrees, at any time and from time to time, upon not less than fifteen (15) days prior written notice by Owner or an Approved Mortgagee, to execute, acknowledge and deliver to Owner or such Approved Mortgagee a statement in writing certifying that this Agreement has not been modified and is in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and specifying the modifications) and stating whether or not, to the best knowledge of Manager, there exists any default by Owner under this Agreement, including any Event of Termination, and if so, specifying each such default of which Manager may have knowledge. Upon similar notice, Manager shall be entitled to a similar certificate from Owner. 31 36 ARTICLE VII DESTRUCTION 7.1 OWNER TO RESTORE AFTER INSURED CASUALTY. Subject to Section 7.2, if all or any part of a Hotel shall be damaged or destroyed by a cause for which insurance coverage was required by this Agreement to be maintained by Owner, then Owner shall repair, restore, replace or rebuild such Hotel ("Casualty Restoration") to the extent insurance proceeds are made available to Owner for restoration as nearly as is reasonably possible to the value, condition and character of such Hotel immediately prior to the occurrence of such damage or destruction. Manager shall cooperate with Owner in obtaining all insurance proceeds payable on account of such damage or destruction so that the same shall be available to owner (subject to the terms of any Approved Mortgage) as the Casualty Restoration progresses. 7.2 TERMINATION AFTER SUBSTANTIAL INSURED CASUALTY. a. If all or any part of a Hotel is damaged or destroyed to such an extent that the estimated cost of the Casualty Restoration exceeds fifty percent (50%) of the total replacement cost (without deduction for depreciation) of such Hotel then, if Owner reasonably concludes that on the basis of the factors existing at the time of such casualty it would be uneconomic to repair and restore the Hotel, Owner shall have the right to terminate this Agreement (other than the provisions of Section 9.3(a)) with respect to such Hotel by written notice to manager given within sixty (60) days of such casualty. If Owner elects to terminate this Agreement with respect to such Hotel, Owner shall pay to Manager a termination fee equal to five (5) times the total Base Fee and Incentive Fee (without any accrual or limitation based on Cash Flow Available for Incentive Fee) earned by Manager with respect to the Hotel as to which Owner has elected to terminate this Agreement for the most recent full Operating Year together with interest on such amount at the rate of interest payable on the Working Capital Line from the date of the casualty to the date of payment; provided, however, if Owner determines in its sole discretion that the value of the Hotel and all insurance proceeds payable with respect to such casualty will be less than the amount of the termination fee, Owner may deliver its duly executed, acknowledged and recordable deed to the Hotel together with all insurance proceeds paid to Owner in respect of such casualty (together with an assignment of any unpaid insurance proceeds with respect to such casualty) in full satisfaction of Owner's obligation to pay such 32 37 termination fee to Manager. Notwithstanding such election by Owner to terminate this Agreement with respect to such Hotel, such Hotel shall remain subject to Manager's right of first refusal pursuant to Section 9.3(a) hereof. b. Owner must notify Manager within thirty (30) days of the occurrence of such damage or destruction if Owner elects to terminate this Agreement under this Section 7.2. 7.3 Uninsured Casualty - Owner's Option to Terminate or Restore. If all or any part of a Hotel shall be damaged or destroyed by any cause for which insurance coverage was not required by this Agreement to be maintained by Owner, and the estimated cost of the Casualty Restoration exceeds thirty (30%) percent of the total replacement cost (without deduction for depreciation) of such Hotel then Owner may terminate this Agreement with respect to such Hotel if it elects to do so by written notice to Manager within thirty (30) days after the occurrence of such damage or destruction. 7.4 Commencement and Completion of Casualty Restoration. Unless Owner shall be entitled to terminate this Agreement under Sections 7.2 or 7.3, Owner shall commence the Casualty Restoration promptly after the occurrence of such damage or destruction and shall complete the same with diligence. If such a right of termination does exist, then the obligation to commence the Casualty Restoration shall be delayed until the earlier of the giving of the applicable notice of termination (in which event the obligations shall not become operative) or the expiration of the applicable notice period (in which event the obligation to commence and complete as provided in this Section 7.4 shall become operative immediately). 7.5 Proceeds of Business Interruption Insurance. The proceeds of any business interruption insurance shall be allocated between Owner and Manager, it being the intention of the parties that Manager share in such proceeds to the extent that they specifically represent fees or reimbursements otherwise payable by Owner to Manager under this Agreement. 33 38 ARTICLE VIII CONDEMNATION 8.1 PERMANENT TAKING. a. In the event of a Taking of an entire Hotel, this agreement shall terminate as of the date of Taking with respect to such Hotel. b. In the event of a Taking of less than the entire portion of a Hotel, if Manager or Owner reasonably determines that the remaining land and building or buildings, after necessary repairs, cannot economically and feasibly be operated as a hotel as contemplated in this Agreement, then either Owner or Manager may terminate this Agreement with respect to such Hotel. c. Upon any Taking of a Hotel, whether or not this Agreement is terminated with respect to such Hotel, Manager shall, if applicable law permits, undertake separate proceedings with respect to the determination of its loss resulting from the Taking. If such separate proceedings cannot be undertaken, Manager shall nonetheless be entitled to a fair and equitable share of the award or other proceeds of the Taking paid to Owner to the extent of Manager's loss; provided, however, that Owner shall receive the entire proceeds attributable to the Taking of all land, the Hotel, the Furniture, Fixtures and Equipment, Operating Supplies, Inventories and Capital Improvements. d. If this Agreement is not terminated with respect to a Hotel following a partial Taking under this Section 8.1, then this Agreement shall remain in full force and effect with respect to the remainder of the Hotel so taken, and Owner shall repair, restore, replace or rebuild the remainder of such Hotel to the extent condemnation proceeds are made available to owner for such repair, restoration, replacement or rebuilding as nearly as possible to its value, condition and character immediately prior to the Taking. Owner shall commence the work promptly after the date of the Taking and shall complete the same with diligence. 8.2 Taking for Temporary Use. Subject to Section 8.2(b), in the event of a Taking of all or part of a Hotel for temporary use, this Agreement shall remain in full force and effect with respect to such Hotel, and the following shall be applicable: 34 39 a. If the Taking is for a period not extending beyond the term of this Agreement, the awards or other proceeds on account of the Taking (including any interest included or paid with respect to such awards or proceeds) other than any portion of such awards or proceeds specifically identified as compensation for alterations or damages to such Hotel shall be included in Gross Revenue and Adjusted Gross Operating Profit for the Operating Year or Years in which received. When and if during the term of this Agreement, the period of temporary use shall terminate, Owner shall, to the extent condemnation proceeds are made available to Owner for restoration, repair and alterations, make all such restoration, repairs and alterations as shall be necessary to restore such Hotel to its condition prior to such Taking for temporary use and shall complete the same with diligence. b. If the Taking is for a period extending beyond the term of this Agreement, the awards or other proceeds on account of the Taking (including any interest included or paid with respect to such awards or proceeds) other than any portion of such awards or proceeds specifically identified as compensation for alterations or damages to such Hotel for the period of the Taking up to the stated expiration of the term of this Agreement shall be included in determining Gross Revenue and Adjusted Gross Operating Profit for the Operating Year of Years in which received, and the remainder of such awards or other proceeds (including interest as aforesaid) shall be paid to Owner. c. Notwithstanding the foregoing provisions of this Section 8.2, if during the last five (5) Operating Years of this Agreement as the term hereof may be extended by Manager there should be a temporary taking of all or a part of any Hotel which extends for a period of at least thirty-six (36) months, and Owner concludes in good faith that it would not be economically reasonable to operate such Hotel as contemplated in this Agreement following the temporary taking, then Owner may elect to terminate this Agreement with respect to such Hotel as of the Date of Taking by giving written notice to Manager within thirty (30) days thereof, in which event the provisions of Section 8.2(b) shall apply with regard to the proceeds. 35 40 ARTICLE IX ASSIGNMENTS, ETC. 9.1 BY MANAGER. a. So long as no default attributable to Manager shall have occurred and be continuing, including an Event of Termination and subject to Section 9.1(b), Manager shall have the right, without Owner's consent, to assign, transfer or convey all of its right, title and interest under this Agreement: (i) to a Manager Affiliate; (ii) to any successor or assignee of Manager which acquires all or substantially all of the business and assets of Manager as the result of any merger, consolidation or reorganization; or (iii) to a person or entity which acquires all or substantially all of the business and assets of Manager; provided, however, that in the event of (ii) or (iii) above or in the event of the sale of at least a majority interest in the Manager through one or more transactions, if the Management Agreement constitutes substantially all of the assets of the Manager at the time of such event, then such event shall be subject to the prior written consent of Owner, which consent shall not be unreasonably withheld. b. Any assignment, transfer or conveyance under Section 9.1(a) shall be subject to the following: (i) the assignee must assume and agree to be bound by all of the terms and provisions of this Agreement; and (ii) the delivery to Owner of an executed counterpart of the instrument of assignment and assumption of rights and obligations. c. In the event that Manager shall assign, transfer or convey its right, title and interest under this Agreement under Sections 9.1(a) and 9.1(b), then Manager shall not be liable for any obligations arising under this Agreement after the date of such assignment, transfer or conveyance. 36 41 d. Except as provided in this Section 9.1, Manager shall not assign, transfer or convey all or any of its right, title and interest under this Agreement without Owner's approval. 9.2 BY OWNER. a. Subject to Manager's rights pursuant to Section 9.3, so long as no default attributable to Owner shall have occurred and be continuing, including an Event of Termination and subject to Section 9.2(b), Owner shall have the right, without Manager's approval, to assign, transfer or convey all or any part of its right, title and interest in any Hotel or any interest therein (which assignment must include this Agreement to the extent appropriate together with all assets of Owner related to the operation of such Hotel, including, without limitation, all of the issued and outstanding capital stock of any liquor license holding corporation). b. Any assignment, transfer or conveyance under Section 9.2(a) shall be subject to the following: (i) the assignee must assume and agree to be bound by all of the terms and provisions of this Agreement; (ii) the delivery to Manager of an executed counterpart of the instrument of assignment and assumption of rights and obligations; and (iii) the assignee shall be United States national who is not involved or reputed to be involved in organized crime, who does not have a generally recognized reputation for unethical business dealings and is not a competitor of Manager and does not have any material ownership interest in a competitor of Manager. c. In the event that Owner shall assign, transfer or convey its right, title and interest in any Hotel and in this Agreement under Sections 9.2(a) and 9.2(b), then Owner shall not be liable for any obligation arising under this Agreement after the date of such assignment, transfer or conveyance. 9.3 SALE OF HOTELS. a. If at any time, or from time to time, during the term of this Agreement, Owner receives and is willing to accept a bona fide offer from a third party 37 42 to purchase all or any portion of Owner's interest in one or more Hotels, or if Owner offers to sell all or any portion of its interest in one or more Hotels to any third party, in each case, other than an offer or sale incidental to the exercise of any remedy by an Approved Mortgagee and other than an offer or sale following Manager's delivery of a Notice of Termination with respect to the affected Hotel or Hotels (any such offer to or from a third party is herein called a Third Party Offer), Owner shall promptly transmit to Manager its written offer to sell its interest in the Hotel or Hotels described in the Third Party Offer to Manager upon the terms and conditions set forth in the Third Party Offer, together with a true copy of such offer, and shall give Manager thirty (30) days to accept such offer. If Manager accepts such offer by written notice to Owner within such time, Owner and manager shall duly perform their obligations under such agreement. If Manager fails to accept such offer in accordance with this paragraph, then Owner shall be free, within 180 days of Manager's failure to accept such offer, to sell its interest in the Hotel or Hotels described in the Third Party Offer to such third party upon the terms and conditions contained in such offer. b. Upon, and as a condition to, any sale, assignment, conveyance or other transfer of a Hotel or Hotels by Owner Manager and the new owner of the Hotel or Hotels shall enter into a new Management Agreement on all of the terms and conditions of this Agreement, except that (A) the Current Priority Amount shall be equal to the Current Priority Amount hereunder multiplied by a fraction, the numerator of which is the Adjusted Gross Operating Profit for the immediately preceding calendar year for the Hotel which has been sold and the denominator of which is the Adjusted Gross Operating Profit of all of the Hotels managed under this Agreement immediately before such sale for such period, and (B) the Operating Profit Target under the new agreement shall be equal to the Operating Profit Target existing under this Agreement immediately before the sale of the Hotel or Hotels to be managed under the new agreement multiplied by a fraction, the numerator of which is the Adjusted Gross Operating Profit for the immediately preceding calendar year of the Hotel or Hotels sold and the denominator of which is the Adjusted Gross Operating Profit of all of the Hotels managed under this Agreement immediately before such sale for such period. 38 43 ARTICLE X MISCELLANEOUS 10.1 COMPLIMENTARY/DISCOUNT POLICIES. Owner will accept Manager's complimentary and discount policies in effect from time to time at the Hotels so long as they conform to general industry practices. Manager will accept Owner's discount policies at the Hotels which are in effect on the date hereof. 10.2 MANAGER IDENTIFICATION, NAMES OF HOTELS. a. The names of the Hotels are set forth in Exhibit __ attached hereto and incorporated herein by this reference. Owner acknowledges that such names are the property of Manager, that such names may not be changed without the approval of Manager and that such names, or any variants thereof, may not be used by Owner in connection with any premises other than the Hotels without the express prior written consent of Manager. Manager acknowledges that if any Hotel becomes known by any name(s) exclusive of any name incorporating the term "Red Lion", such name(s) would be the property of Owner. Upon the termination of this Agreement for any reason whatsoever, Owner shall have no right to use, and shall refrain from using, any name incorporating the term "Red Lion" and any other name or variant thereof employed in connection with the name(s) of any Hotel. b. Owner further acknowledges that the trade names "Maxis" and "Red Lion" or cognates or successors thereof, and Manager's logotype or cognates or successors thereof, are the property of Manager and that upon termination of this Agreement for any reason whatsoever, Owner and the Hotels shall discontinue using them in the conduct of their business to the extent they are using them; provided, however, that if this Agreement is terminated with respect to one or more Hotels by reason of Manager's default, Owner may continue using such tradenames and trademarks for a period of up to one hundred twenty (120) days following such termination to permit an orderly transition to new management of the Hotel or Hotels as to which this Agreement has been terminated. Subject to the foregoing, upon such termination, Owner agrees that it will not engage in a business or advertising practice which will lead the public or pe Hotels' customers to believe there is any relationship, affiliation or identity with Manager. Owner further agrees that during the term of this Agreement it will not identify as a "Red Lion" hotel any hotel which is not a Red Lion 39 44 Hotel, as that group may exist from time to time, or identify the Hotels with any hotel organization other than Manager. 10.3 COMPLIANCE WITH LAW. a. Manager shall make all reasonable efforts, in the name of and at the expense and with the cooperation of Owner, to comply with and abide by all laws, rules, regulations, requirements, orders, notices, determinations and ordinances of any federal, state or municipal authority applicable to the Hotels, including, without limiting the foregoing, the state and local liquor authorities, the Board of Fire Underwriters and the requirements of any insurance companies covering any of the risks against which the Hotels are insured. If the cost of compliance exceeds, or appears reasonably likely to exceed, Five Thousand Dollars ($5,000.00) per Hotel (subject to inflationary increases from time to time) in any instance and is not provided for in a current approved Operating Plan and Budget or Capital Improvement Plan, Manager shall promptly notify Owner. b. With respect to a violation of any such laws, rules, regulations, requirements, orders, notices, determinations or ordinances, Owner shall have the right to contest any of the foregoing and postpone compliance pending the determination of such contest, if so permitted by law and not detrimental to the operation of the Hotels. 10.4 GOVERNING LAW. The Parties agree that all disputes relating to the performance and/or interpretation of any term or provision of this Agreement shall be governed by the laws of California. 10.5 NO WAIVER OF BREACH. No failure by Manager or Owner to insist upon the strict performance of any covenant, agreement, term or provision of this Agreement, or to exercise any right or remedy consequent upon a breach thereof, shall constitute a waiver of any such breach or any subsequent breach of such covenant, agreement, term or provision. No waiver of any breach shall affect or alter this Agreement, but each and every covenant, agreement, term and provision of this Agreement shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. 10.6 NOTICES. All notices, requests, approvals, demands and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given and to be effective five (5) 40 45 business days after being deposited in the United States mail as registered or certified matter, postage prepaid, return receipt requested, addressed as follows: a. If to Manager: RL Acquisition Company 4001 Main Street Vancouver, Washington 98663 Attention: James Rech b. If to Owner: Red Lion Inns Operating, L.P. 4001 Main Street Vancouver, Washington 98663 Attention: H. Raymond Bingham or at such other address as the party to whom the notice is sent shall have been designated in accordance with the provisions of this Section 10.6. 10.7 SUCCESSORS AND ASSIGNS. Subject to the provisions of Article IX, this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Parties hereto. 10.8 INDEMNIFICATION. Owner shall protect, defend, indemnify and save harmless Manager and Manager Affiliates against and from all claims, damages, losses and expenses, including but not limited to attorneys' fees and costs, by reason of any suit, claim, demand, judgment or cause of action initiated by any person, arising or alleged to have arisen out of any act or mission of Manager in the performance of its obligations under this Agreement; provided, however, that Manager shall protect, defend, indemnify and save harmless Owner against and from all claims, damages, losses and expenses, including but not limited to attorneys' fees and costs, arising out the gross negligence, willful misconduct or breach of this Agreement by Manager or Manager Affiliates. 10.9 LIMITATION ON PLEDGING OWNER'S CREDIT. Except as provided in Section 6.1, Manager shall not borrow any money or execute any promissory note, bill of exchange or other obligation, mortgage or encumbrance in the name and on behalf of Owner or pledge the credit of Owner without Owner's approval except for purchases made in the ordinary course of business in the management of the Hotels within the scope of this Agreement. Manager hereby agrees to indemnify Owner against any claims, suits, liabilities, costs and expenses, 41 46 including attorneys' fees, which may be asserted against or incurred by Owner by reason of any such unauthorized actions by Manager. To the extent Manager uses or pledges its credit in making purchases on behalf of Owner in the ordinary course of business in the management of the Hotels within the scope of this Agreement, Owner agrees to pay for such purchases to the extent funds from the Hotels' operations are insufficient, and agrees to indemnify Manager against any claims, suits, liabilities, costs and expenses, including, but not limited to attorneys' fees and costs which may be asserted against or incurred by Manager by reason of the failure of Owner to pay for such purchases. 10.10 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof. 10.11 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which shall constitute but one and the same instrument. 10.12 CAPTIONS, ETC. The Index and captions to the Articles and Sections of this Agreement are for convenience of reference only and in no way define, limit or describe the pe o intent of this Agreement or any part hereof, nor in any other way affect this Agreement or any part hereof. 10.13 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained in this Agreement shall constitute or be construed to be or create a partnership, joint venture or similar relationship between the Parties. 10.14 AMENDMENT. This Agreement may be amended, modified and/or supplemented only by written agreement of the parties hereto. 10.15 LIMITED RECOURSE. Notwithstanding anything to the contrary contained herein or elsewhere, no general partner, limited partner, officer, director, stockholder, employee, agent, servant or other representative of Manger (each an "Individual") shall have any personal liability for the performance of any obligations, or in respect of any liability, of Manager under this Agreement, and no monetary or other judgment shall be sought or enforced against any such Individuals or their assets. 