<PAGE> 1
As filed with the Securities and Exchange Commission on September 13, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CANDLEWOOD HOTEL COMPANY, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 7011 48-1188025
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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LAKEPOINT OFFICE PARK
9342 EAST CENTRAL
WICHITA, KANSAS 67206
(316) 631-1300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------------------
WARREN D. FIX
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
LAKEPOINT OFFICE PARK
9342 EAST CENTRAL
WICHITA, KANSAS 67206
(316) 631-1300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------------
Copies to:
THOMAS W. DOBSON KENDALL BISHOP
CHARLES K. RUCK ALLISON KELLER
LATHAM & WATKINS O'MELVENY & MYERS LLP
650 TOWN CENTER DRIVE, 20TH FLOOR 1999 AVENUE OF THE STARS, SUITE 700
COSTA MESA, CALIFORNIA 92626 LOS ANGELES, CALIFORNIA 90067
-------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
-------------------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
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Common Stock, par value
$.01 per share $ $57,500,000 $19,828
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(1) Includes shares which the Underwriters have the option to
purchase from the Company to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee
pursuant to Rule 457(a).
-------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 1996
SHARES
[CANDLEWOOD LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold
by Candlewood Hotel Company, Inc. (the "Company"). Prior to this offering (the
"Offering"), there has been no public market for the Common Stock of the
Company. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Application has been made for quotation on the Nasdaq National Market under the
symbol "CNDL."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURI-
TIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share............................ $ $ $
Total(3)............................. $ $ $
================================================================================
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $550,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $ , the Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject any order in whole or in part. It is expected that the
delivery of certificates representing the shares will be made against payment
therefor at the office of Montgomery Securities on or about , 1996.
-------------------------------
MONTGOMERY SECURITIES SCHRODER WERTHEIM & CO.
, 1996
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE> 4
[Graphics]
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IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, ON THE
OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