10.16 MEMORANDUM OF AGREEMENT. At Manger's request, Owner shall execute, acknowledge and deliver to Manager, in recordable form, multiple original counterparts of a memorandum of this Agreement, which Manager is hereby authorized to record in the property records of each county 42 47 in which a Hotel is located for the purpose of putting subsequent transferees or prospective transferees on notice concerning the existence of this Agreement. IN WITNESS WHEREOF, Owner and Manager have executed this Management Agreement on the day and year first above written. "Owner" RED LION INNS OPERATING L.P., a Delaware limited partnership By Red Lion Properties, Inc., a Delaware corporation, Its General Partner By /s/ H. Raymond Bingham -------------------------------- H. Raymond Bingham Its Executive Vice President "Manager" RL ACQUISITION COMPANY, a California limited partnership By /s/ H. Raymond Bingham -------------------------------- H. Raymond Bingham Its Attorney-In-Fact 43 EX-10.33 5 ASSIGNMENT AND ASSUMPTION AGREEMENT 1 EXHIBIT 10.33 ASSIGNMENT AND ASSUMPTION AGREEMENT (Management Agreement and Assignment of Management Agreement) This Assignment and Assumption Agreement, dated as of August 1,, 1995 (the "Agreement"), is by and between Red Lion, a California Limited Partnership ("Red Lion") and Red Lion Hotels, Inc., a Delaware corporation ("RLI"). Capitalized terms not defined herein shall have the meanings assigned to them in the Assignment of Management Agreement (as defined below). RECITALS WHEREAS, Red Lion and Red Lion Inns Operating L.P., a Delaware Limited Partnership ("Owner"), are parties to a Management Agreement, dated as of April 6, 1987, as amended (the "Management Agreement"). Red Lion was formerly known as RL Acquisition Company, a California limited partnership, the name under which it originally signed the Management Agreement and the Assignment of Management Agreement. WHEREAS, Red Lion is party to an Assignment of Management Agreement dated as of April 6, 1987, by and among Owner (as assignor), United States National Bank of Oregon, a national banking association ("USNB"), and Canadian Imperial Bank of Commerce, an extranational banking association, as co-agents (collectively, as assignee), and Red Lion (as manager), as amended (the "Assignment of Management Agreement"). CIBC Inc. ("CIBC"), a Delaware corporation, is successor with respect to the interest of Canadian Imperial Bank of Commerce under the Assignment of Management Agreement. WHEREAS, Red Lion intends to assign, transfer and convey to RLI all of its interests, rights, duties and obligations under the Management Agreement and the Assignment of Management Agreement and RLI intends to assume all of Red Lion's interests, rights, duties and obligations under the Management Agreement and the Assignment of Management Agreement, in each case, pursuant to this Agreement. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and promises set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Assignment. -------------- Red Lion hereby assigns, grants, conveys and transfers to RLI all of Red Lion's interests, rights, duties and obligations under the Management Agreement and the Assignment of Management Agreement as if RLI originally were named as manager in each thereof. 2 2. Assumption. -------------- RLI hereby assumes all of Red Lion's interests, rights, duties and obligations under the Management Agreement and the Assignment of Management Agreement as if RLI originally were named as manager in each thereof. RLI affirms the Management Agreement and the Assignment of Management Agreement and agrees to be bound by each. This assumption by RLI is made also for the benefit of (i) Owner in satisfaction of the requirements of Section 9.1 of the Management Agreement and (ii) USNB and CIBC, co-agents, as assignee under the Assignment of Management Agreement, in satisfaction of the requirements of Section 5.1 thereof. 3. Miscellaneous. ----------------- This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Assignment and Assumption Agreement as of the date first above written. RED LION, a California Limited Partnership By: RLA-GP, Inc., a Delaware corporation, General Partner By: /s/ David J. Johnson ------------------------- David J. Johnson, Executive Vice President RED LION HOTELS, INC., a Delaware corporation By: /s/ David J. Johnson ------------------------------------- David J. Johnson, President and Chief Executive Officer EX-10.34 6 RED LION SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN 1 Exhibit 10.34 CONFORMED COPY -------------- RED LION SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN July 1, 1989 (As Amended Through Amendment No. 3) Red Lion Hotels, Inc. a Delaware corporation 4001 Main Street PO Box 1027 Vancouver, WA 98666 2 TABLE OF CONTENTS Page 1. Purposes; Administration; Plan Year ....................... 1 2. Eligibility; Participation ................................ 1 3. Contributions ............................................. 2 4. Participants' Accounts .................................... 4 5. Time and Manner of Payment ................................ 5 6. Vesting ................................................... 6 7. Withdrawals ............................................... 7 5. Amendment; Termination .................................... 7 9. Claims Procedure .......................................... 8 10. General Provisions ........................................ 9 11. Effective Date ............................................ 10 i 3 RED LION SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN July 1, 1989 (As Amended Through Amendment No. 3) Red Lion Hotels, Inc. a Delaware corporation 4001 Main Street PO Box 1027 Vancouver, WA 98666 Company 1. Purposes: Administration: Plan Year ----------------------------------- 1.1 The Company adopts this plan to provide retirement benefits to eligible employees in addition to the benefits provided by the Employee Retirement Savings Plan (the "Savings Plan"), the Company's tax qualified profit sharing plan, which includes a qualified cash or deferred arrangement under section 401(k) of the Internal Revenue Code. If the Company sells substantially all of its assets and the buyer assumes all of the Company's obligations under this plan, the Company shall be released from those obligations. 1.2 The plan shall be administered by an Administrative Committee (the "Committee") of one or more persons appointed by the managing general partner of the Company. The Committee shall interpret the plan, determine eligibility and the amount of benefits, maintain records, determine earnings rates and generally be responsible for seeing that the purposes of the plan are accomplished. The Committee may delegate all or part of its administrative duties to others. 1.3 The plan year shall be the calendar year starting January 1 and ending December 31, except the period from July 1, 1989 to December 31, 1989 shall be an initial short plan year. 2. Eligibility; Participation -------------------------- 2.1 Subject to 2.2, an employee shall participate as follows: (a) Participation in elective deferrals under 3.1 shall commence with the first pay period after hire, subject to enrollment procedures of the Committee. 4 (b) Participation in Company contributions under 3.3 shall commence on the entry date the employee becomes eligible for participation in the Company's Employee Retirement Savings Plan. If the entry date is not a January 1, the contribution in 3.3(a) shall be based on compensation payable from the entry date to the end of the plan year in excess of the contribution and benefit base for a full year. 2.2 A management employee of the Company shall be eligible to participate in the plan for any plan year for which the employee is a highly compensated employee as defined for purposes of discrimination testing in the Savings Plan. Upon first becoming eligible, an employee shall enroll for participation by completing a Statement of Participation on a form provided by the Committee. 2.3 A person having an Account under the plan shall be referred to as a participant. A participant who loses eligibility for a plan year as a result of not being a highly compensated employee for such year under the Savings Plan shall continue to have an Account in the plan, but no contributions shall be made under Section 3 for such year. 3. Contributions ------------- 3.1 Subject to 3.4, for each plan year, a portion of a participant's salary and bonus for the year shall be deferred as follows. For the period after hire before the participant is eligible to make elective contributions under the Savings Plan, the amount deferred shall be a percentage of compensation elected by the participant, up to the maximum percentage allowed by the Savings Plan. For the period after the participant is eligible under the Savings Plan, the amount deferred shall be the excess (if any) for the plan year of (a) over (b) below: (a) The participant's elective contributions under the Savings Plan based on the percentage of compensation elected by the participant up to the maximum percentage allowed by the Savings Plan. (b) The amount of elective contributions actually allowed for the participant under the Savings Plan for the year after application of the annual dollar limit on elective deferrals, the $150,000 limit on qualified plan 2 5 compensation, the actual deferral percentage test, and the limit on annual additions. 3.2 Amounts deferred under 3. 1 shall be credited to the participant's Deferral Account. 3.3 Subject to 3.4 and 3.5, for each plan year the Company shall contribute the following amounts for each participant: (a) 6 percent of the participant's compensation for the year in excess of the contribution and benefit base determined under section 230 of the Social Security Act. "Compensation" means the compensation from which elective contributions may be made under the Savings Plan, before reduction for such elective contributions, deferrals under this plan or amounts elected under a flexible benefits plan. Compensation in excess of the $150,000 limit on qualified plan compensation shall be counted for this purpose. (b) The excess (if any) of (1) over (2) below: (1) The participant's matching contributions under the Savings Plan based on the participant's elective contributions under 3.1(a) before reduction under 3.1(b) and after any reduction in the rate of matching as a result of the 4-percent-of-eligible-payroll limit on matching contributions provided under the Savings Plan. (2) The amount of matching contributions actually allowed for the participant under the Savings Plan for the year after application of the annual dollar limit on elective deferrals, the actual deferral percentage test, the contribution percentage test and the limit on annual additions. 3.4 If an excess deferral or excess matching contribution under the Savings Plan is distributed to a participant under sections 4.04-6 or 4.04-7 of the Savings Plan, or any successor provision, the participant shall repay the amount received, including any earnings, to the Company. The 3 6 Company shall treat such amount as a deferral contribution under this Plan and shall reduce the taxable income reported to the participant by the same amount. 3.5 No contribution under 3.3 shall be made in any plan year in which the participant does not elect any elective contribution under the Savings Plan. 3.6 Company contributions under 3.3 shall be credited to the participant's Company Account. 4. Participants' Accounts ---------------------- 4.1 The Committee shall keep the following Accounts for each participant: (a) A Deferral Account. (b) A Company Account. 4.2 The Committee shall credit to a participant's Company Account the contribution provided by 3.3(a) as of a date not later than the last day of the plan year. 4.3 The Committee shall credit to a participant's Deferral Account the deferrals under 3.1 at the time which, but for the limitations imposed by law, the deferrals would have been credited to the participant's account under the Savings Plan. 4.4 The Committee shall credit to a participant's Company Account the contributions under 3.3 (b) at the time which, but for the limitations imposed by law, the contribution would have been credited to the participant's account under the Savings Plan. 4.5 As of each regular or special valuation date under the Savings Plan, the Committee shall credit earnings or losses to each participant's Accounts. The Committee shall establish within the trust described in 10.4 one or more pooled investment funds (collectively, the "SERP Funds"), and the following shall apply: (a) The Committee shall define the objectives for the SERP Funds, may establish new funds, combine two or more funds or change the objectives of an existing fund. (b) When there are two or more SERP Funds offered, allocation of the Accounts of each participant among the funds shall be controlled 4 7 by the participant in minimum increments established by the Committee. If no allocation is made, the Committee shall determine the SERP Funds into which contributions shall be deposited. (c) The Committee shall inform all participants about the SERP Funds and the objectives of each. The SERP Funds shall be valued as of each valuation date under the Savings Plan. (d) Except as provided above, the provisions 10.02 of the Savings Plan relating to amounts, timing, and notice requirements for allocations shall apply with respect to allocations by the participant under this plan. (e) The SERP Funds shall be valued as of each regular or special valuation date under the Savings Plan. 5. Time and Manner of Payment -------------------------- 5.1 The vested amount of a participant's Accounts shall be paid in one of the following ways as selected under 5.2: (a) In a lump sum within 30 days after the Benefit Date. (b) In substantially equal monthly installments over 5 years, beginning within 30 days after the Benefit Date. (c) In substantially equal monthly installments over 10 years, beginning within 30 days after the Benefit Date. 5.2 The Benefit Date shall be the earliest of the following: (a) The date the participant ceases to be employed by the Company, other than in a direct transfer to employment with an entity designated by the Committee as an affiliate of the Company. (b) The date the participant dies. 5 8 (c) The date the participant becomes disabled as determined under the terms of the Savings Plan. 5.3 In the participant's Statement of Participation, the participant shall select the form of payment under 5.1. A participant's selection shall be irrevocable for deferrals and Company contributions credited to the participant's Accounts while the selection is in effect and any earnings credited thereto. A participant may change the form of payment by written notice to the Committee. Such a change shall be effective on the first day of the plan year beginning after the Committee receives notice of the change. A change of payment form shall apply only to deferrals and Company contributions, and earnings credited thereto, after the change becomes effective. 5.4 The Company shall withhold from any payments any income tax or other amounts as required by law. If FICA tax is due on deferrals or Company contributions, the participant's share of FICA shall be withheld from other compensation payable to the participant. 5.5 On the death of a participant, payments under 5.1 shall be made to the participant's beneficiary at the same time the payments would have been made to the participant. The participant's beneficiary shall be determined under the terms of the Savings Plan as in effect at the date of death, regardless of whether the participant ceases to be a participant in the Savings Plan. 5.6 If a beneficiary is receiving payments under 5.5 and dies before the payments are completed, the remaining payments shall be made to the beneficiary's estate. 6. Vesting ------- 6.1 A participant's Deferral Account shall be fully vested at all times. 6.2 A participant's Company Account shall be vested in the same percentage as the participant's matching contributions under the Savings Plan, except as follows. The Company Account shall be fully vested if a Change of Control Event under 6.3 occurs. 6.3 A "Change of Control Event" means any one of the following, except the corporate reorganization of July 1995 shall not be a Change of Control Event: 6 9 (a) The sale of all or substantially all of the assets of the Company; (b) The sale of 50% or more of the Partnership interests in the Company, whether by sale, merger or other disposition; (c) The liquidation or dissolution of the Company; (d) Any other sale or disposition of the assets or Partnership interests of the Company (whether any of such Partnership interests are now outstanding) resulting in a change in control of the policies, procedures and operation of the Company. 7. Withdrawals ----------- 7.1 A participant may withdraw vested amounts from the participant's Accounts to the extent approved by the Committee because of financial hardship as defined in the Savings Plan. The withdrawal shall be limited to the amount reasonably necessary to meet the financial hardship. The vested amounts in the participant's Accounts under this plan shall be exhausted first, before hardship withdrawals are allowed under the Savings Plan. 7.2 The withdrawal date shall be fixed by the Committee after application by the participant under procedures fixed by the Committee. The application shall include a signed statement of the facts causing financial hardship and any other facts required by the Committee. The Committee may require a minimum advance notice, may limit the amount and frequency of withdrawals, and may delay payment of an approved withdrawal to permit a special valuation, to permit liquidation of necessary assets or for other pertinent reasons. Accounts shall be adjusted as of the last regular or special valuation date on or before the withdrawal. 8. Amendment: Termination ---------------------- 8.1 The Company may amend the plan at any time by notice to the participants. An amendment may be retroactive within the plan year in which notice is given. An amendment may not reduce the balance in the participants' Accounts as of the date notice of the amendment is given to participants. An amendment may not change the terms in 4.5 under which earnings or losses are determined. No amendment may accelerate the time of payment of 7 10 benefits to persons participating in the plan at the time of the amendment. 8.2 If the Savings Plan is terminated, this plan shall terminate as of the same date. If all the assets of the Savings Plan are then distributed to its participants, all the Accounts under this plan shall be distributed in a lump sum to the participants at the same time. 8.3 The Company may terminate this plan effective the first day of any plan year after notice to the participants. On termination, all Accounts under this plan shall be distributed in a lump sum to participants. 8.4 If the Internal Revenue Service issues a final ruling that the amount of any participant's Account will be subject to current income tax to the participant, all amounts to which the ruling is applicable shall be paid within 30 days to the participant. 9. Claims Procedure ---------------- 9.1 Any person claiming a benefit, requesting an interpretation or ruling under the plan, or requesting information under the plan shall present the request in writing to the Committee, which shall respond in writing as soon as practicable. 9.2 If the claim or request is denied, the written notice of denial shall state: (a) The reasons for denial, with specific reference to the plan provisions on which the denial is based. (b) A description of any additional material or information required and an explanation of why it is necessary. (c) An explanation of the plan's claim review procedure. 9.3 Any person whose claim or request is denied or who has not received a response within 30 days may request review by notice in writing to the Committee. The original decision shall be reviewed by the Committee which may, but shall not be required to, grant the claimant a hearing. On review, whether or not there is a hearing, the claimant may have representation, examine pertinent documents and submit issues and comments in writing. 8 11 9.4 The decision on review ordinarily shall be made within 60 days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be so notified and the time limit shall be 120 days. The decision shall be in writing and shall state the reasons and the relevant plan provisions. All decisions on review shall be final and bind all parties concerned. 10. General Provisions ------------------ 10.1 Any notice under this plan shall be in writing and shall be effective when actually delivered, or, if mailed, when deposited postage prepaid. Mail shall be directed to the Company at the address stated in this plan, to the participant at the address stated in the Statement of Participation, or to such other address as a party may specify by notice to the other parties. Notices to the Committee shall be sent to the Company's address. 10.2 The rights of a participant under this plan are personal. Except for the limited provisions of 5.5, no interest of a participant or any beneficiary or representative of a participant may be directly or indirectly transferred, encumbered, seized by legal process or in any other way subjected to the claims of any creditor. 10.3 Except as provided in 10.4, the rights of the participants and beneficiaries under this plan shall be an unfunded, unsecured promise of the Company to make future payments. 10.4 The Company shall establish a trust with a financial institution for payment of benefits under the plan, which shall be a grantor trust for tax purposes. The trust shall provide that any assets contributed to the Trustee shall be used exclusively for payment of benefits under this plan except in the event the Company becomes insolvent, in which case the trust fund shall be held for payment of the Company's obligations to its general creditors. 10.5 Following termination of employment, a participant shall not be an employee of the Company for any purpose and payments under section 5 shall not constitute salary or wages. A participant shall receive such payments as retirement benefits, not as compensation for performance of any substantial services. 10.6 The plan shall not be a contract of employment between the Company and any employee. No employee may object to amendment or termination of the plan. The plan shall not prevent the Company from discharging any employee at any time. 9 12 10.7 The Committee may decide that because of the mental or physical condition of a person entitled to payments, or because of other relevant factors, it is in the person's best interest to make payments to others for the benefit of the person entitled to payment. In that event the Committee may in its discretion direct that payments be made as follows: (a) To a parent or spouse or a child of legal age. (b) To a legal guardian. (c) To one furnishing maintenance, support, or hospitalization. 10.8 This plan shall be construed according to the laws of Washington except as preempted by federal law. 10.9 The Company may elect to pay any administrative fees or expenses and may allocate the cost among adopting Employers. Otherwise the expenses and fees shall be paid from the trust fund. 11. Effective Date -------------- This plan shall be effective July 1, 1989. RED LION By J.H. BEST, JR. ------------------------ Executed: January 22, 1990 AMENDMENT NO, 1 EXECUTED AS FOLLOWS EFFECTIVE JANUARY 1, 1994: RED LION By BETH A. UGORETZ ------------------------ Executed: February 16, 1994 10 13 AMENDMENT NO. 2 EXECUTED AS FOLLOWS EFFECTIVE IN PART JANUARY 1, 1995 AND IN PART JANUARY 1, 1994: - ---------------------------------------------------------------------------- RED LION By BETH A. UGORETZ ------------------------- Executed: July 26, 1995 AMENDMENT NO, 3 EXECUTED AS FOLLOWS EFFECTIVE OCTOBER 1, 1995: - -------------------------------------------------------------- RED LION By BETH A. UGORETZ ------------------------- Executed: September l8, 1995 11 EX-10.35 7 SECOND AMENDMENT TO THE EQUITY PARTICIPATION PLAN 1 EXHIBIT 10.35 SECOND AMENDMENT TO THE 1994 EQUITY PARTICIPATION PLAN OF DOUBLETREE CORPORATION This Second Amendment to the 1994 Equity Participation Plan of Doubletree Corporation (the "Amendment") is adopted by Doubletree Corporation, a Delaware corporation (the "Company"), effective as of April 22, 1996. R E C I T A L S : A. The Company's 1994 Equity Participation Plan (the "Incentive Plan") was adopted by the Board of Directors (the "Board") on June 3, 1994, and approved by the stockholders of the Company on June 30, 1994. On January 27, 1995, the Board adopted, and on April 25, 1995, the stockholders of the Company approved the First Amendment to the Incentive Plan. B. The Incentive Plan currently states that shares of stock of the Company subject to the Incentive Plan shall not exceed two million (2,000,000). This second amendment increases the aggregate number of shares of stock subject to the Incentive Plan from two million (2,000,000) to three million three hundred thousand (3,300,000). C. Section 10.2 of the Incentive Plan provides that the Board may amend the Incentive Plan, subject in certain instances to receipt of approval of the stockholders of the Company. D. Effective February 13, 1996, the Board unanimously recommended and the Board unanimously adopted this Second Amendment in the form given below ("Second Amendment"). E. The Second Amendment was approved by the stockholders of the Company at its Annual Meeting of Stockholders held on April 22, 1996. SECOND AMENDMENT 1. Section 2.1(a) of the Incentive Plan is hereby amended to read in its entirety as follows: 2.1 Shares Subject to the Plan. (a) The shares of stock subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock, initially shares of the Company's Common Stock, par value $.01 per share. The aggregate number 2 of such shares which may be issued upon exercise of such options or rights or upon any such awards under the Plan shall not exceed three million three hundred thousand (3,300,000). The shares of Common Stock issuable upon exercise of such options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. The undersigned, David L. Stivers, Secretary of the Company, hereby certifies that the Board and the stockholders of the Company adopted the foregoing Second Amendment as stated above. Executed at Phoenix, Arizona this 22nd day of April, 1996. /s/ David L. Stivers _________________________________________ David L. Stivers, Secretary EX-10.36 8 STOCKHOLDERS AGREEMENT DATED 9/30/95 1 EXHIBIT 10.36 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT (this "Agreement") dated as of September 30, 1996 among Doubletree Corporation, a Delaware corporation (together with its subsidiaries, "Doubletree"), Jack P. DeBoer ("DeBoer"), an individual, the Alexander John DeBoer Trust dated March 14, 1995 (the "Alexander Trust") and the Christopher Scott DeBoer Trust dated March 14, 1995 (the "Christopher Trust") (collectively, the "Trusts")(DeBoer and the Trusts constituting the shareholders of JPD Corporation, a Kansas corporation ("JPD Corporation")) and the Warren D. Fix Family Partnership, L.P., a Kansas limited partnership (the "Fix Partnership")(collectively, the "Initial Stockholders"). W I T N E S S E T H: WHEREAS, the membership interests in Candlewood Hotel Company, LLC, a Delaware limited liability Company ("Candlewood LLC") and certain subsidiary limited liability companies and the stock of JPD Corporation are proposed to be transferred and assumed by Candlewood Hotel Company, Inc., a Delaware corporation ("Candlewood" or the "Company") (the "Initial Reorganization"); WHEREAS, in connection with the Initial Reorganization, Doubletree, JPD Corporation and the Fix Partnership entered into an Incorporation and Registration Rights Agreement dated as of September 1, 1996 (the "Registration Rights Agreement") providing, among other things, the parties with certain rights, including the right, under certain circumstances to transfer their respective interests in Candlewood LLC and JPD Corporation to Candlewood in exchange for shares of common stock of Candlewood and to register their respective shares of common stock of Candlewood so acquired pursuant to the Securities Act of 1933, as amended (the "Securities Act); WHEREAS, pursuant to the Registration Rights Agreement, the Members of Candlewood LLC have approved the Reorganization and the filing by the Company of a registration statement under the Securities Act, as a result of which (a) the Company has been incorporated having authorized capital stock consisting of 100,000,000 shares of Common Stock, par value $.01 per share (the "Candlewood Common Stock") , and 5,000,000 shares of Preferred Stock, par value $.01 per share, (b) 5,175,000 shares of Candlewood Common Stock will be issued and outstanding, of which 2,587,500 shares will be owned of record and beneficially by Doubletree, 2,111,399 shares will be owned of record and beneficially by DeBoer, 43,988 shares will be owned of record and beneficially by the Alexander Trust, 43,988 shares will be owned of record and beneficially by the Christopher Trust and 388,125 shares will be owned of record and beneficially by the Fix Partnership; WHEREAS, the Registration Rights Agreement, as amended, requires that the Initial Stockholders execute and deliver a stockholders agreement in the form hereof; NOW, THEREFORE, in consideration of the premises and undertakings hereinafter set forth, the parties hereto agree as follows: 2 ARTICLE I. DEFINITIONS AND INTERPRETATION Section 1.1. Definitions. As used in this Agreement: "Affiliate" of a Holder means any Person, other than Candlewood, controlling, controlled by or under common control with such Holder. "Annual Election" means the annual election of Directors held in accordance with the By-laws, including any such election by stockholders' consent. "Board" means the Board of Directors of Candlewood. "By-laws" mean the By-laws of Candlewood. "Candlewood Entity" means Candlewood and each of its Subsidiaries. "Certificate of Incorporation" means the Restated Certificate of Incorporation of Candlewood in the form filed with the Delaware Secretary of State on October 16, 1996. "DeBoer/Fix Director" means each Initial DeBoer/Fix Director and each Person nominated by the DeBoer/Fix Holders pursuant to Section 2 and elected as a Director. "DeBoer/Fix Holders" means DeBoer, the Trusts and the Fix Partnership (so long as they are each a Holder) and each Permitted Transferee, other than Candlewood, who becomes a Holder by acquiring any DeBoer/Fix Shares in compliance with Section 4.8. "DeBoer/Fix Shares" means the shares of Candlewood Common Stock owned of record and beneficially by DeBoer, the Trusts and the Fix Partnership on the Effective Date. "DeBoer Holders" means DeBoer and the Trusts (so long as they are each a Holder) and each Permitted Transferee of DeBoer, other than Candlewood, who becomes a Holder by acquiring any DeBoer Shares in compliance with Section 4.8. "DeBoer Shares" means the shares of Candlewood Common Stock owned of record and beneficially by DeBoer and the Trusts on the Effective Date. "Director" means a director of Candlewood. "Disposition" has the meaning given to such term in Section 3.1. "Doubletree Director" means any Person nominated by the Doubletree Holders and elected as a Director. 2 3 "Doubletree Holders" means Doubletree (so long as it is a Holder) and each Permitted Transferee of Doubletree, other than Candlewood, who becomes a Holder by acquiring any Doubletree Shares in compliance with Section 4.8. "Doubletree Shares" means the Shares of Candlewood Common Stock owned of record and beneficially by Candlewood on the Effective Date. "Effective Date" means the date on which the Doubletree Shares, the DeBoer Shares and the Fix Partnership Shares were issued to Doubletree, DeBoer, the Trusts and the Fix Partnership. "Fix Partnership Holders" means the Fix Partnership (so long as it is a Holder) and each Permitted Transferee of the Fix Partnership, other than Candlewood, who becomes a Holder by acquiring any Fix Partnership Shares in compliance with Section 4.8. "Fix Partnership Shares" means the shares of Candlewood Common Stock owned of record and beneficially by the Fix Partnership on the Effective Date. "Holder" means a record and beneficial owner of any Subject Shares. "Initial Doubletree Directors" means Richard Ferris and Peter Ueberroth. "Initial DeBoer/Fix Directors" means Jack DeBoer and Warren Fix. "Permitted Transferee" of a Holder means (i) a successor to such Holder by operation of law pursuant to a statutory merger, consolidation, dissolution or liquidation (ii) a purchaser of all or substantially all of such Holder's assets, or (iii) a Person owning, directly or indirectly, a majority of the Voting securities or other comparable equity interests of such Holder, a Person under common control with such Person (including, in the case of an individual, a family member or a trust controlled by a family member) or a Person of which such Holder owns, directly or indirectly, a majority of the outstanding Voting Securities or other comparable equity interests, or (iv) or a successor to such Holder by will or through the laws of descent, or through a gift or other contribution made in anticipation of the death of such Holder; provided, however, that in each case the successor, purchaser or Person referred to in Clauses (i), (ii) or (iii) of this definition was an Affiliate of such Holder prior to such merger, consolidation, dissolution, liquidation, purchase of assets or acquisition of Voting Securities or other comparable equity interests and, in each case referred to in clauses (i), (ii) or (iii) of this definition, the Permitted Transferee has become a party to and bound by this Agreement as to all Subject Shares then being transferred to it in compliance with by Section 4.8. "Permitted Transferee" includes successive transferees in transactions described in the preceding sentence. "Person" means an individual, partnership, corporation, unincorporated organization or association, trust, government or department, unit or political subdivision of a government, or other entity. 3 4 "Public Sale" means a sale of Candlewood Common Stock by Candlewood and/or by one or more Holders of Subject Shares to one or more underwriters for distribution pursuant to an effective registration statement under the Securities Act in accordance with the Registration Rights Agreement. "Reorganization" means any merger or consolidation of Candlewood with or into any other Person, any recapitalization or reclassification of capital stock or other equity interests of Candlewood or any sale of all or substantially all of the assets of Candlewood in any one or series of related transactions other than in connection with the Initial Reorganization. "Subject Shares" means the Doubletree Shares, the DeBoer Shares and the Fix Partnership Shares; provided, however, that at all times, such term shall include all Subject Shares that have been transferred by a Holder to a Permitted Transferee of such Holder. Notwithstanding the foregoing, upon (A) the Disposition of any Subject Shares pursuant to a Public Sale to any Person or (B) the Disposition of any Subject Shares other than pursuant to a Public Sale after the termination of Section 3.1 (as provided in Section 4.7(a)) to any Person other than a Permitted Transferee of the Holder thereof, the shares so cancelled or disposed of shall cease to be Subject Shares and thereafter shall not be subject to any of the terms and conditions of this Agreement (other than Section 4.1(d)). "Subsidiaries" means each corporation, partnership, joint venture or other entity in which Candlewood owns, directly or indirectly, more than 50% of the outstanding Voting Securities. "Voting Securities" means shares of capital stock or equity interests the holders of which are at the time entitled to elect a majority of the issuer's board of directors or other comparable body. Additional terms are defined where used in this Agreement. Section 1.2. Interpretation. Each definition in this Agreement includes the singular and the plural, and references to the neuter gender include the masculine and feminine whenever appropriate. References to any statute mean such statute as amended at the time and include any successor legislation, and references to a business day mean any day other than Saturday, Sunday or legal holiday where Candlewood's principal office is located. The words "herein", "hereof" and "hereunder" refer to this Agreement as a whole. The headings of the Articles and Sections are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. Unless the context otherwise requires, references to Articles, Sections and Subsections mean the Articles, Sections and Subsections of this Agreement. Section 1.3. Changes in Candlewood Common Stock. If during the term of this Agreement the outstanding shares of Candlewood Common Stock shall be changed into a different number of shares or a different class or classes of shares by reason of any split-up, combination, reclassification or other recapitalization, or if a stock dividend shall be declared on shares of Candlewood Common Stock with a record date during such term, the terms of this 4 5 Agreement (including its definitions) shall be appropriately modified to give effect to such occurrence. Section 1.4. Partial Invalidity. Each provision of this Agreement shall be interpreted so as to render it valid and enforceable under applicable law. A finding that any such provision is invalid or unenforceable in any jurisdiction or in any particular circumstance shall not affect its validity or enforceability under the laws of any other jurisdiction or in any other circumstances. Section 1.5. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed entirely in such State. ARTICLE II. VOTING OF SUBJECT SHARES AND GOVERNANCE Section 2.1. Composition of Board. (a) On the Effective Date and until the completion of a Public Sale, the number of Directors shall be four, of which two shall be Doubletree Directors and two shall be DeBoer/Fix Directors. (b) From and after the initial Public Sale, the following provisions shall be applicable: (i) The number of Directors comprising the whole Board shall initially be four, subject to increase as provided in Section 2.1(b)(ii). Commencing with the first Annual Election after the initial Public Sale, the number of Directors comprising the whole Board shall be determined as provided in the By-laws. (ii) Not later than December 31, 1996, the number of Directors comprising the whole Board shall be increased-to at least 6 Directors, at least two of whom shall be individuals who are not nominated as provided in Sections 2.3 through 2.4, inclusive, and are not otherwise affiliated with any Holder (the "Unaffiliated Directors"). The initial Unaffiliated Directors shall be elected by unanimous vote of the Directors who are then in office; and each Holder shall use its reasonable best efforts to recruit suitable candidates for election as the initial Unaffiliated Directors as soon as practicable. Any successor Unaffiliated Directors shall be recruited by the Holders in the same manner, approved by unanimous vote of the Directors who are then in office and elected at an Annual Election in accordance with this Agreement or, if the election occurs at any time other than an Annual Election, elected by unanimous vote of the Directors who are then in office. (iii) The number of Doubletree Directors shall be the product of the number of Directors comprising the whole Board who are not Unaffiliated Directors (the "Affiliated Directors") multiplied by one-half. (iv) The number of DeBoer/Fix Directors shall be the product of the number of Affiliated Directors multiplied by one-half. 5 6 (vi) Notwithstanding the immediately preceding clauses (iii) and (iv) if there shall be a number of Affiliated Directors which is not evenly divisible by two, the Doubletree Holders and the DeBoer/Fix Holders shall agree upon and jointly nominate the additional director. (c) Each of the Doubletree Holders, DeBoer Holders and Fix Partnership Holders, agrees to vote its Subject Shares (or sign written consents in lieu thereof) at each Annual Election, and at all other times when required to fill a vacancy on the Board, however arising, and to take all such other action as may be reasonably necessary (including, without limitation, causing one or more of the Directors nominated by it to be removed or resign promptly after any change in ownership of Subject Shares), so that the Board shall be constituted as provided in Section 2.1(a) or (b), as applicable, and to the extent herein provided shall consist of the appropriate numbers in accordance with this Section 2.1 of Doubletree Directors and DeBoer/Fix Directors nominated in accordance with Sections 2.3, and 2.4, as applicable, and (not later than December 31, 1996) Unaffiliated Directors nominated in accordance with Section 2.1(b)(ii). Section 2.2. Election of Initial Board. (a) Each of Doubletree, the Fix Partnership, DeBoer and the Trusts hereby authorize, consent to and approve the election of each of the Initial Directors and the DeBoer/Fix Directors as Directors to serve until their respective successors have been duly elected pursuant to this Agreement, the Certificate of Incorporation, the By-laws and applicable law. Section 2.3. Changes in Doubletree Directors. (a) The Doubletree Holders may designate the individual to fill any vacancy on the Board resulting from the death, resignation or removal of any Doubletree Director by giving written notice to Candlewood (which shall promptly forward a copy of such notice to each Holder). Within not more than 10 days after the notice described in the preceding sentence is so forwarded, the Holders will use their best efforts to cause the election to the Board of the nominee named in such notice. (b) The Doubletree Holders may nominate the individual to succeed any Doubletree Director who will not stand for re-election, and may change any such nomination, at any Annual Election by giving written notice to Candlewood of its nominees as Doubletree Directors not less than 45 days (or, in the case of unforeseen circumstances, such shorter period as may be permitted by law) prior to the date fixed for any Annual Election which is scheduled to occur after the initial Public Sale. If the notice specified in the preceding sentence is not given within the time required, the incumbent Doubletree Directors shall be deemed to be the nominees for election as Doubletree Directors at such Annual Election. Section 2.4. Changes in DeBoer/Fix Directors. (a) The DeBoer/Fix Holders may designate the individual to fill any vacancy on the Board resulting from the death, resignation or removal of any DeBoer/Fix Director by giving written notice to Candlewood (which shall promptly forward a copy of such notice to each Holder). Within not more than 10 days after the notice described in the preceding sentence is so forwarded, the Holders will use their best efforts to cause the election to the Board of the nominee named in such notice. 6 7 (b) The DeBoer/Fix Holders may nominate the individual to succeed any DeBoer/Fix Director who will not stand for re-election, and may change any such nomination, at any Annual Election by giving written notice to Candlewood of its nominee as DeBoer/Fix Director not less than 45 days (or, in the case of unforeseen circumstances, such shorter period as may be permitted by law) prior to the date fixed for any Annual Election which is scheduled to occur after the initial Public Sale. If the Notice specified in the preceding sentence is not given within the time required, the incumbent DeBoer/Fix Directors shall be deemed to be the nominee for election as DeBoer/Fix Directors at such Annual Election. Section 2.5. Removal of Directors. A Doubletree Director may not be removed from the Board except by delivery to Candlewood and all Holders of a written notice of such removal signed by the Doubletree Holders. A DeBoer/Fix Director may not be removed from the Board except by delivery to Candlewood and all Holders of a written notice of such removal signed by the DeBoer/Fix Holders. Within not more than 10 days after such notice is given, each of the Holders shall execute and deliver to Candlewood its written consent to the removal specified in such notice or, if requested by whichever of the Doubletree Holders or the DeBoer/Fix Holders, shall have given such notice in accordance with this Section 2.5, shall vote its Subject Shares in favor of such removal. Section 2.6. Approvals Required for Certain Corporate Actions. Subject to Section 4.5, the parties agree that without the written approval of the Doubletree Holders and the DeBoer/Fix Holders: (a) Neither the Certificate of Incorporation nor the By-laws shall be amended; (b) No Candlewood Entity shall acquire, directly or indirectly (through a stock or asset purchase or otherwise), any assets, in one or a series of related transactions with the same or related sellers, for an aggregate purchase price in excess of $10,000,000; (c) No Candlewood Entity shall sell, transfer or otherwise dispose of, directly or indirectly (through a stock or asset sale or otherwise), any assets outside the ordinary course of business, in one or a series of related transactions, for an aggregate sale price in excess of $10,000,000; (d) No Candlewood Entity shall make any capital expenditure, or any series of related capital expenditures, in excess of an aggregate of $10,000,000; (e) No Candlewood Entity shall purchase, redeem or repurchase any Subject Shares, any shares of its capital stock or any of its partnership interests or any shares of capital stock or partnership interests of any other Candlewood Entity, except for (a) any redemption or repurchase by a Subsidiary directly or indirectly wholly-owned by Candlewood of shares of capital stock or partnership interests issued by such Subsidiary, or (b) except for a repurchase of Subject Shares pursuant to Section 2(d) of the Registration Rights Agreement. 7 8 (f) Candlewood shall not declare or pay any dividend or declare or make any other distribution in respect of its capital stock; (g) No Candlewood Entity shall issue, sell or grant additional shares of its capital stock or membership interests or options or warrants exercisable for or securities or other rights convertible into or exchangeable for shares of its capital stock or partnership interests, or issue or agree to issue any phantom stock rights, or file any registration statement (other than pursuant to the demand registration rights provided in Section 2 of the Registration Rights Agreement) with respect to the proposed sale of any of the foregoing; (h) Neither Candlewood nor any Subsidiary not directly or indirectly wholly-owned by Candlewood shall authorize or consummate any stock dividend or stock split (except in accordance with the reasonable recommendations of the managing underwriter for the initial Public Sale pursuant to the Registration Rights Agreement); (i) No Candlewood Entity shall incur or assume any indebtedness for borrowed money, other than indebtedness incurred solely to refund indebtedness existing on the Effective Date and other than pursuant to Candlewood's line of credit with GMAC and borrowings from Doubletree, in excess of $10,000,000 in the aggregate; (j) No Candlewood Entity shall loan its funds to any other Person or extend its credit to any other Person other than in the ordinary course of business; (k) No Candlewood Entity shall guarantee the obligations of any other Person, other than guarantees not in excess of $10,000,000 executed in the ordinary course of business; (l) No Candlewood Entity shall enter into any joint venture that involves an aggregate investment or receipt of proceeds in excess of $10,000,000; (m) No Candlewood Entity shall engage in any business which is not significantly related to the business that Candlewood is conducting on the Effective Date; (n) No Candlewood Entity shall enter into (A) any transaction or other arrangement not in the ordinary and proper course of business on an arm's length basis with Doubletree, Mr. Jack DeBoer, Mr. Warren Fix, JPD Corporation, the Trusts or the Fix Partnership, or any entity in which any of them or their respective Affiliates has a greater than 5% interest or has a control relationship or (B) any loan to or management, employment or consulting agreement with any of the foregoing, except for those arrangements described in the Company's Registration Statement on Form S-1 relating to the Company's Common Stock, including purchases and other relations with INNCO and the guarantee by Doubletree of certain indebtedness incurred by the Company and its franchisees; 8 9 (o) No Candlewood Entity shall change its accounting principles or practices (except as required by generally accepted accounting principles) or hire a firm other than KPMG Peat Marwick to act as its independent public accountants; (p) No Candlewood Entity shall establish compensation payable to any manager, officer, director, employee or other agent if such compensation as to any one of the foregoing, in the aggregate, would exceed $500,000 in any year, or establish compensation for Mr. Jack DeBoer or Mr. Warren Fix if such compensation as to either of them, in the aggregate, would exceed $300,000 in any year. (q) No Candlewood Entity shall enter into any other transaction or other arrangement not in the ordinary course of business; and (r) Candlewood shall not consolidate or amalgamate with, or merge with or into, or acquire all or substantially all of the assets or control of, any other business organization other than in the course of the Initial Reorganization; provided, however, that, in the case of a merger or other combination between Candlewood and Doubletree, such approval shall not be unreasonably withheld; (s) No Candlewood Entity shall dissolve, liquidate or wind up its affairs; (t) There shall be no increase in the number of members of the Board, either by amendment to the Certificate of Incorporation, the By-laws or otherwise, except as provided in Section 2.1. (u) Candlewood shall not cause or permit any Subsidiary holding assets representing all or substantially all the assets of Candlewood and its Subsidiaries, on a consolidated basis (the "Group") or any group of Subsidiaries holding all or substantially all of such assets to (A) consolidate or amalgamate with, or merge into, any entity that is not a member of the Group, (B) sell (in a single transaction or a series of related transactions) all or substantially all of such assets to an entity that is not a member of the Group or (C) dissolve, liquidate or wind up its (or their) affairs; or (v) No Candlewood Entity shall permit or obligate any Candlewood Entity or otherwise agree, either individually or as a consolidated group, to make any decision, or take any action, described in items (a) through (q) above; (w) Provided, however, that if at any time either Doubletree Holders or the DeBoer/Fix Holders, as the case may be, shall own less than 20% of the outstanding shares of Candlewood Common Stock, all rights of the Doubletree Holders or the DeBoer/Fix Holders, as the case may be, under this Section 2.6 shall terminate and be of no further force or effect; provided further, however, that following the death of Jack DeBoer, the rights of the Fix Partnership Holders under this Section 2.6 shall terminate and be of no further force or effect. 9 10 Section 2.7 Purchase Rights. In furtherance and not by way of limitation of Section 2.6, additional shares of Common Stock of Candlewood, or securities convertible into or exchangeable for such shares, if such shares or securities are to be sold for cash, shall be first offered to the Holders of then outstanding Subject Shares in proportion to the number of such Subject Shares held by them, respectively, which offer shall be outstanding for a period of not less than 30 days from receipt of written notice thereof; provided, however, that Candlewood shall have the right to issue such additional shares or such securities, without first offering them to such Holders, if such additional shares or securities are to be sold for cash through an offering to its employees or to the employees of any Subsidiary for such consideration and upon such terms and conditions as shall be approved by the Doubletree Holders and the DeBoer/Fix Holders pursuant to clause (g) of Section 2.6, so long as applicable, and by the Board; and provided, further, that, except as aforesaid, no Holder shall have any preemptive or other right to subscribe for or acquire any shares of capital stock or other securities issued by Candlewood. Section 2.8. Agent for Affiliated Holders. If a portion or all of the Subject Shares held by Doubletree, DeBoer, the Trusts or the Fix Partnership shall be transferred to one or more Permitted Transferees, resulting in the Subject Shares which were theretofore held by such Holder being held by more than one Holder, then Doubletree, DeBoer, the Trusts or the Fix Partnership, as the case may be, shall: (i) act, or shall cause one of such Holders to act, as agent and proxy for all purposes of this Agreement (including without limitation the voting of Subject Shares, the nomination of Directors, the giving of consents, the approval of amendments, the receipt of notices, etc.) for all of the Doubletree Holders, DeBoer Holders or the Fix Partnership Holders, as the case may be, and (ii) specify in writing to the other parties that it (or such other Holder) is to act as such agent and proxy, and thereafter the other parties shall be entitled to look solely to, and to deal solely with, the person so specified for all purposes of this Agreement as if such Holder held all the Subject Shares held by the party providing such notice and its Permitted Transferees. Section 2.9. Irrevocable Proxy. The Fix Partnership Holders and the Trusts hereby appoint DeBoer as its and their proxy to exercise in DeBoer's sole discretion all rights of the Fix Partnership Holders and the Trusts to nominate and/or remove each DeBoer/Fix Director and to exercise all rights pursuant to Section 2.6 hereof. This proxy is coupled with an interest in Candlewood and shall be irrevocable. Except as set forth below in this paragraph, this proxy may be invoked by DeBoer at any time by notice to the other Holders but, unless and until invoked, such rights may be exercised by the Fix Partnership Holders and the Trusts; provided, however, that upon the death of Warren D. Fix all such rights shall automatically vest in DeBoer which shall thereafter have the sole right to exercise all such rights of the Fix Partnership Holders. Notwithstanding the foregoing, this proxy may not be invoked or exercised after the death of Jack DeBoer. 10 11 ARTICLE III. RESTRICTIONS ON TRANSFERS OF SUBJECT SHARES; VOTING AGREEMENTS; AND LIQUIDATION AGREEMENT Section 3.1. Dispositions Prior to Initial Public Sale. Until the termination of the provisions of this Section 3.1, no Holder shall (a) sell, assign, transfer by operation of law or otherwise, pledge, hypothecate, grant any security interest or other lien in or otherwise dispose of any of its Subject Shares, or make or permit any indirect transfer of such Subject Shares through an issuance of such Holder's capital stock or other equity interests resulting in a direct or indirect change in the beneficial ownership of a majority of its Voting Securities or other equity interests (a "Disposition"), or (b) agree or otherwise become obligated to take any action referred to in clause (a) of this Section 3.1; provided, however, that, subject to Section 4.8, the restrictions set forth in such clauses (a) and (b) shall not apply to a Disposition of Subject Shares: (A) to a Permitted Transferee of such Holder, whether pursuant to a Reorganization or otherwise, (B) in a Public Sale or (C) sold by Doubletree pursuant to Section 2(d) of the Registration Rights Agreement; provided, however, that the provisions of this Section 3.1 shall not apply to Doubletree to the extent that they would limit a change of control of Doubletree or preclude the hypothecation of the Doubletree Shares to a bank or other financial institution. ARTICLE IV. GENERAL PROVISIONS Section 4.1. Legend on Share Certificates for Subject Shares. (a) All certificates for Subject Shares which are subject to the terms and provisions of Article II and/or Article III shall bear the following legend: The shares represented by this certificate (the "Shares") have not been registered under the Securities Act of 1933, as amended, and no sale, transfer or other disposition may be made of the Shares unless they have been so registered or Candlewood Hotel Company, Inc. (the "Company") has been furnished with a legal opinion from a nationally recognized law firm satisfactory to it that such registration is not required. The Shares are also subject to certain restrictions on transfer and requirements as to voting contained in the Stockholders Agreement dated as of September 30, 1996 among the Company, the registered holder of the Shares and certain other stockholders, a copy of which is on file with the Secretary of the Company. (b) Upon the termination of this Agreement pursuant to Section 4.5(a), each Holder shall be entitled to receive, in exchange for any certificate for Candlewood Common Stock bearing the legend set forth in subsection (a) of this Section 4.1, a certificate bearing a legend containing only the first sentence of such legend, unless Candlewood shall have determined (based upon the advice of legal counsel) that such legend is then no longer required. 11 12 (c) The restrictions on transfer of the Subject Shares provided in this Agreement shall also be noted in the Candlewood stock register. (d) If any shares of Candlewood Common Stock shall cease to be Subject Shares in accordance with this Agreement, any Person acquiring such shares shall be entitled to receive, in exchange for any certificate for such shares bearing the legend set forth in subsection (a) of this Section 4.1, a certificate bearing a legend containing only the first sentence of such legend, unless Candlewood shall have determined (based upon the advice of legal counsel) that such legend is then no longer required. Section 4.2. Notices. All notices, requests or demands required or permitted by this Agreement: (i) shall be in writing; (ii) shall be deemed to have been given, forwarded, made or delivered: (x) if delivered in person or by overnight courier service, when received, (y) if transmitted by telefax, when so transmitted if evidence of completed transmission is received, and (z) if sent by prepaid registered or certified mail, return receipt requested, on the earlier of the date of receipt or the seventh day after it is mailed; and (iii) shall be addressed: if to Candlewood, at Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206, Attention: President (or to such other address as Candlewood shall furnish by notice given to each Holder), and if to any Holder, at such Holder's address appearing on the Holder List (as hereinafter defined). Section 4.3. Holder List. Candlewood shall maintain a list (the "Holder List") of the name and address of each Holder and the number of Subject Shares held by it. Each Holder shall give prompt notice to Candlewood of any change in the information pertaining to it in the Holder List, but in the absence of such notice Candlewood and each other Holder may treat the information reflected in the current Holder List as correct. Candlewood shall furnish a copy of the Holder List to any Holder upon request. Section 4.4. Amendments, Waivers and Consents. This Agreement may be amended only by a document executed (which may be in counterparts) by Candlewood and all of the Holders. Any Holder may waive the benefit of any provision of this Agreement, either in a specific instance or generally, by delivering to Candlewood and each other Holder a consent to such waiver. All consents required or permitted by this Agreement shall be in writing and signed by the party to be charged therewith. Section 4.5. Termination. (a) All provisions of this Agreement shall terminate as to all Subject Shares on the close of business on the day before the tenth anniversary of the Effective Date. In the event of a Public Sale prior to such tenth anniversary, the provisions of Section 3.1 shall terminate on the date on which such Public Sale is completed. All provisions of this Agreement shall terminate (prior to such tenth anniversary) on the first day on which the Subject Shares shall comprise less than a majority of the total number of shares of Candlewood Common Stock then outstanding. This Agreement or any provision hereof may be terminated by a document executed in the manner provided in Section 4.4 for amendments to this Agreement with the same force and effect as provided therein. Candlewood shall give prompt written notice of any termination under this Section 4.5(a) to all Holders. 12 13 (b) The termination of this Agreement or any provision hereof shall not affect any action taken or agreement entered into prior to such termination or any liability under any obligation previously incurred under this Agreement, all of which shall survive such termination. Section 4.6. Equitable Remedies; Submission to Arbitration. (a) Each Holder, by becoming a party to this Agreement, acknowledges and agrees that its breach or nonperformance of any provision of this Agreement in accordance with the specific terms hereof would result in irreparable harm to Candlewood and to each other Holder for which money damages would not provide an adequate remedy. Accordingly, each Holder (i) agrees that Candlewood and each other Holder shall be entitled to specific performance or injunctive or other equitable relief against such Holder in the event of its breach or other non-performance of any of the provisions of this Agreement; and (ii) waives any requirement for the securing or posting of any bond in connection with such remedy. (b) EXCEPT AS OTHERWISE PROVIDED IN SECTION 4.6(a), EACH HOLDER IRREVOCABLY AGREES THAT ALL DISPUTES IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT OR ANY OTHER AGREEMENT CONTEMPLATED HEREBY SHALL BE RESOLVED BY ARBITRATION IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA, UNDER THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION. The arbitrator to resolve any such dispute shall be selected by the Holders who are involved in the dispute, shall have expertise and experience in the resolution of disputes similar to the dispute to be resolved and shall not be an Affiliate of any Holder. If such Holders are unable to agree on such selection, each such Holder shall select one arbitrator and such arbitrators shall select an arbitrator meeting the criteria set forth in the immediately preceding sentence to resolve such dispute. The fees and expenses of any arbitrator selected by any Holder shall be paid by such Holder; the fees and expenses of any other arbitrators shall be shared equally by the Holders who are involved in the dispute. All other expenses of such arbitration shall be paid by the Holder incurring the same. Section 4.7. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of Candlewood and each Holder; provided, however, that Candlewood may not assign this Agreement except by operation of law or to a purchaser of all or substantially all of its business and assets; and provided further, that no Holder may assign this Agreement except in connection with a transfer of Subject Shares by such transferring Holder to another Person which thereupon becomes a Holder with respect to such Subject Shares, all in accordance with Section 3.1 and Section 4.8. In addition, upon the death of Jack P. DeBoer, the rights of the DeBoer Holders hereunder shall terminate and be of no further force or effect. Section 4.8. Counterparts; Additional Parties. This Agreement (a) may be executed in counterparts, all of which together shall constitute a single agreement, and (b) shall become effective on the Effective Date. Prior to any Disposition of Subject Shares to a Permitted Transferee, without regard to whether or not Section 3.1 is then in effect, the Holder effecting such Disposition shall cause such Permitted Transferee to execute and deliver to Candlewood and all of the Holders a supplemental agreement to this Agreement, in form and substance reasonably 13 14 satisfactory to each of them, whereby such Permitted Transferee shall agree to become a party to and be bound by all of the terms and conditions of this Agreement applicable to a Holder of Subject Shares and confirm that all of the Subject Shares to be acquired by such Permitted Transferee in such shall continue to be subject to this. As promptly as practicable, Candlewood shall cause a fully executed counterpart of this Agreement or any supplemental agreement referred to in this Section 4.8 to be delivered to each Holder. 14 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. DOUBLETREE CORPORATION, CHRISTOPHER SCOTT DEBOER a Delaware corporation TRUST DATED MARCH 14, 1995 By: /S/ DAVID L. STIVERS By: /S/ SKYLER SCOTT DEBOER -------------------- ----------------------- David L. Stivers Skyler Scott DeBoer, Senior Vice President, General as Co-Trustee Counsel and Secretary By: /S/ LYNN A. DEBOER ----------------------- THE WARREN D. FIX FAMILY Lynn A. DeBoer, PARTNERSHIP, a Kansas limited as Co-Trustee partnership By: /S/ WARREN D. FIX ------------------------------ Warren D. Fix, General Partner /S/ JACK P. DEBOER - ------------------ JACK P. DEBOER ALEXANDER JOHN DEBOER TRUST DATED MARCH 14, 1995 By: /S/ SKYLER SCOTT DEBOER ----------------------- Skyler Scott DeBoer, as Co-Trustee By: /S/ LYNN A. DEBOER ----------------------- Lynn A. DeBoer, as Co-Trustee 15 EX-10.37 9 CREDIT FACILITY AGREEMENT DATED 11/11/96 1 EXHIBIT 10.37 CREDIT FACILITY AGREEMENT THIS CREDIT FACILITY AGREEMENT (this "Agreement") is entered into as of this 11th day of November 1996, by and between Candlewood Hotel Company, Inc., a Delaware corporation ("Candlewood Inc"), and Doubletree Corporation, a Delaware corporation ("Doubletree"). RECITALS A. Doubletree, the Warren D. Fix Family Partnership, L.P. (the "Fix Partnership"), and JPD Corporation, a Kansas corporation, formed Candlewood Inc in August 1996 to succeed to the business of Candlewood Hotel Company, L.L.C., a Delaware limited liability company ("Candlewood LLC"). B. The membership interests in Candlewood LLC were owned 50% by Doubletree, 42.5% by JPD Corporation and 7.5% by the Fix Partnership. C. Pursuant to the Limited Liability Company Agreement of Candlewood Hotel Company, L.L.C. (the "Candlewood LLC Agreement"), Doubletree agreed to contribute to Candlewood LLC up to $15 million as requested by the members of Candlewood LLC. The Candlewood LLC Agreement provided that Doubletree would receive a preferred return on each such contribution equal to seven percent (7%) per annum for the first twelve months following its contribution, ten percent (10%) per annum for the second twelve months and fifteen percent (15%) per annum thereafter. D. Prior to the proposed public offering (the "Offering") of Common Stock of Candlewood Inc, the amount of capital in excess of $200,100 previously contributed to Candlewood LLC by Doubletree, together with a preferred return on such amount (collectively, the "Excess Contribution Amount"), will be distributed to Doubletree. E. Candlewood Inc desires to obtain from Doubletree, prior to the Offering, a $15 million subordinated credit facility. F. Doubletree is willing to lend to Candlewood Inc an aggregate of up to $15 million upon the terms and subject to the conditions set forth herein. NOW THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS: 1. Initial Loan Disbursement. Concurrently with the execution of, and subject to the terms and conditions of, this Agreement, Doubletree shall make a loan (the "Initial Loan") to Candlewood Inc in a principal amount equal to the Excess Contribution Amount, to be evidenced by a promissory note (the "First Note") in the form attached as Exhibit A. The terms of the Initial Loan shall be governed by the First Note. 2. Additional Loan Disbursements. Subsequent to the date of the Initial Loan, subject to the terms and conditions of this Agreement, Doubletree shall make 2 additional loans (the "Additional Loans") to Candlewood Inc, at such times as requested by Candlewood Inc upon 30 days' written notice, in increments of not less than $100,000, each such loan to be evidenced by a promissory note (an "Additional Note") in the form attached as Exhibit B. The terms of each Additional Loan shall be governed by the applicable Additional Note. The aggregate principal amount of the Initial Loan and the Additional Loans shall not exceed $15 million. Repayment of the Initial Loan or any of the Additional Loans shall not affect this $15 million limit. For example, if the aggregate principal amount of the Initial Loan and the Additional Loans were $13 million (leaving $2 million available for borrowing hereunder) and Candlewood repaid $5 million of that principal amount, the total principal amount available for borrowing hereunder would remain $2 million. 3. Conditions Precedent. Doubletree's obligation to make the Initial Loan is subject to its receipt of the Initial Note, fully executed and acknowledged. Doubletree's obligation to make an Additional Loan is subject to its receipt of (i) a written request for such Additional Loan from Candlewood Inc at least 5 days (or such shorter time as shall be agreed upon by the parties) prior to the date on which Candlewood Inc. requests that the Additional Loan be disbursed and (ii) an Additional Note, fully executed and acknowledged; provided, however that if (a) any proceedings shall be commenced by or against Candlewood Inc, as debtor, under any bankruptcy, reorganization, insolvency, readjustment of debt, arrangement, receivership or liquidation law or statute of the federal or any state government and such proceeding has not been dismissed or an order for relief granted with respect thereto or (b) if an event which would, or which with the giving of notice or passage of time would, permit any of the Note or the Additional Notes to be accelerated and to become immediately due at the option of the holder thereof, shall have occurred and be continuing or would occur and exist after the funding of such Additional Loan, and such event shall not have been waived or consented to by the holders of the Note or the Additional Note, Doubletree shall be under no obligation to make an Additional Loan. 4. Miscellaneous. (a) All notices, requests and other communications required or permitted to be made hereunder shall, except as otherwise provided, be in writing and may be delivered personally or sent by telegram, telecopy, telex or certified mail, postage prepaid, addressed as follows: To Doubletree: Doubletree Corporation 410 North 44th Street, Suite 700 Phoenix, Arizona 85008 Attention: David L. Stivers Senior Vice President, General Counsel and Secretary Telecopy number: (602) 220-6602 2 3 To Candlewood Inc: Candlewood Hotel Company, Inc. Lakepoint Office Park 9342 East Central Wichita, Kansas 67206-2555 Attention: Warren D. Fix Executive Vice President, Chief Financial Officer and Secretary Telecopy number: (316) 631-1333 with a copy to: Latham & Watkins 650 Town Center Drive, Suite 2000 Costa Mesa, California 92626 Attention: Charles K. Ruck Telecopy number: (714) 755-8290 Such notices, requests and other communications sent shall be effective upon receipt, unless sent by (i) overnight courier, in which case they shall be effective exactly one (1) business day after deposit with such overnight courier, or (ii) mail, in which case they shall be effective exactly three (3) business days after deposit in the United States mail. Either party may change its address or other information by giving notice thereof to the other party hereto in conformity with this paragraph. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of California. (c) This Agreement or any provision hereof may be changed, waived, or terminated only by a statement in writing signed by the party against which such change, waiver or termination is sought to be enforced. (d) All rights of Doubletree hereunder shall inure to the benefit of its successor and assigns. Candlewood Inc shall not assign any of its interest under this Agreement without the prior written consent of Doubletree; provided that Candlewood Inc shall be entitled to direct loans made pursuant hereto to be paid to any of its directly or indirectly wholly owned subsidiaries. Any purported assignment inconsistent with this provision shall, at the option of Doubletree, be null and void. (e) In any action or proceeding brought to enforce any provision of this Agreement, or to seek damages for a breach of any provision hereof, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. (f) If any provision of this Agreement should be found to be invalid or unenforceable, all of the other provisions shall nonetheless remain in full force and effect to the maximum extent permitted by law. 3 4 (g) This Agreement, together with the Initial Note and Additional Notes, is intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant to determine the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. (h) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement. 4 5 IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date set forth above. DOUBLETREE CORPORATION, CANDLEWOOD HOTEL COMPANY, INC., a Delaware corporation a Delaware corporation By: /s/ Richard M. Kelleher By: /s/ Warren D. Fix ----------------------------------- ---------------------------------- Name: Richard M. Kelleher Warren D. Fix ------------------------------ Executive Vice President, Chief Title:President and Chief Financial Officer and Secretary ----------------------------- Executive Officer ----------------------------- 5 EX-10.38 10 SUBORDINATED PROMISSORY NOTE DATED 11/11/96 1 EXHIBIT 10.38 SUBORDINATED PROMISSORY NOTE $12,457,109.04 November 11, 1996 FOR VALUE RECEIVED, Candlewood Hotel Company, Inc., a Delaware corporation ("Candlewood Inc"), having its principal place of business at Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206, hereby promises to pay Doubletree Corporation, a Delaware corporation ("Doubletree"), a principal sum of Twelve Million Four Hundred and Fifty Seven Thousand One Hundred Nine Dollars and Four Cents ($12,457,109.04), which is equal to the sum of (i) the amount of capital in excess of $200,100 previously contributed by Doubletree to Candlewood Hotel Company, L.L.C. ("Candlewood LLC") under the Limited Liability Company Agreement of Candlewood Hotel Company, L.L.C. and (ii) the preferred return on such amount as of the date of this Note. Each portion of the principal amount hereunder (a "Contributed Amount") will bear interest at varying rates depending on the date upon which Doubletree contributed such Contributed Amount to Candlewood LLC (the "Contribution Date"). Each Contributed Amount will bear simple interest at rates of seven percent per annum for the first 12 months following the Contribution Date for that Contributed Amount, 10% per annum for the second 12 months following that Contribution Date and 15% per annum thereafter. The Contribution Date and amount of each Contributed Amount are set forth on Schedule A hereto. The interest on the entire principal amount shall be payable quarterly on the last business day of each March, June, September and December, commencing on December 31, 1996. Each payment by Candlewood, Inc. under this Note shall first be applied to reduce the accrued but unpaid interest on the entire principal amount and then the principal amount of the Contributed Amounts in the inverse or order in which the Contributed Amounts were contributed to Candlewood, Inc. The entire principal amount shall become due on the fifth anniversary hereof. This Note may be prepaid at the option of Candlewood Inc in whole at any time or in part from time to time without penalty or premium. Each such repayment shall be applied to accrued but unpaid interest and then to the principal on the Contributed Amounts in the inverse order in which they were contributed to Candlewood LLC. This Note is issued pursuant to a credit facility agreement (the "Agreement") between the parties. If an Event of Default (as hereinafter defined) shall occur, then, at the option of the holder hereof, and subject to the subordination provisions below, this Note shall become immediately due and payable. An "Event of Default" shall be deemed to have occurred hereunder if (a) Candlewood Inc shall fail to make any payment under this Note in full within five (5) days of the date upon which it is due; (b) any proceedings shall be commenced by or against Candlewood Inc, as debtor, under any bankruptcy, reorganization, insolvency, readjustment of debt, arrangement, receivership or liquidation law or statute of the federal or any state government, and, with respect to any such proceeding commenced against Candlewood Inc, such proceeding is not dismissed within 60 days or an order for relief is granted in such proceeding; or (c) Candlewood Inc is 2 deemed to be in default in the payment of principal or interest under any instrument evidencing the Senior Indebtedness (as defined below) as a result of which holders of such Senior Indebtedness shall be entitled to accelerate its maturity. If an Event of Default occurs and is continuing, the interest rate upon this Note shall be increased to the lesser of (i) the then prevailing rate plus 4% or (ii) the maximum rate permitted by law, running from the time payment should have been made to the time that the Event of Default is cured or the Note is paid in full. The indebtedness represented by this Note (including the interest thereon) shall be subordinate and junior in right of payment, to the extent set forth herein, to all indebtedness of Candlewood Inc for money borrowed from banks or other institutional lenders for the development of hotels and any bank line of credit, including in either case any refinancings or consolidations thereof (collectively "Senior Indebtedness"). Until all Senior Indebtedness has been paid in full, no payment shall be due or made hereunder if at the time of such payment (i) a default in the payment of principal or interest on Senior Indebtedness occurs and is continuing or would occur as a result of such payment, that in either case permits the holders of such Senior Indebtedness to accelerate its maturity or the maturity of which has been accelerated; or (ii) (x) Candlewood Inc receives a written notice of a default, other than a payment default, under any Senior Indebtedness permitting an acceleration thereof, (y) such default is continuing and has not been cured or waived, and (z) one hundred and eighty days have not passed since the date of receipt of such notice, but payments may and shall thereafter be resumed if the maturity of such Senior Indebtedness has not been or does not remain accelerated. Candlewood Inc may and shall resume payments on this Note when the default is cured or waived or payment is otherwise permitted under clause (ii) above; provided that such payments will again be subject to the limitations set forth under clauses (i) and (ii) above if a subsequent default under the same provisions of the instrument governing Senior Indebtedness occurs after a similar default has been cured or waived, except that (I) in no event shall the same set of facts give rise to more than a single one hundred and eighty (180) day period under clause (ii) above and (II) no default existing on the date any such notice is given may be used as the basis for any subsequent notice. If any payment or distribution shall be received by any holder of this Note in contravention of any of the terms hereof and before all Senior Indebtedness shall be paid in full, such payment or distribution shall be held in trust for the benefit of, and, if such Senior Indebtedness has been accelerated, shall be paid over or delivered to, the holders of the Senior Indebtedness at the time outstanding for application of the payment of all Senior Indebtedness remaining unpaid, in accordance with the priorities of payment thereof, to the extent necessary to pay all Senior Indebtedness in full. No act or failure to act on the part of Candlewood Inc, and no default under or breach of any agreement of Candlewood Inc, whether or not herein set forth, shall in any way prevent or limit the holder of any Senior Indebtedness from enforcing fully the subordination herein provided for, irrespective of any knowledge or notice which such holder hereof may at any time have. So long as any Senior Indebtedness shall be outstanding, Candlewood Inc shall not, without the prior written consent of all holders thereof, alter or amend any of the terms of this Note in any manner which might adversely affect the holders of Senior Indebtedness. Nothing in this paragraph shall impair or qualify, as between Candlewood Inc and the holder hereof, (i) the obligation of Candlewood Inc which is absolute and unconditional to pay the holder hereof the principal of and interest on this Note when and as due and set forth elsewhere herein, or (ii) the rights of the holder hereof upon an Event of Default. 2 3 Upon any distribution to creditors of Candlewood Inc in a liquidation or dissolution of Candlewood Inc or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to Candlewood Inc or its property: (i) holders of Senior Indebtedness shall be entitled to receive payment in full in cash of the principal of and interest (including interest accruing after the commencement of any such proceeding) to the date of payment on the Senior Indebtedness before any payment of principal of or interest shall be made hereunder and until the Senior Indebtedness is paid in full in cash, any distribution which would have been made but for this provision shall be made to holders of Senior Indebtedness as their interests may appear, except that the holder of this Note may receive securities that are subordinated to Senior Indebtedness to or at least the same extent as this Note. Subject to the payment in full of all Senior Indebtedness, the holder of this Note shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions applicable to the Senior Indebtedness to the extent that payments or distributions otherwise payable on this Note have been applied to the payment of Senior Indebtedness. For the purposes of such subrogation, no payment or distribution to the holders of Senior Indebtedness under the provisions hereof, to which the holder of this Note would be entitled other than for the subordination provisions hereof, and no payment pursuant to the provisions hereof to the holders of Senior Indebtedness by the holder of this Note shall, as between Candlewood Inc and its creditors (other than the holders of Senior Indebtedness and the holder of this Note), be deemed to be a payment by Candlewood Inc on account of such Senior Indebtedness, it being understood that the subordination provisions of this Note are solely for the purpose of defining the relative rights of the holder of this Note, on the one hand, and the holders of Senior Indebtedness, on the other hand. Candlewood Inc hereby waives all rights to offset against its obligations hereunder with respect to claims which it may now or hereafter have against the payee or subsequent holder hereof, except for claims arising under the Agreement or any agreement or instruments entered into pursuant thereto. Candlewood Inc and all guarantors and endorsers hereof, and their successors and assigns, hereby waive presentment, demand, protest and notice thereof or of dishonor. If any action should be commenced to collect this Note or any portion thereof, the prevailing party shall be entitled to recover its costs and expenses, including, without limitation, reasonable attorneys' fees and disbursements incurred in connection with such action, including any appeal of such action. In the event that any term, covenant, condition, provision or agreement herein contained is held to be invalid, void or otherwise unenforceable by any court of competent jurisdiction, the fact that such term, covenant, condition, provision or agreement is invalid, void or otherwise unenforceable shall in no way affect the validity or enforceability of any other term, covenant, condition, provision or agreement herein contained. 3 4 This Note shall be governed by and construed in accordance with the internal laws of the State of California without regard to principles of conflict of laws, and may not be amended, modified or canceled orally. Candlewood Hotel Company, Inc. By: /s/ Warren D. Fix ------------------------------- Warren D. Fix Executive Vice President, Chief Financial Officer and Secretary 4 EX-10.39 11 GUARANTY AGREEMENT DATED 12/31/96 1 EXHIBIT 10.39 EXECUTION COUNTERPART GUARANTY AGREEMENT THIS GUARANTY AGREEMENT (this "Guaranty") is made as of the 31 day of December, 1996, by Doubletree Corporation, a Delaware corporation (hereinafter referred to as "Doubletree" or as the "Guarantor"), in favor of GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation ("GMAC-CM"), and its successors and assigns. RECITALS A. GMAC-CM has agreed to provide a Forward Commitment, substantially in the form of Exhibit A attached hereto and made a part hereof (as amended from time to time, the "Forward Commitment"), for the financing of certain hotel properties with developers/borrowers approved by Guarantor or by Candlewood Hotel Company, Inc., a Delaware corporation ("Candlewood"). Guarantor or Candlewood will submit the approved projects to GMAC-CM for loan underwriting. Such loans which are accepted by GMAC-CM and for which it issues a Forward Commitment shall be hereinafter referred to as the "Mortgage Loans." B. Doubletree owns a substantial equity interest in Candlewood and will receive a substantial benefit from the projects to be financed by GMAC-CM. C. Doubletree has agreed to certain guaranties and credit enhancements in connection with the Mortgage Loans as more fully set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the matters described in the foregoing Recitals, in order to induce GMAC-CM to enter into the Forward Commitment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. For purposes of this Guaranty, the following terms shall have the meanings indicated: (a) "AFFILIATE OF MORTGAGOR" means, with respect to Mortgagor, another Person who: (i) directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with the Mortgagor; (ii) is a partner, director, officer or trustee of the Mortgagor or of any Person covered by clause (i) above; (iii) is a partner of a partnership or joint venture which owns, or is a beneficiary or trustee of a trust which owns, or other owner of any stock or other evidences of beneficial ownership in, the Mortgagor or any Person who directly or indirectly through one or more intermediaries controls or is controlled by the Mortgagor; or (iv) is related to the Mortgagor by blood (including grandparents of the Person specified and of his or her spouse and all lineal descendants of such grandparents) or marriage or close business association to the specified person or to any Person covered by clause (i) above or of the spouse of any of the foregoing persons. For purposes of this definition, the term "control" with respect to a Mortgagor means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Mortgagor, whether through the ownership of voting stock, by contract or otherwise. (b) "ALLONGE" means an instrument to be executed and delivered by the Mortgagee to assign to Guarantor each Mortgage Note being repurchased pursuant to the Repurchase Option. 2 (c) "APPROVED PROJECT COSTS" for a particular Mortgage Loan shall have the meaning set forth in the Forward Commitment applicable to such Loan, together with any increases thereto permitted pursuant to the terms and provisions of the Building Loan Agreement for variances and cost overruns. (d) "ASSIGNMENT OF RENTS AND LEASES" means, with respect to any Mortgage Loan, the assignment of rents and leases executed by the Mortgagor with respect to such Mortgage Loan. (e) "BANKRUPTCY DEFAULT" shall mean any default under the Mortgage Loan Documents caused by the Mortgagor filing or being the subject of a bankruptcy, insolvency or reorganization proceeding under state or federal law. (f) "BUILDING LOAN AGREEMENT" means, with respect to any Mortgage Loan, the building loan agreement executed by the Mortgagor with respect to the Construction Loan. (g) "BUSINESS DAY" means any day other than a Saturday, a Sunday, a federal holiday or another day on which commercial banks in the Commonwealth of Pennsylvania are authorized or required to be closed for the conduct of their regular banking operations. (h) "CANDLEWOOD" shall refer to Candlewood Hotel Company, Inc., a Delaware corporation and successor to Candlewood Hotel Company, LLC, a Delaware limited liability company, together with the successors and permitted assigns of such Delaware corporation. (i) "CONFORMING LOAN CRITERIA" shall refer to a Mortgaged Property which at the maturity of the Construction Loan or the Extended Construction Loan, as the case may be, meets, in GMAC-CM's sole discretion, each of GMAC-CM's then current conduit origination and underwriting standards, including but not limited to (i) DSCR equal to or greater than 1.4 and (ii) the LTV shall not be greater than 75%. (j) "CONSTRUCTION LOAN" shall mean and refer to the construction loan over its initial loan term (and excluding any extension or renewal terms or time periods), closed and funded pursuant to the Forward Commitment. (k) "DEBT" means Total Assets less Total Stockholders' Equity, as reported with the U.S. Securities and Exchange Commission on any financial statements on an annual or quarterly basis, whether such financial statements are audited or are unaudited. If at any time Guarantor is not a corporation whose stock is publicly traded. "Debt" shall mean the substantial equivalent of the concept set forth in the preceding sentence, as reflected in those financial statements to be provided by Guarantor pursuant to Section 23 below. (l) "DELINQUENCY" AND "DELINQUENCIES" means any portion of the Indebtedness which is due and owing to GMAC-CM prior to the Maturity Date of the Mortgage Loan (whether by acceleration or otherwise) and which is not paid as and when due (following applicable notice and grace periods, if any) in accordance with the provisions of the applicable Mortgage Loan Documents. (m) "DOUBLETREE" shall refer to Doubletree Corporation, a Delaware corporation, its successors and permitted assigns. (n) "DSCR" shall mean Debt Service Coverage Ratio which shall be computed by dividing annual NOI by the annual debt service payments on the subject Mortgage Loan, including interest computed at the greater of (1) the actual average interest rate under the Mortgage Loan during the twelve month period preceding such date of determination or (2) the interest rate in effect on the last day of the month immediately preceding the date of determination. - 2 - 3 (o) "ENVIRONMENTAL INDEMNITY" means, with respect to any Mortgage Loan, the environmental indemnity executed in connection with such Mortgage Loan. (p) "EXTENDED CONSTRUCTION LOAN" shall mean the Construction Loan, to the extent the term of the same may be extended for one or both extension terms or time periods, in accordance with the conditions, terms and provisions set forth in the Forward Commitment. (q) "EVENT OF DEFAULT" shall have the meaning set forth in Section 11 hereof. (r) "EXPENSES" shall mean for any specified period, all ordinary, necessary and reasonable operating and capital expenses actually paid on a cash basis during such period and which are related to the Mortgagor's ownership and operation of the Mortgaged Property during such period. Such Expenses shall include, by way of example rather than of limitation: (1) principal, interest and other debt service payments for the Mortgage Loan secured by such Mortgaged Property; (2) property taxes and assessments; (3) utility charges; (4) costs of providing elevator, janitorial, trash removal and maintenance services; (5) costs of maintaining and repairing the Mortgaged Property; (6) management fees, overhead and expenses (of no less than four percent (4%) of gross annual revenues); (7) franchise fees of no less than five percent (5%) of gross annual revenues; (8) an equipment and property reserve of no less than four percent (4%) of gross annual revenues; and (9) any capital improvement costs paid by Mortgagor and approved in advance in writing by GMAC-CM. Such Expenses shall not include the following: (i) any overhead of Mortgagor incurred in connection with the management of the Mortgaged Property; (ii) all amounts paid to Mortgagor or an Affiliate of Mortgagor in excess of amounts that would reasonably be paid in an arms-length transaction to a Person that is not an Affiliate of Mortgagor; (iii) non-cash deductions of Mortgagor; (iv) salaries or distributions paid or made to any employee, partner, officer, director or shareholder of Mortgagor or an Affiliate of Mortgagor; (v) the cost of capital improvements made to the Mortgaged Property not approved in advance in writing by GMAC-CM: or (vi) the cost of Mortgagor's federal, state or local income taxes, franchise taxes or other taxes (other than real property taxes for the Mortgaged Property). (s) "FORWARD COMMITMENT" shall have the definition set forth in the Recitals hereto. (t) "GMAC-CM" shall refer to GMAC Commercial Mortgage Corporation, a California corporation, and its successors and assigns. (u) "GROSS REVENUES" means for any specified period, all revenue received on a cash basis during such period from all sources related to the Mortgaged Property, including without limitation, all rents, issues, profits, revenues, cash proceeds from accounts and accounts receivable, and other income and proceeds from the use or occupancy of hotel rooms, conference rooms and other public facilities at the Mortgaged Property, all parking revenue, refunds, license, lease and concession fees and rentals, income from vending machines, food and beverage sales, wholesale and retail sales of merchandise, and service charges; provided, however, Gross Revenues for such specified period shall also include on an accrual basis, prorated over such specified period, any property or casualty insurance proceeds that are not used for restoration of the Mortgaged Property, any condemnation awards from a temporary taking that are not used for restoration of the Mortgaged Property or to replace such collateral with its substantial equivalent, any proceeds of business interruption and other loss of income insurance, and any health club membership fees; provided, further, Gross Revenues shall not include the following: (i) gratuities to employees, (ii) federal, state or municipal excise, sales, use or similar taxes collected directly from patrons or guests or included as part of the sales price of any goods or services, (iii) insurance proceeds (other than proceeds from business interruption or other loss of income insurance or other than property insurance not used for restoration), (iv) condemnation proceeds (other than proceeds from a temporary taking that are not used for restoration), (v) proceeds from any sale of the Mortgaged Property or from a refinancing of any debt encumbering the Mortgaged Property, (vi) proceeds from any disposition of furniture, fixtures and equipment no longer necessary for the operation of the Mortgaged Property; (vii) or interest accruing on amounts deposited in any FF&E or other reserve account. -3- 4 (v) "GUARANTEED OBLIGATIONS" shall have the meaning set forth in Section 11 hereof. (w) "GUARANTOR" shall mean Doubletree and its successors and permitted assigns. (x) "GUARANTY" means this Guaranty, including all Schedules and Exhibits hereto, as the same may be amended, supplemented, corrected or otherwise modified. (y) "GUARANTY FEE" shall have the meaning set forth in Section 9 hereof. (z) "GUARANTY INTEREST RATE" shall have the meaning set forth in Section 9 hereof. (aa) "INDEBTEDNESS" means all principal, interest, late fees, indemnification indebtedness and other amounts outstanding, from time to time, under the Mortgage Loan Documents for a particular Mortgage Loan. (bb) "LETTER OF CREDIT" shall have the meaning set forth in Section 8 hereof. (cc) "LIQUIDATION RECOVERIES" shall have the meaning set forth in Section 6 hereof. (dd) "LOAN AMOUNT" shall refer to the amount of financing that GMAC-CM agrees to provide to any Mortgagor for any of the respective Mortgage Loans, whether a Construction Loan or an Extended Construction Loan, pursuant to the Forward Commitment. The respective Loan Amounts for the Construction Loan and the Extended Construction Loan need not necessarily be the same amounts. (ee) "LOAN GUARANTY" means, with respect to any Mortgage Loan, any and all guaranties executed in connection therewith including, without limitation, any completion guaranty. (ff) "LOSS" shall have the meaning set forth in Section 6 hereof. (gg) "LTV" means the ratio of the Loan Amount to the fair market value of the Mortgaged Property, as such fair market value is established pursuant to an appraisal dated within thirty (30) days of such determination and acceptable in all respects to GMAC-CM, in its sole discretion. (hh) "MATURITY DATE" shall refer to the date any referenced Mortgage Loan then outstanding is due and payable in full. (ii) "MAXIMUM AMOUNT" means, with respect to any Mortgage Loan, the initial Maximum Amount for such Mortgage Loan, as said initial Maximum Amount is set forth on the Mortgage Loan Schedule, as increased by (a) interest on the Maximum Amount or the portion thereof then due, accruing from the date the same is due by Guarantor hereunder until the date paid in full, at the annual rate of three percent (3%) over the prime rate published from time to time by The Wall Street Journal, and (b) all collection costs hereunder, and as decreased by any amounts attributable to principal for such Mortgage Loan and which is actually funded by Guarantor hereunder (other than pursuant to clause (ii) of the first sentence of Section 7 below) and not reimbursed to Guarantor pursuant to the provisions hereof. The initial Maximum Amount for a particular Mortgage Loan is derived pursuant to a formula that ensures that the portion of the Mortgage Loan held by GMAC-CM which is not guaranteed under this Guaranty, does not exceed fifty-six and twenty-five hundredths percent (56.25%) of the Approved Project Costs applicable to that Mortgage Loan and related Mortgaged Property. (jj) "MONETARY DEFAULT" shall mean a default under the Mortgage Loan Documents which directly results from the nonpayment of a monetary sum as and when due. - 4 - 5 (kk) "MORTGAGE" means, with respect to any Mortgage Loan, the mortgages, deeds of trust, deeds to secure debt or other real property security instruments, together with each modification, amendment and supplement thereto, creating a lien on the Mortgaged Property described therein to secure a Mortgage Note. (ll) "MORTGAGE/DEED OF TRUST ASSIGNMENT" means an instrument to be delivered by the Mortgagee to transfer the related Mortgage. Assignment of Rents and Leases, and all other recorded security agreements to Guarantor pursuant to the Repurchase Option. (mm) "MORTGAGE LOAN AND MORTGAGE LOANS" shall mean either a Construction Loan or an Extended Construction Loan closed and funded pursuant to a particular Forward Commitment as more fully set forth on the Mortgage Loan Schedule. (nn) "MORTGAGE LOAN DOCUMENTS" means with regard to each Mortgage Loan, the Mortgage Note, Mortgage, Assignment of Rents and Leases, Environmental Indemnity, Building Loan Agreement, Loan Guaranty, Security Agreement and each other document or instrument further securing, evidencing, indemnifying, guaranteeing or governing the Mortgage Loan or otherwise related to the Mortgage Loan. (oo) "MORTGAGE LOAN FILES" means the Mortgage Loan Documents and all correspondence and other materials relating to the Mortgagor, the Mortgaged Property or the Mortgage Loan, its origination or servicing. (pp) "MORTGAGE LOAN SCHEDULE" means the schedule of Mortgage Loans subject to executed Forward Commitments, attached hereto as Schedule 1, as the same shall be supplemented after the closing of each Mortgage Loan and as the same may be amended, corrected or otherwise modified by instrument executed or initialed by GMAC-CM and Guarantor, which schedule includes, without limitation, the initial Maximum Amount for each such loan and the Rebate Interest Rate, if any, applicable to each such loan. (qq) "MORTGAGE NOTE" means the promissory note or notes or other documents, together with all amendments and modifications thereof, evidencing the indebtedness of a Mortgagor under a Mortgage Loan. (rr) "MORTGAGED PROPERTY" means, with respect to a Mortgage Note, the land, improvements, fixtures, personal property, contract rights (including rights under any management agreement or franchise agreement), leases, rents, hotel revenues, profits, permits and licenses (including liquor licenses), and other collateral (including any interest under a ground lease) directly securing such Mortgage Note. (ss) "MORTGAGEE" means, with respect to any Mortgage as of any date of determination, the holder of the related Mortgage Note as of such date. (tt) "MORTGAGOR" means the obligor or obligors identified as such under a Mortgage Note or Mortgage. (uu) "MULTIPLE DELINQUENCY" means, with respect to any Mortgage Loan, either (i) the second Delinquency to occur in any continuous twelve (12) month period or (ii) the fourth Delinquency to occur under such Mortgage Loan over its term, as may be extended from time to time. (vv) "NET WORTH" means, as of any date, the difference between the assets shown on the financial statements of such Person (whether certified or made in connection with a filing with the Securities and Exchange Commission) less all liabilities of such Person, including, without limitation, all Debt. (ww) "NOI" shall mean -5- 6 (a) for purposes of GMAC-CM determining whether a Mortgage Loan and the related Mortgaged Property satisfy the Conforming Loan Criteria. "NOI" shall mean Net Operating Income as defined and determined by GMAC-CM in accordance with its then-current underwriting standards and practices for its conduit program for loans of that type, which may include, without limitation: 1. An allowance of no less than 4% multiplied by gross annual revenues for management fees: 2. An allowance of no less than 5% multiplied by gross annual revenues for franchise fees payable to Candlewood; and 3. An allowance of no less than 4% multiplied by gross annual revenues for a property, plant, furniture, fixture, and equipment replacement reserve; and (b) for all other purposes, "NOI" shall mean Gross Revenues less Expenses, all to the extent confirmed by the periodic financial and property reporting and audit requirements set forth in the Mortgage Loan Documents. (xx) "NON-MONETARY DEFAULT" shall mean any default under the Mortgage Loan Documents beyond any applicable cure period, other than a Monetary Default and a Bankruptcy Default. (yy) "PARTICIPATION AGREEMENT" shall mean that agreement in the form attached hereto as Exhibit B, governing the subordinate participation rights Guarantor may obtain in a particular Mortgage Loan upon payment of Guaranteed Obligations related thereto, together with all exhibits and schedules to such agreement. (zz) "PERIODIC RECOVERY" shall have the meaning set forth in Section 3 hereof. (aaa) "PERSON" means an individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, bank, unincorporated organization or government or any agency or political subdivision thereof. (bbb) "REMEDIES NOTICE" shall have the meaning set forth in Section 4 hereof. (ccc) "REPURCHASE OPTION" shall mean the option of Gurarantor to purchase a Mortgage Loan pursuant to Section 5 hereof. (ddd) "SECURITY AGREEMENT" means, with respect to any Mortgage Loan, the financing statements and security agreements executed in connection therewith. 2. GUARANTY OF PAYMENT. Guarantor hereby unconditionally and irrevocably guarantees to GMAC-CM the punctual payment when due, and not merely the collectability, of (a) all Delinquencies as set forth in Section 3 below and (b) all Loss as set forth in Section 6 below, in the aggregate up to the Maximum Amount for all Mortgage Loans. The Maximum Amount for any particular Mortgage Loan shall be reduced by the amount of any Delinquency satisfied from time to time by Guarantor in accordance with Section 3 below which is attributable to principal under a particular Mortgage Loan, and shall be increased by the cash amount, without interest, of any subsequent recoveries by GMAC-CM against the Mortgagor for those Delinquencies which were previously satisfied by Guarantor, which recoveries shall be promptly paid to Guarantor by GMAC-CM in the ordinary course of GMAC-CM's servicing of Mortgage Loan payments. Sums paid by Guarantor hereunder (other than interest and collection costs under Section 19 below), shall not be applied on account of the Indebtedness outstanding for a particular Mortgage Loan, but rather, shall constitute the purchase by Guarantor of -6- 7 a subordinated participation in such Mortgage Loan in the amount paid by Guarantor, which participation shall be governed by the terms and provisions of the Participation Agreement. Recoveries paid by GMAC-CM to Guarantor shall be applied to reduce Guarantor's participation interest in such Mortgage Loan. Interest and collection costs paid by Guarantor under Section 19 below, will belong to GMAC-CM and will not be applied on account of the Indebtedness outstanding under any Mortgage Loan or to the purchase by Guarantor of a participation interest in any Mortgage Loan. 3. GUARANTY OF DELINQUENCIES. To the extent that for any month during a Mortgage Loan term that GMAC-CM does not receive, for any reason, any portion of the Indebtedness due for such month, following applicable notice and grace periods, if any, GMAC-CM may give written notice to Guarantor of such Delinquency. Guarantor hereby unconditionally and irrevocably guarantees to GMAC-CM that Guarantor shall pay to GMAC-CM no later than seven (7) Business Days after the date of such notice from GMAC-CM, the amount of such Delinquency, up to the then Maximum Amount. To the extent that such guarantee payment is not timely received by GMAC-CM, Guarantor shall be in default hereunder and shall be liable for interest and collection costs as set forth in Section 19 below. To the extent that GMAC-CM subsequently receives from Mortgagor after payment of all current Indebtedness, any portion of the Delinquencies previously satisfied by Guarantor pursuant to this Guaranty (a "Periodic Recovery"), such cash Periodic Recovery amounts up to the amount of the prior Delinquency, without interest, actually received from Mortgagor shall be remitted promptly to Guarantor and shall be added to and shall increase the Maximum Amount. As described more fully in Section 27 below but subject to the provisions of Section 6(c) below, Guarantor shall have no subrogation rights against Mortgagor and shall not demand or request repayment from Mortgagor or an Affiliate of Mortgagor for any Delinquency which Guarantor has satisfied and paid under this Guaranty. Satisfaction by Guarantor of any Delinquency shall not cure or remedy Mortgagor's failure to properly pay such sums under the Mortgage Loan Documents and the Mortgage Loan default resulting therefrom. 4. LOAN ADMINISTRATION. Guarantor acknowledges and agrees that GMAC-CM has full and absolute control over administration of the Mortgage Loans, including decisions regarding whether to modify the Mortgage Loan terms, extend the Maturity Date, advance additional funds, release collateral, terminate management, franchise or other pledged contractual rights, waive or relinquish rights or remedies, or assign GMAC-CM's rights and interests, subject to the terms and conditions of such agreements and Mortgage Loan Documents. Notwithstanding the foregoing, GMAC-CM hereby agrees as follows: (a) GMAC-CM shall provide Guarantor with copies of all written notices of default sent to each Mortgagor by GMAC-CM; (b) As to those Mortgage Loan defaults which directly result from the occurrence of a Monetary Default, GMAC-CM shall only accelerate the maturity of the Indebtedness and foreclose on the Mortgaged Property, obtain a receiver therefor or accept a deed in lieu thereof if within a period of sixty (60) days (inclusive of any applicable notice and/or grace periods set forth in the Mortgage Loan Documents) from the occurrence of such Monetary Default, the Monetary Default has not been cured by Mortgagor or satisfied by Guarantor in accordance with Section 3 above (with the seven Business Day notice period described in Section 3 being a part of such sixty-day forbearance period); provided, however, (i) the foregoing restrictions shall in no way affect or restrict GMAC-CM's rights to immediately proceed with its available remedies upon the occurrence of any Mortgage Loan default that is caused by a Bankruptcy Default or a Non-Monetary Default, and (ii) GMAC-CM shall have no obligation to forbear from pursuing its lawful remedies for such sixty-day period if the Monetary Default is a Multiple Delinquency; (c) If the Mortgage Loan default is a Non-Monetary Default or if the Monetary Default has not been cured within such sixty-day period or if the Monetary Default is a Multiple Delinquency, GMAC-CM may, at its option, elect to foreclose on all or a portion of the Mortgaged Property, appoint a receiver therefor, accept a deed in lieu thereof or otherwise exercise its rights and remedies as regards the Mortgaged Property and/or the Mortgagor, in which event GMAC-CM shall give Guarantor written notice (the "Remedies Notice") of (i) -7- 8 GMAC-CM's intention to pursue its available remedies and (ii) the aggregate Indebtedness then outstanding, together with per diem interest and other charges, under the applicable Mortgage Loan. Guarantor shall then have thirty (30) days to avoid potential exposure for a Loss by instead, exercising Guarantor's Repurchase Option; and (d) GMAC-CM will not materially modify the Mortgaged Loan terms, extend the Maturity Date, advance additional funds (except in an emergency) release collateral, terminate management, franchise or other material pledged contractual rights or waive or relinquish material rights or remedies, without first (i) having determined in its business judgment, after considering all facts and circumstances, that to do so is necessary or desirable to prevent a default or to protect the value of the security for the Mortgage Loan, and (ii) notifying Guarantor of GMAC-CM's intent to do so, which notice shall also constitute a Remedies Notice hereunder. 5. REPURCHASE OPTION. At any time during the thirty (30) days following GMAC-CM's Remedies Notice, Guarantor may, at its option (the "Repurchase Option") purchase the defaulted Mortgage Loan by payment to the Mortgagee, within such time period, of the aggregate Indebtedness then outstanding under such Mortgage Loan less the amount, if any, of Guarantor's participation interest in such Mortgage Loan. Upon receipt of such funds, GMAC-CM shall execute and deliver, without representation, warranty or recourse, the Allonge, the Mortgage/Deed of Trust Assignment and other assignments and transfers of the applicable Mortgage Loan Documents, together with all assignable rights of GMAC-CM in and to policies of insurance (property, title or other) and all claims thereunder, all rights of GMAC-CM to condemnation awards and all other rights of GMAC-CM related to such Mortgage Loan other than indemnification rights for the benefit of GMAC-CM which survive the payoff of such loan; provided, however, GMAC-CM shall represent and warrant that it has done nothing during its ownership of the Mortgage Loan to affect the validity and enforceability of such loan as a first mortgage lien on the Mortgaged Property, and that it has not transferred, encumbered or assigned the Mortgage Loan; and provided, further, GMAC-CM shall take such other actions as may be necessary, after taking into account all facts and circumstances, to vest in Guarantor unencumbered title to all of the foregoing, all at Guarantor's sole cost and expense. 6. GUARANTY OF LOSS. (a) If Guarantor does not timely exercise its Repurchase Option and if the Mortgage Loan default is continuing, GMAC-CM may, at its option, proceed to exercise its available remedies, including foreclosure. In such event, GMAC-CM may suffer a "Loss" in an amount equal to the then outstanding Indebtedness under the Loan minus all Liquidation Recoveries (as hereinafter defined) actually received by GMAC-CM with respect to the Loan or Mortgaged Property. As used herein, the term "Liquidation Recoveries" shall mean (i) if the Mortgaged Property has been sold at foreclosure to a third party, the net cash proceeds from such foreclosure sale actually received by GMAC-CM (it being understood and agreed that Guarantor shall have the right to purchase the Mortgaged Property at such foreclosure sale), (ii) if the Mortgaged Property is acquired by GMAC-CM or its designee at a foreclosure sale (it being understood and agreed that Guarantor shall have the right to purchase the Mortgaged Property at such foreclosure sale), the successful GMAC-CM foreclosure bid less reasonable foreclosure costs, (iii) if GMAC-CM has elected to accept a deed to the Mortgaged Property in lieu of foreclosure, the value of such Mortgaged Property as reasonably agreed to by GMAC-CM based upon an internal or other appraisal of the Mortgaged Property, or (iv) if GMAC-CM has elected to pursue other available remedies, the net cash proceeds to GMAC-CM from the exercise of such remedies. GMAC-CM shall not give less than thirty (30) days prior notice to Guarantor of any foreclosure sale of the Mortgaged Property (which notice period may be part of the sixty (60) day and thirty (30) day notice periods set forth in Sections 4(b), 4(c) and 6(b) of this Agreement), which shall include the date, time and place of the sale. There shall be added to Liquidation Recoveries, the net cash amount of all sums recovered by GMAC-CM with respect to such Mortgage Loan (other than under this Guaranty), including without limitation, the net amount recovered under any policy of property, title or other insurance applicable to such Mortgage Loan, under any assigned contract or from any other guarantor of such Mortgage Loan; provided, however, GMAC-CM shall not be required to institute or prosecute any proceedings or claims against any or all of such collateral, insurance or other sources of payment (including without limitation, proceedings under the Loan Guaranty to recover any deficiency or alleged breach -8- 9 of non-recourse covenants or conditions) as a condition of payment hereunder or enforcement of the terms of this Guaranty; provided, however, GMAC-CM shall use reasonable efforts, taking into accounts all facts and circumstances, to recover any Loss satisfied by Guarantor and to remit the same to Guarantor. (b) If the Mortgage Loan default is a Bankruptcy Default, the Loss guaranteed by Guarantor hereunder shall be equal to the then Maximum Amount. Within thirty (30) days of written notice from GMAC-CM of the occurrence of a Bankruptcy Default, Guarantor may, at its option, exercise its Repurchase Option as to such Mortgage Loan or shall pay to GMAC-CM the then Maximum Amount. To the extent that the Repurchase Option is not consummated or the Maximum Amount has not been received within such thirty-day period, Guarantor shall be in default hereunder, with Guarantor liable for additional interest and for collections costs, as described below. (c) After completion of the foreclosure or other enforcement action (except for remedies taken for a Bankruptcy Default, for which recovery against Guarantor is governed by clause (b) above) and after GMAC-CM's determination of the amount of its Loss, GMAC-CM shall provide written notice to Guarantor of the amount of such Loss. Guarantor hereby unconditionally and irrevocably guarantees to GMAC-CM that Guarantor shall pay to GMAC-CM, no later than seven (7) Business Days after the date of such notice from GMAC-CM, the amount of such Loss, up to the then Maximum Amount. To the extent that such guarantee payment is not timely received by GMAC-CM, Guarantor shall be in default hereunder and shall be liable for interest and collection costs. GMAC-CM shall not be required to seek a personal judgement against Mortgagor and/or Mortgagor's principal equity owners under the Loan Documents (for breaches of non-recourse covenants and conditions, under the Environmental Indemnity or otherwise) prior to seeking payment from Guarantor of any Loss; provided, however, GMAC-CM shall use reasonable efforts, taking into account all facts and circumstances, to recover the Loss and remit the same to Guarantor. Upon receipt by GMAC-CM of all Indebtedness owing to GMAC-CM under the Mortgage Loan Documents (except in the case of a Bankruptcy Default), GMAC-CM shall assign, without recourse, representation or warranty (except as provided in Section 5 above), the Mortgage Loan Documents to Guarantor, together with all other rights of GMAC-CM described in Section 5 above. 7. LOAN PAYDOWN. In addition to the guarantee of Delinquencies and the guarantee of Loss, as described above, Guarantor hereby unconditionally and irrevocably guarantees to GMAC-CM that, in the event that on or before sixty (60) days prior to (a) the Maturity Date of each Construction Loan or (b) the first Maturity Date of each Extended Construction Loan, as applicable, the related Mortgaged Property has not achieved a minimum 1.10 DSCR, then, in such event, Guarantor, not earlier than sixty (60) days but at least thirty (30) days prior to each such Maturity Date shall have either (i) paid down, up to the then Maximum Amount, the Loan Amount for such particular Mortgage Loan in order to achieve a 1.10 DSCR or (ii) entered into an agreement, in the form attached to and made a part of the Participation Agreement, whereby Guarantor agrees to become fully liable for the payment of all principal, interest, net cash flow, tax and insurance escrows, and other sums payable monthly on account of such Mortgage Loan. Sums payable by Guarantor pursuant to clause (ii)of the preceding sentence shall be applied to the purchase by Guarantor of a subordinated participation in the Mortgage Loan, in accordance with the terms and provisions of the Participation Agreement, but shall not reduce the Maximum Amount. Guarantor may at any time revoke its agreement under such clause (ii) above and terminate its obligations thereunder by paying the sum then owing, if any, under clause (i) above, and such agreement will automatically terminate when the Mortgage Loan achieves a 1.10 DSCR or when the Maximum Amount for such loan equals zero (Guarantor acknowledging, however, that payments under clause (ii) above shall not reduce the Maximum Amount). GMAC-CM will continue its customary efforts to collect all interest and other sums coming due from the Mortgagor and will promptly credit to Guarantor all sums so collected. 8. ACCELERATION/LETTER OF CREDIT. (a) In addition to all other rights and remedies set forth herein, the Maximum Amount for all Mortgage Loans then outstanding shall be immediately due and payable if any of the representations and - 9 - 10 warranties in Section 22 are incorrect as of the date hereof or if, at any time during the term of any Mortgage Loan (i) Guarantor files or has filed against it a bankruptcy, insolvency or reorganization proceeding under federal or state law (unless, in the case of an involuntary proceeding, such proceeding is dismissed within sixty (60) days of the filing thereof), (ii) any representation, warranty or covenant in Section 22(b), (d), (e), (g), (i), (j), (k) or (l) is incorrect or breached, or (iii) Guarantor breaches any covenant set forth in clauses (b) and (c) below. (b) If, at any time, one or more of the covenants set forth in Section 23 below is violated, within fifteen (15) Business Days of notice thereof by GMAC-CM, Guarantor shall obtain and deliver to GMAC-CM at Guarantor's sole expense, an unconditional, irrevocable letter of credit (the "Letter of Credit") in an amount equal to twenty-five percent (25%) of the aggregate Maximum Amount for all Mortgage Loans then outstanding. The Letter of Credit shall be from a financial institution having at least $100 million in assets, shall name GMAC-CM as the sole beneficiary and shall be in form and content acceptable to GMAC-CM, in its sole discretion. GMAC-CM shall be entitled to present the Letter of Credit and to make a draw against the same if Guarantor fails to pay a Delinquency, Loss, or other sum required to be paid under this Guaranty in accordance with the terms hereof. GMAC-CM shall promptly return the Letter of Credit to Guarantor if and to the extent that the breach of the financial covenants set forth herein is cured, without in any manner limiting GMAC-CM's rights to require another Letter of Credit if one or more of such covenants are violated at a subsequent date. (c) If, after obtaining the Letter of Credit and prior to its return to Guarantor, one of the covenants set forth in Section 23 below is violated for a second time (when measured at least one hundred twenty (120) days after the date of the first breach), GMAC-CM shall have the right to require Guarantor, within fifteen (15) Business Days of notice thereof by GMAC-CM, to obtain an additional letter of credit or an increase to or supplement of the Letter of Credit so that the face amount of the aggregate Letter of Credit equals fifty percent (50%) of the aggregate Maximum Amount for all Mortgage Loans then outstanding. 9. REBATE TO GUARANTOR. GMAC-CM hereby agrees to pay to Guarantor, commencing on the first day of the second month following the closing of each Mortgage Loan, an amount (the "Guaranty Fee") equal to one-twelfth (1/12) of the product of (i) that amount of interest, if any, as is set forth on the Mortgage Loan Schedule opposite the particular Mortgage Loan to which it applies (the "Guaranty Interest Rate") and (ii) the then-outstanding principal balance of such Mortgage Loan, as and to the extent that (a) GMAC-CM has received all principal, interest, net cash flow, tax and insurance escrows and other sums owing by Mortgagor under such Mortgage Loan through the payment date for the immediately preceding month and (b) GMAC-CM has made no claim against Guarantor under this Guaranty which has not been satisfied in full. Guarantor acknowledges and agrees that the Guaranty Interest Rate is in addition to the interest rate which GMAC-CM would otherwise charge to the Mortgagor, shall be disclosed to the Mortgagor in the Forward Commitment or other document, and the Guaranty Fee represents reasonable consideration to Guarantor for its costs and expenses in providing this Guaranty for the benefit of Mortgagor. Guarantor further acknowledges and agrees that if a claim has been made under this Guaranty but has not been fully satisfied for any reason, or if, for any reason, GMAC-CM has not received from the Mortgagor, by the prior month's payment date, all sums due and payable under such Mortgage Loan, the Guaranty Fee for that Mortgage Loan for that month shall be applied to the Indebtedness and shall not be due and payable to Guarantor unless and until GMAC-CM has received all such delinquent sums from Guarantor and the Mortgagor. Notwithstanding the foregoing, in those circumstances where Guarantor has exercised its option under clause (ii) of Section 7 to become fully liable for the payment of sums owing under a particular Mortgage Loan, to the extent that a Guaranty Fee is received from the Mortgagor for that Mortgage Loan, it shall be retained by GMAC-CM as consideration for GMAC-CM's increased costs of servicing such loan. 10. TERMINATION OF GUARANTY. (a) Except as set forth in clause (b) below, this Guaranty shall be terminated as to a particular Mortgage Loan and Guarantor shall be released from all liability with respect to a particular Mortgage Loan at - 10 - 11 such time as GMAC-CM has notified Guarantor in writing that the related Mortgaged Property has satisfied the Conforming Loan Criteria. GMAC-CM agrees to provide Guarantor with such notice promptly after confirming to GMAC-CM's satisfaction, in its sole discretion, that the Conforming Loan Criteria have been satisfied. (b) This Guaranty shall continue in effect as to all Mortgage Loans which have not satisfied the Conforming Loan Criteria. With respect to each Mortgage Loan which has satisfied the Conforming Loan Criteria, this Guaranty shall continue in effect (i) with respect to all obligations and liabilities of Guarantor under Section 19, and (ii) as provided in Section 12(b). 11. PRIMARY LIABILITY OF GUARANTOR. ------------------------------- (a) This Guaranty is an absolute, irrevocable and unconditional guaranty of payment. Guarantor shall be liable, with respect to each Mortgage Loan for the payment of all indebtedness described herein up to the Maximum Amount applicable to such loan (up to such ceiling, in the aggregate for all Mortgage Loans, the "Guaranteed Obligations"), as set forth in this Guaranty, as a primary obligor. This Guaranty shall be effective as a waiver of, and Guarantor hereby expressly waives, any and all rights to which Guarantor may otherwise have been entitled under any suretyship laws in effect from time to time, including any right or privilege, whether existing under statute, at law or in equity, to require GMAC-CM to take prior recourse or proceedings against any collateral, security or Person whatsoever. (b) Guarantor hereby agrees that in the event of the occurrence of a default of an obligation of Guarantor hereunder which continues beyond applicable notice and grace periods, if any, (individually and collectively an "Event of Default"), then upon the occurrence of such Event of Default, the Guaranteed Obligations, for purposes of this Guaranty, shall be deemed immediately due and payable at the election of GMAC-CM, and Guarantor shall, on demand and without presentment, protest, notice of protest, further notice of nonpayment or of dishonor or of default, or notice of acceleration or of intent to, or any other notice whatsoever, without any notice having been given to Guarantor or Mortgagor previous to such demand of the acceptance by GMAC-CM of this Guaranty, and without any notice having been given to Guarantor or Mortgagor previous to such demand of the creating or incurring of such indebtedness, all such notices being hereby waived by Guarantor, pay all damages and all costs and expenses, up to the then Maximum Amount, that may arise in consequence of any such Event of Default (including any and all costs and expenses incurred by GMAC-CM in connection with the collection and enforcement of this Guaranty or any portion thereof including all reasonable attorneys' fees and expenses, investigation costs, and all court costs, whether or not suit is filed hereon, and it shall not be necessary for GMAC-CM, in order to enforce such payment by Guarantor, first to institute suit or pursue or exhaust any rights or remedies against Mortgagor or others liable on such indebtedness or to institute suit or pursue or exhaust any rights or remedies against Mortgagor and all other Guarantor or other sureties of the Guaranteed Obligations or to enforce any rights against any security that shall ever have been given to secure such indebtedness, or to joint Mortgagor or any others liable for the payment of the Guaranteed Obligations or any part thereof in any action to enforce this Guaranty, or to resort to any other means of obtaining payment of the Guaranteed Obligations; provided, however, except as specifically set forth above, nothing herein contained shall prevent GMAC-CM from suing on the Mortgage Note or foreclosing the Mortgage or from exercising any other rights thereunder, and if such foreclosure or other remedy is availed of, only the net proceeds therefrom, after deduction of all charges and expenses of every kind and nature whatsoever, shall be applied in reduction of the amount due on the Mortgage Note and Mortgage, and GMAC-CM shall not be required to institute or prosecute proceedings to recover any deficiency or alleged breach of non-recourse covenants or conditions as a condition of payment hereunder or enforcement hereof; provided, however, GMAC-CM shall use reasonable efforts, taking into account all facts and circumstances, to recover any Loss amount and remit the same to Guarantor. At any sale of the Mortgaged Property or other collateral given for the Indebtedness or any part thereof, whether by foreclosure or otherwise, GMAC-CM may at its discretion purchase all or any part of the Mortgaged Property or collateral so sold or offered for sale for its own account and may, in payment of the amount bid therefor, deduct such amount from the balance due it pursuant to the terms of the Mortgage Note and Mortgage. - 11 - 12 (c) Suit may be brought or demand may be made against all parties who have signed this Guaranty or any other guaranty covering all or any part of the Guaranteed Obligations, or against any one or more of them, separately or together, without impairing the rights of GMAC-CM against any party hereto. Any time that GMAC-CM is entitled to exercise its rights or remedies hereunder, it may in its discretion elect to demand payment. 12. CERTAIN AGREEMENTS AND WAIVERS BY GUARANTOR. (a) Guarantor hereby agrees that neither GMAC-CM's rights or remedies nor Guarantor's obligations under the terms of this Guaranty shall be released, diminished, impaired, reduced or affected by any one or more of the following events, actions, facts, or circumstances, and the liability of Guarantor under this Guaranty shall be absolute and unconditional irrespective of: (i) any limitation of liability or recourse in any other Loan Document or arising under any law; (ii) any claim or defense that this Guaranty was made without consideration or is not supported by adequate consideration; (iii) the taking or accepting of any other security or guaranty for, or right of recourse with respect to, any or all of the Guaranteed Obligations; (iv) any homestead exemption or any other exemption under applicable law; (v) any release, surrender, abandonment, exchange, alteration, sale or other disposition, subordination, deterioration, waste, failure to protect or preserve, impairment, or loss of, or any failure to create or perfect any lien or security interest with respect to, or any other dealings with, any collateral or security at any time existing or purported, believed or expected to exist in connection with any or all of the Guaranteed Obligations, including any impairment of Guarantor's recourse against any Person or collateral: (vi) whether express or by operation of law, any partial release of the liability of Guarantor hereunder, or if one or more other guaranties are now or hereafter obtained by GMAC-CM covering all or any part of the Guaranteed Obligations, any complete or partial release of any one or more of such guarantors under any such other guaranty, or any complete or partial release or settlement of Mortgagor or any other party liable, directly or indirectly, for the payment of any or all of the Guaranteed Obligations; (vii) the death, insolvency, bankruptcy, disability, dissolution, liquidation, termination, receivership, reorganization, merger, consolidation, change of form, structure or ownership, sale of all assets, or lack of corporate, partnership or other power of Mortgagor or any other party at any time liable for the payment of any or all of the Guaranteed Obligations; (viii) either with or without notice to or consent of Guarantor, except as required under Section 4(d) above: any renewal, extension, modification or rearrangement of the terms of any or all of the Guaranteed Obligations and/or any of the Loan Documents, including material alterations of the terms of payment (including changes in maturity date(s) and interest rate(s)) or performance (including changes in the final plans and specifications and other terms or aspects of construction of the improvements at the Mortgaged Property) or any other terms thereof, or any waiver, termination, or release of, or consent to departure from, any of the Loan Documents or any other guaranty of any or all of the Guaranteed Obligations, or any adjustment, indulgence, forbearance, or compromise that may be -12- 13 granted from time to time by GMAC-CM to Mortgagor, Guarantor, and/or any other Person at any time liable for the payment of any or all of the Guaranteed Obligations: (ix) any neglect, lack of diligence, delay, omission, failure, or refusal of GMAC-CM to take or prosecute (or in taking or prosecuting) any action for the collection or enforcement of any of the Guaranteed Obligations, or to foreclose or take or prosecute any action to foreclose (or in foreclosing or taking or prosecuting any action to foreclose) upon any security therefor, or to exercise (or in exercising) any other right or power with respect to any security therefor, or to take or prosecute (or in taking or prosecuting) any action in connection with any Loan Document, or any failure to sell or otherwise dispose of in a commercially reasonable manner any collateral securing any or all of the Guaranteed Obligations; provided, however, GMAC-CM shall use reasonable efforts, taking into account all facts and circumstances, to recover any Loss amount and to remit the same to Guarantor. (x) any failure of GMAC-CM to notify Guarantor, to the extent required under Section 4(d) above, of any creation, renewal, extension, rearrangement, modification, supplement, subordination, or assignment of the Guaranteed Obligations or any part thereof, or of any Loan Document, or of any release of or change in any security, or of any other action taken or refrained from being taken by GMAC-CM against Mortgagor or any security or other recourse, or of any new agreement between GMAC-CM and Mortgagor, it being understood that GMAC-CM shall not be required to give Guarantor any notice of any kind under any circumstances with respect to or in connection with the Guaranteed Obligations, any and all rights to notice Guarantor may have otherwise had being hereby waived by Guarantor, and Guarantor shall be responsible for obtaining for itself information regarding the Mortgagor, including any changes in the business or financial condition of the Mortgagor, and Guarantor acknowledges and agrees that GMAC-CM shall have no duty to notify Guarantor of any information which the GMAC-CM may have concerning the Mortgagor. (xi) if any requirement for any reason that GMAC-CM is required to refund any payment by Mortgagor to any other party liable for the payment of any or all of the Guaranteed Obligations or pay the amount thereof to someone else; (xii) the making of advances by GMAC-CM to protect its interest in the Mortgaged Property, preserve the value of the Mortgaged Property or for the purpose of performing any term or covenant contained in any of the Loan Documents; (xiii) the existence of any claim, counterclaim, set-off, recoupment, reduction or defense based upon any claim or other right that Guarantor may at any time have against Mortgagor, GMAC-CM, or any other Person, whether or not arising in connection with this Guaranty, the Mortgage Note, the Loan Agreement, or any other Loan Document; (xiv) the unenforceability of all or any part of the Guaranteed Obligations against Mortgagor, whether because the Guaranteed Obligations exceed the amount permitted by law or violate any usury law, or because the act of creating the Guaranteed Obligations, or any part thereof, is ultra vires, or because the officers or Persons creating same acted in excess of their authority, or because of a lack of validity or enforceability of or defect or deficiency in any of the Loan Documents, or because Mortgagor has any valid defense, claim or offset with respect thereto, or because Mortgagor's obligation ceases to exist by operation of law, or because of any other reason or circumstance, it being agreed that Guarantor shall remain liable hereon regardless of whether Mortgagor or any other Person be found not liable on the Guaranteed Obligations, or any part thereof, for any reason (and regardless of any joinder of Mortgagor or any other party in any action to obtain payment of any or all of the Guaranteed Obligations); or -13- 14 (xv) any order, ruling or plan of reorganization emanating from proceedings under Title 11 of the United States Code with respect to Mortgagor or any other Person, including any extension, reduction, composition, or other alteration of the Guaranteed Obligations, whether or not consented to by GMAC-CM. (b) In the event any payment by Mortgagor, Guarantor or any other Person to GMAC-CM is held to constitute a preference, fraudulent transfer or other voidable payment under any bankruptcy, insolvency or similar law, or if for any other reason GMAC-CM is required to refund such payment or pay the amount thereof to any other party, such payment by Mortgagor, Guarantor or any other Person to GMAC-CM shall not constitute a release of Guarantor from any liability hereunder, and this Guaranty shall continue to be effective or shall be reinstated (notwithstanding any prior release, surrender or discharge by GMAC-CM of this Guaranty or of Guarantor), as the case may be, with respect to, and this Guaranty shall apply to, any and all amounts so refunded by GMAC-CM or paid by GMAC-CM to Guarantor or another Person (which amounts shall constitute part of the Guaranteed Obligations), and any interest paid by GMAC-CM and any attorneys' fees, costs and expenses paid or incurred by GMAC-CM in connection with any such event. It is the intent of Guarantor and GMAC-CM that the obligations and liabilities of Guarantor hereunder are absolute and unconditional under any and all circumstances and that until the Guaranteed Obligations are fully and finally paid and performed, and not subject to refund or disgorgement, the obligations and liabilities of Guarantor hereunder shall not be discharged or released, in whole or in part, by any act or occurrence that might, but for the provisions of this Guaranty, be deemed a legal or equitable discharge or release of a guarantor. GMAC-CM shall be entitled to continue to hold this Guaranty in its possession for so long as may be necessary (including any bankruptcy "preference" periods following the satisfaction of all Guaranteed Obligations) to enforce any obligation of Guarantor hereunder and/or to exercise any right or remedy of GMAC-CM hereunder. (c) If acceleration of the time for payment of any amount payable by Mortgagor under the Mortgage Note, the Loan Agreement, or any other Loan Document is stayed or delayed by any law or tribunal, all such amounts shall nonetheless be payable by Guarantor on demand by GMAC-CM. 13. SUBORDINATION. If, for any reason whatsoever, Mortgagor and/or Candlewood is now or hereafter becomes indebted to Guarantor for any payments made under this Guaranty: (a) such indebtedness and all interest thereon and all liens, security interests and rights now or hereafter existing with respect to property of Mortgagor and/or Candlewood securing same shall, at all times, be subordinate in all respects to the Guaranteed Obligations and to all liens, security interests and rights now or hereafter existing to secure the Guaranteed Obligations; (b) Guarantor shall not be entitled to enforce or receive payment, directly or indirectly, of any such indebtedness of Mortgagor and/or Candlewood to Guarantor until the Guaranteed Obligations have been fully and finally paid and performed; (c) Guarantor hereby assigns and grants to GMAC-CM a security interest in all such indebtedness and security therefor, if any, of Mortgagor and/or Candlewood to Guarantor now existing or hereafter arising, including any dividends and payments pursuant to debtor relief or insolvency proceedings referred to below. In the event of receivership, bankruptcy, reorganization, arrangement or other debtor relief or insolvency proceedings involving Mortgagor and/or Candlewood as debtor, GMAC-CM shall have the right to prove its claim in any such proceeding so as to establish its rights hereunder and shall have the right to receive directly from the receiver, trustee or other custodian (whether or not a Default shall have occurred or be continuing under any of the Loan Documents), dividends and payments that are payable upon any obligation of Mortgagor and/or Candlewood to Guarantor now existing or hereafter arising, and to have all benefits of any security therefor, until the Guaranteed Obligations have been fully and finally paid and performed. If, notwithstanding the foregoing provisions. Guarantor should receive any payment, claim or distribution that is prohibited as provided above in this Section, Guarantor shall pay the same to GMAC-CM immediately. Guarantor hereby agreeing that it shall -14- 15 receive the payment, claim or distribution in trust for GMAC-CM and shall have absolutely no dominion over the same except to pay it immediately to GMAC-CM; and (d) Guarantor shall promptly upon request of GMAC-CM from time to time execute such documents and perform such acts as GMAC-CM may require to evidence and perfect its interest and to permit or facilitate exercise of its rights under this Section, including execution and delivery of financing statements, proofs of claim, further assignments and security agreements, and delivery to GMAC-CM of any promissory notes or other instruments evidencing indebtedness of Mortgagor and/or Candlewood to Guarantor. All promissory notes, accounts receivable ledgers or other evidences, now or hereafter held by Guarantor, of obligations of Mortgagor and/or Candlewood to Guarantor shall contain a specific written notice thereon that the indebtedness evidenced thereby is subordinated under and is subject to the terms of this Guaranty. 14. OTHER LIABILITY OF GUARANTOR OR MORTGAGOR. GMAC-CM agrees that, without the prior written consent of Guarantor, GMAC shall not extend to a particular Mortgagor any debt ("Additional Debt") other than the Indebtedness outstanding under the Indebtedness outstanding under the Mortgage Loan to such Mortgagor, provided, however, to the extent that Guarantor has received a Forward Commitment or other written notification regarding any such Additional Debt and has not objected in writing to GMAC-CM prior to the closing of such Additional Debt. Guarantor shall be deemed to have consented to the issuance of such Additional Debt by GMAC-CM. If Guarantor is or becomes liable, by endorsement or otherwise, for any indebtedness owing by Mortgagor to GMAC-CM other than under this Guaranty, such liability shall not be in any manner impaired or affected hereby, and the rights of GMAC-CM hereunder shall be cumulative of any and all other rights that GMAC-CM may have against Guarantor. This Guaranty is independent of (and shall not be limited by) any other guaranty now existing or hereafter given. 15. GMAC-CM ASSIGNS. This Guaranty is for the benefit of GMAC-CM and GMAC-CM's successors and assigns, and in the event of an assignment of the Guaranteed Obligations, or any part thereof, the rights and benefits hereunder, to the extent applicable to the Guaranteed Obligations so assigned, may be transferred with such Guaranteed Obligations. 16. BINDING EFFECT. This Guaranty is binding not only on Guarantor, but also on Guarantor's successors and assigns; provided, however, (a) Guarantor may not, without the prior written consent of GMAC-CM, assign any of its rights, powers, duties or obligations hereunder and (b) Guarantor shall provide prior written notice to GMAC-CM if any of the obligations of Guarantor hereunder are to become binding on a successor to Guarantor. 17. GOVERNING LAW; FORUM. This Guaranty is an agreement executed under seal, and its validity, enforcement, and interpretation, shall for all purposes be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania and applicable United States federal law, and is intended to be performed in accordance with, and only to the extent permitted by, such laws. If any Guarantor is a corporation, the designation "(SEAL)" on this Guaranty shall be effective as the affixing of such Guarantor's corporate seal physically to this Guaranty. All obligations of Guarantor hereunder are payable and performable at the place or places where the Guaranteed Obligations are payable and performable. Guarantor hereby irrevocably submits generally and unconditionally for Guarantor and in respect of Guarantor's property to the jurisdiction of any state court, or any United States federal court, sitting in the state specified in the first sentence of this Section and to the jurisdiction of any state or United States federal court sitting in the state in which any of the Mortgaged Property is located, over any suit, action or proceeding arising out of or relating to this Guaranty or the Guaranteed Obligations. Guarantor hereby irrevocably waives, to the fullest extent permitted by law, any objection that Guarantor may now or hereafter have to the laying of venue in any such court and any claim that any such court is an inconvenient forum. Guarantor hereby agrees and consents that, in addition to any methods of service of process provided for under applicable law, all service of process in any such suit, action or proceeding in any state court, or any United States federal court, sitting in the state specified in the first sentence of this Section may be made by certified or registered mail, return receipt requested, directed to Guarantor at the address set forth at the end of this Guaranty, or at a subsequent address of which GMAC-CM received actual notice from Guarantor in accordance with said Section, and service so made shall be complete when received or -15- 16 when delivery is refused by Guarantor. Nothing herein shall affect the right of GMAC-CM to serve process in any manner permitted by law or limit the right of GMAC-CM to bring proceedings against Guarantor in any other court or jurisdiction. 18. INVALIDITY OF CERTAIN PROVISIONS. If any provision of this Guaranty or the application thereof to any Person or circumstance shall, for any reason and to any extent, be declared to be invalid or unenforceable, neither the remaining provisions of this Guaranty nor the application of such provision to any other Person or circumstance shall be affected thereby, and the remaining provisions of this Guaranty, or the applicability of such provision to other Persons or circumstances, as applicable, shall remain in effect and be enforceable to the maximum extent permitted by applicable law. 19. ATTORNEYS' FEES AND COSTS OF COLLECTION. Guarantor acknowledges that the Maximum Amount of the Guaranteed Obligations shall be increased by all fees, costs, interest and other sums described in this Section. Guarantor shall pay on demand all attorneys' fees and all other costs and expenses incurred by GMAC-CM in the enforcement of or preservation of GMAC-CM's rights under this Guaranty including all reasonable attorneys' fees and expenses, investigation costs, and all court costs, whether or not suit is filed herein, or whether at maturity or by acceleration, or whether before or after maturity, or whether in connection with bankruptcy, insolvency or appeal, or whether in connection with the collection and enforcement of this Guaranty against any other Guarantor, if there be more than one. Guarantor agrees to pay interest on (i) any Guaranteed Obligations not paid when due in accordance with the provisions of this Guaranty, and (ii) any expenses or other sums due to GMAC-CM under this Section that are not paid when due, in each case at an annual rate equal to three percent (3%) over the prime rate published from time to time by The Wall Street Journal. Guarantor's obligations and liabilities under this Section shall survive any payment or discharge in full of the Guaranteed Obligations. Notwithstanding the foregoing, it is understood and agreed, in the event that Guarantor is the prevailing party in any suit between GMAC-CM and Guarantor, (a) GMAC-CM shall not be entitled to collect its attorneys' fees, expenses, investigation costs or court costs from Guarantor and (b) GMAC-CM shall reimburse Guarantor for its reasonable attorneys' fees, expenses, investigation costs and court costs related to such suit. 20. PAYMENTS. All sums payable under this Guaranty shall be paid in lawful money of the United States of America that at the time of payment is legal tender for the payment of public and private debts. 21. CONTROLLING AGREEMENT. It is not the intention of GMAC-CM or Guarantor to obligate Guarantor to pay interest in excess of that lawfully permitted to be paid by Guarantor under applicable law. Should it be determined that any portion of the Guaranteed Obligations or any other amount payable by Guarantor under this Guaranty constitutes interest in excess of the maximum amount of interest that Guarantor, in Guarantor's capacity as guarantor, may lawfully be required to pay under applicable law, the obligation of Guarantor to pay such interest shall automatically be limited to the payment thereof in the maximum amount so permitted under applicable law. The provisions of this Section shall override and control all other provisions of this Guaranty and of any other agreement between Guarantor and GMAC-CM. 22. REPRESENTATIONS, WARRANTIES, AND GENERAL COVENANTS OF GUARANTOR. Guarantor hereby represents, warrants, and covenants that (a) Guarantor owns a substantial equity interest in Candlewood and Guarantor will derive a material and substantial benefit, directly or indirectly, from the agreement of GMAC-CM to issue the Forward Commitment; (b) this Guaranty is duly authorized and valid, and is binding upon and enforceable against Guarantor; (c) Guarantor is not, and the execution, delivery and performance by Guarantor of this Guaranty will not cause Guarantor to be, in violation of or in default with respect to any law or in default (or at risk of acceleration of indebtedness) under any agreement or restriction by which Guarantor is bound or affected; (d) Guarantor is duly organized, validly existing, and in good standing under the laws of the state of its organization and has full power and authority to enter into and perform this Guaranty; (e) Guarantor will indemnify GMAC-CM from any loss, cost or expense as a result of any representation or warranty of Guarantor being false, incorrect, incomplete or misleading in any material respect; (f) there is no litigation pending or, to the knowledge of Guarantor, threatened before or by any tribunal against or affecting Guarantor which would -16- 17 materially and adversely affect its ability to perform hereunder; (g) all financial statements and information heretofore furnished to GMAC-CM by Guarantor do, and all financial statements and information hereafter furnished to GMAC-CM by Guarantor will, fairly present the condition (financial or otherwise) of Guarantor as of their dates and the results of Guarantor's operations for the periods therein specified; (h) after giving effect to this Guaranty, Guarantor is solvent, is not engaged or about to engage in business or a transaction for which the property of Guarantor is an unreasonably small capital, and does not intend to incur or believe that it will incur debts that will be beyond its ability to pay as such debts mature; (i) Guarantor acknowledges that, except to the extent set forth in the Participation Agreement, GMAC-CM has no duty at any time to investigate or inform Guarantor of the financial or business condition or affairs of Mortgagor or any change therein; (j) Guarantor acknowledges and agrees that Guarantor may be required to pay and perform the Guaranteed Obligations in full without assistance or support from the Mortgagor or any other Person; (k) Guarantor has read and fully understands the provisions contained in the Forward Commitment (including without limitation, the Approved Project Costs described therein) and in the Mortgage Note, the Building Loan Agreement, the Mortgage, the Environmental Indemnity, and the other Mortgage Loan Documents; and (l) unless Guarantor has notified GMAC-CM in writing prior to the execution of any Forward Commitment for a particular Mortgage Loan. Jack P. DeBoer has not been fired from and remains a senior officer of Candlewood, with significant day to day decision-making authority. Guarantor's representations, warranties and covenants are a material inducement to GMAC-CM to enter into the Forward Commitment and shall survive the execution hereof and any bankruptcy, foreclosure, transfer of security or other event affecting Mortgagor, Guarantor, any other party, or any security for all or any part of the Guaranteed Obligations. 23. FINANCIAL COVENANTS. Guarantor hereby covenants and agrees that so long as any of the Guaranteed Obligations remain unpaid: (a) MINIMUM NET WORTH. Guarantor shall not permit its Net Worth to be less than $154 million; (b) DEBT TO NET WORTH. Guarantor shall not permit the ratio of its Debt to Net Worth to exceed 2-1/2:1; (c) CASH FLOW FROM OPERATIONS. Guarantor shall not permit its Net Cash Provided By Operating Activities, as reflected in its financial statements, whether audited or unaudited, reported from time to time with the U.S. Securities and Exchange Commission, to be negative for any fiscal year or for any two (2) successive calendar quarters; and (d) MATERIAL ADVERSE CHANGE. Guarantor shall not permit a change in its financial condition which could materially and adversely affect its ability to satisfy any or all of the Guaranteed Obligations hereunder; provided, however, this covenant shall not have been breached or violated unless and until (i) within thirty (30) days after written notice by GMAC-CM to Guarantor of a potential material adverse change, Guarantor has not provided to GMAC-CM a reasonable written explanation regarding why such event should not be considered a material adverse change, (ii) GMAC-CM has determined, and has notified Guarantor, within thirty (30) days of receipt of Guarantor's explanation, that such explanation is not satisfactory to allay GMAC-CM's concerns regarding the material adverse change, and (iii) within sixty (60) days of such second notice from GMAC-CM, Guarantor has not cured such adverse event or provided alternative comfort satisfactory to GMAC-CM regarding the same. Breach of one or more of the foregoing covenants will not constitute an Event of Default of Guarantor hereunder, provided Guarantor timely performs its obligations under Section 8(b) and, when applicable, Section 8(c) above. From and after such time, if any, as Guarantor is no longer a corporation whose stock is publicly traded, Guarantor covenants and agrees to promptly provide to GMAC-CM annual financial statements for Guarantor, -17- 18 audited by an independent public accounting firm reasonably acceptable to GMAC-CM, together with such additional financial information and reports as GMAC-CM may periodically request. 24. NOTICES. All notices, requests, consents, demands and other communications required or which any party desires to give hereunder or under any other Loan Document shall be in writing and, unless otherwise specifically provided in such other Loan Document, shall be deemed sufficiently given or furnished if delivered by personal delivery, by courier, or by registered or certified United States mail, postage prepaid, addressed to the party to whom directed at the addresses specified near the signature blocks of this Guaranty (unless changed by similar notice in writing given by the particular party whose address is to be changed) or by telegram, telex, or facsimile. Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of courier or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or, in the case of telegram, telex or facsimile, upon receipt, provided that, service of a notice required by any applicable statute shall be considered complete when the requirements of that statute are met. Notwithstanding the foregoing, no notice of change of address shall be effective except upon actual receipt. This section shall not be construed in any way to affect or impair any waiver of notice or demand provided in this Guaranty or in any Loan Document or to require giving of notice or demand to or upon any person in any situation or for any reason. 25. CUMULATIVE RIGHTS. The exercise by GMAC-CM of any right or remedy hereunder or under any other Loan Document, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. GMAC-CM shall have all rights, remedies and recourses afforded to GMAC-CM by reason of this Guaranty or any other Loan Document or by law or equity or otherwise; and the same (a) shall be cumulative and concurrent, (b) may be pursued separately, successively or concurrently against Guarantor or others obligated for the Guaranteed Obligations, or any part thereof, or against any one or more of them, or against any security or otherwise, at the sole discretion of GMAC-CM, (c) may be exercised as often as occasion therefor shall arise, it being agreed by Guarantor that the exercise of, discontinuance of the exercise of or failure to exercise any of such rights, remedies, or recourses shall in no event be construed as a waiver or release thereof or of any other right remedy, or recourse, and (d) are intended to be, and shall be, nonexclusive. No waiver of any default on the part of Guarantor or of any breach of any of the provisions of this Guaranty or of any other document shall be considered a waiver of any other or subsequent default or breach, and no delay or omission in exercising or enforcing the rights and powers granted herein or in any other document shall be construed as a waiver of such rights and powers, and no exercise or enforcement of any rights or powers hereunder or under any other document shall be held to exhaust such rights and powers, and every such right and power may be exercised from time to time. The granting of any consent, approval or waiver by GMAC-CM shall be limited to the specific instance and purpose therefor and shall not constitute consent or approval in any other instance or for any other purpose. No notice to or demand on Guarantor in any case shall of itself entitle Guarantor to any other or further notice or demand in similar or other circumstances. No provision of this Guaranty or any right, remedy or recourse of GMAC-CM with respect hereto, or any default or breach, can be waived, nor can this Guaranty or Guarantor be released or discharged in any way or to any extent, except specifically in each case by a writing intended for that purpose (and which refers specifically to this Guaranty) executed, and delivered to Guarantor, by GMAC-CM. 26. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any default in the payment when due of any of the Guaranteed Obligations, GMAC-CM is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, without notice to any Person (any such notice being expressly waived by Guarantor to the fullest extent permitted by applicable law), to set off and apply any and all deposits, funds, or assets at any time held and other indebtedness at any time owing by GMAC-CM to or for the credit or the account of Guarantor against any and all of the obligations of Guarantor now or hereafter existing under this Guaranty, whether or not GMAC-CM shall have made any demand under this Guaranty or exercised any other right or remedy hereunder. GMAC-CM will promptly notify Guarantor after any such set-off and application made by GMAC-CM, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of GMAC-CM under this Section are in addition to the other rights and remedies -18- 19 (including other rights of set-off) that GMAC-CM may have and every right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by an instrument in writing executed by GMAC-CM. The foregoing rights shall not apply to any commercial paper or publicly traded debt or securities of GMAC-CM held by Guarantor. 27. SUBROGATION. Notwithstanding anything to the contrary contained herein but subject to the provisions of Section 6(c) hereof, (a) Guarantor shall not have any right of subrogation in or under any of the Loan Documents or any right, title or interest in and to any security or right of recourse for the Indebtedness, until the Indebtedness has been fully and finally paid, and as set forth in the Participation Agreement. Guarantor's participation in a Mortgage Loan will be fully subordinate to GMAC-CM's interests therein, and (b) if Guarantor is or becomes an "insider" (as defined in Section 101 of the United States Bankruptcy Code) with respect to Mortgagor, then Guarantor hereby irrevocably and absolutely waives any and all rights of contribution, indemnification, reimbursement or any similar rights against Mortgagor with respect to this Guaranty (including any right of subrogation, except to the extent of collateral held by GMAC-CM), whether such rights arise under an express or implied contract or by operation of law. It is the intention of the parties that Guarantor shall not be deemed to be a "creditor" (as defined in Section 101 of the United States Bankruptcy Code) of Mortgagor by reason of the existence of this Guaranty in the event that Mortgagor or Guarantor becomes a debtor in any proceeding under the United States Bankruptcy code. This waiver is given to induce GMAC-CM to make the Loan as evidenced by the Mortgage Note to the Mortgagor. 28. FURTHER ASSURANCES. Guarantor at Guarantor's expense will promptly execute and deliver to GMAC-CM upon GMAC-CM's reasonable request all such other and further documents, agreements, and instruments in compliance with or accomplishment of the agreements of Guarantor under this Guaranty. Notwithstanding the generality of the foregoing, Guarantor agrees to promptly execute and deliver a written confirmation of this Guaranty at the request of GMAC-CM from time to time, including at such times as GMAC-CM has extended, renewed, supplemented, modified or assigned the Loan. 29. NO FIDUCIARY RELATIONSHIP. The relationship between Guarantor and GMAC-CM is solely that of guarantor and beneficiary. GMAC-CM has no fiduciary or other special relationship with or duty to Guarantor and none is created hereby or may be inferred from any course of dealing or act or omission of GMAC-CM. 30. INTERPRETATION. If this Guaranty is signed by more than one Person as "Guarantor", then the term "Guarantor" as used in this Guaranty shall refer to all such Persons jointly and severally, and all promises, agreements, covenants, waivers, consents, representations, warranties and other provisions in this Guaranty are made by and shall be binding upon each and every such undersigned Person, jointly and severally and GMAC-CM may pursue any Guarantor hereunder without being required (i) to pursue any other Guarantor hereunder or (ii) pursue rights and remedies under the Mortgage and/or applicable law with respect to the Mortgaged Property or any other Mortgage Loan Documents. The term "GMAC-CM" shall be deemed to include any subsequent holder(s) of the Mortgage Note. Whenever the context of any provisions hereof shall require it, words in the singular shall include the plural, words in the plural shall include the singular, and pronouns of any gender shall include the other genders. Captions and headings in the Loan Documents are for convenience only and shall not affect the construction of the Mortgage Loan Documents. All references in this Guaranty to Schedules, Articles, Sections, Subsections, paragraphs and subparagraphs refer to the respective subdivisions of this Guaranty, unless such reference specifically identifies another document. The terms "herein", "hereof", "hereto", "hereunder" and similar terms refer to this Guaranty and not to any particular Section or subsection of this Guaranty. The terms "include" and "including" shall be interpreted as if followed by the words "without limitation". All references in this Guaranty to sums denominated in dollars or with the symbol "$" refer to the lawful currency of the United States of America, unless such reference specifically identifies another currency. For purposes of this Guaranty, "Person" or "Persons" shall include firms, associations, partnerships (including limited partnerships), joint ventures, trusts, corporations, limited liability companies, and other legal entities, including governmental bodies, agencies, or instrumentalities, as well as natural persons. -19- 20 31. TIME OF ESSENCE. Time shall be of the essence in this Guaranty with respect to all of Guarantor's obligations hereunder. 32. EXECUTION. This Guaranty may be executed in multiple counterparts, each of which, for all purposes, shall be deemed an original, and all of which together shall constitute one and the same agreement. 33. ENTIRE AGREEMENT. This Guaranty embodies the entire agreement between GMAC-CM and Guarantor with respect to the guaranty by Guarantor of the Guaranteed Obligations. This Guaranty supersedes all prior agreements and understandings, if any, with respect to guaranty by Guarantor of the Guaranteed Obligations. No condition or conditions precedent to the effectiveness of this Guaranty exist. This Guaranty shall be effective upon execution by Guarantor and delivery to GMAC-CM. This Guaranty may not be modified, amended or superseded except in a writing signed by GMAC-CM and Guarantor referencing this Guaranty by its date and specifically identifying the portions hereof that are to be modified, amended or superseded. 34. WAIVER OF JURY TRIAL. GMAC-CM AND GUARANTOR HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH GUARANTOR AND GMAC-CM MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH, OR IN ANY WAY PERTAINING TO, THIS GUARANTY. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY GUARANTOR AND GMAC-CM, AND GUARANTOR AND GMAC-CM HEREBY REPRESENT, EACH ON ITS RESPECTIVE BEHALF, THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GUARANTOR AND GMAC-CM FURTHER REPRESENT AND WARRANT, EACH ON ITS RESPECTIVE BEHALF, THAT EACH HAS BEEN REPRESENTED IN THE SIGNING OF THIS GUARANTY AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED BY INDEPENDENT LEGAL COUNSEL SELECTED OF EACH PARTY'S RESPECTIVE FREE WILL, AND THAT EACH HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. 35. CONSENT TO JURISDICTION. GMAC and Guarantor each irrevocably submit generally and unconditionally for itself and in respect of its property to the nonexclusive jurisdiction of any state or federal court sitting in the Commonwealth of Pennsylvania over any suit, action or proceeding arising out of, or relating to, this Guaranty, and irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such state or federal court. GMAC and Guarantor irrevocably waive, to the fullest extent permitted by law, any objection that each may now or hereafter have to the laying of venue of any such suit, action or proceeding brought in any such court, and any claims that any such suit, action or proceeding is brought in an inconvenient forum. Final judgment in any such suit, action or proceeding brought in any such court shall be conclusive and binding upon GMAC and Guarantor and may be enforced in any court in which GMAC and Guarantor are subject to jurisdiction, by a suit upon such judgment provided that service of process is effected upon Guarantor as permitted by applicable law. THIS GUARANTY REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. - 20 - 21 IN WITNESS WHEREOF, Guarantor and GMAC-CM duly executed this Guaranty under seal as of the date first written above. Address of Guarantor DOUBLETREE CORPORATION, a Delaware corporation 410 N. 44th St. By: /s/ David L. Stivers - --------------------------- -------------------------------------- Suite 700 Name: David L. Stivers - --------------------------- -------------------------------- Phoenix, AZ 85008 Title: Senior Vice President - --------------------------- -------------------------------- GMAC Commercial Mortgage GMAC-COMMERCIAL MORTGAGE CORPORATION, a Corporation California corporation 8614 Westwood Center Drive Suite 630 Vienna, Virginia 22182-2233 Attn: David B. Post Fax No. (703) 749-4399 By: /s/ David B. Post ----------------------------------------- Name: David B. Post ------------------------------------ Title: Senior Vice President ----------------------------------- EX-11.1 12 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 DOUBLETREE CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands except per share data)
1994 1995 1996 ----------------- ----------------- ----------------- Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ------- ------- ------- ------- ------- ------- Net Income $13,235 $13,235 $17,791 $17,791 $25,934 $25,934 ======= ======= ======= ======= ======= ======= Weighted average shares outstanding 19,953 19,953 21,901 21,901 25,088 25,088 Additional number of common share equivalents assuming exercise of options and warrants 118 123 318 480 678 911 ------- ------- ------- ------- ------- ------- Weighted average common and common equivalent shares outstanding 20,071 20,076 22,219 22,381 25,766 25,999 ------- ------- ------- ------- ------- ------- Effect of other contingent issuances of common shares(1) -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- Weighted average shares outstanding assuming full dilution 20,071 20,076 22,219 22,381 25,766 25,999 ======= ======= ======= ======= ======= ======= Earnings per share $ 0.66 $ 0.66 $ 0.80 $ 0.79 $ 1.01 $ 1.00 ======= ======= ======= ======= ======= =======
(1) The Company has no outstanding securities or agreements which would result in the issuance of common shares other than common share equivalents. EX-21.1 13 SUBSIDIARIES OF DOUBLETREE CORPORATION 1 EXHIBIT 21.1 SUBSIDIARIES OF DOUBLETREE CORPORATION 1. Samantha Hotel Corporation, a Delaware corporation 2. RFS, Inc., a Tennessee corporation 3. Doubletree Partners, a Delaware general partnership 4. Doubletree Hotels Corporation, an Arizona corporation 5. Doubletree of Phoenix, Inc., a Delaware corporation 6. INNCO Corporation, an Arizona corporation 7. HOSCO Corporation, an Arizona corporation 8. DT Management, Inc., an Arizona corporation 9. DT Real Estate, Inc., an Arizona corporation 10. Doubletree Hotel Systems, Inc., an Arizona corporation 11. Harbor Hotels Corporation, a Delaware corporation 12. DTM Burlingame, Inc., an Arizona corporation 13. Red Lion Hotels, Inc., a Delaware corporation EX-23.1 14 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Doubletree Corporation: We consent to incorporation by reference in the registration statement (no. 333-23619) on Form S-3 and registration statements (no. 333-18219) and (no. 33-92354) on Form S-8 of Doubletree Corporation and (no. 333-08237) of Red Lion of our report dated March 17, 1997, relating to the consolidated balance sheets of Doubletree Corporation and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Doubletree Corporation. KPMG Peat Marwick LLP Phoenix, Arizona March 28, 1997 EX-24.1 15 POWERS OF ATTORNEY 1 EXHIBIT 24.1 POWERS OF ATTORNEY FOR 10-K DIRECTORS: Fatt, William R. Ferris, Richard J. Frey, Dale F. Gamey, Ronald K. Gilhuly, Edward A. Leventhal, Norman B. Michelson, Michael W. Myers, John H. Ueberroth, Peter V. 2 POWER OF ATTORNEY William R. Fatt does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ William R. Fatt --------------------------------- William R. Fatt 3 POWER OF ATTORNEY Richard J. Ferris does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ Richard J. Ferris --------------------------------- Richard J. Ferris 4 POWER OF ATTORNEY Dale F. Frey does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Doubletree Corporation and Red Lion Inns Limited Partnership Form 10-K Annual Reports for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ Dale F. Frey --------------------------- Dale F. Frey 5 POWER OF ATTORNEY Ronald K. Gamey does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ Ronald K. Gamey --------------------------- Ronald K. Gamey 6 POWER OF ATTORNEY Edward A. Gilhuly does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ Edward A. Gilhuly -------------------------------- Edward A. Gilhuly 7 POWER OF ATTORNEY Norman B. Leventhal does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Doubletree Corporation and Red Lion Inns Limited Partnership Form 10-K Annual Reports for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ Norman B. Leventhal ----------------------------------- Norman B. Leventhal 8 POWER OF ATTORNEY Michael W. Michelson does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ Michael W. Michelson ---------------------------------- Michael W. Michelson 9 POWER OF ATTORNEY John H. Myers does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ John H. Myers ---------------------------- John H. Myers 10 POWER OF ATTORNEY Peter V. Ueberroth does hereby constitute and appoint David L. Stivers and William L. Perocchi, his true and lawful attorneys-in-fact and agents, with full power of substitution, whether acting individually or together, to sign the Form 10-K Annual Report for the fiscal year ended December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and any amendments thereto, on his behalf, and to file the same, with any exhibits thereto and other documents in connection therewith, granting to each of such attorneys-in-fact and agents full power and authority to do and perform each and every act requisite and necessary in connection with such matters and hereby ratifying and confirming all that each of such attorneys-in-fact and agents or his or her substitutes may do or cause to be done by virtue hereof. Such Power of Attorney shall remain in effect until it is revoked in writing by the undersigned. /s/ Peter V. Ueberroth ---------------------- Peter V. Ueberroth EX-27.1 16 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 25,588 691 120,759 (326) 0 87,662 643,393 (7,920) 1,730,949 148,068 506,235 0 0 396 801,134 1,730,949 13,756 310,496 13,042 263,810 0 142 6,648 39,896 13,962 25,934 0 0 0 25,934 1.01 1.01
EX-99.1 17 AGREEMENT TO FURNISH EXHIBITS AND SCHEDULES 1 EXHIBIT 99.1 AGREEMENT TO FURNISH EXHIBITS AND SCHEDULES The Registrant hereby agrees to furnish supplementally to the Securities and Exchange Commission, upon its request, a copy of any of the exhibits and schedules to the Exhibits to the Form 10-K. Each of such Exhibits to the Form 10-K sets forth a brief description of each exhibit and schedule. 2 -----END PRIVACY-ENHANCED MESSAGE-----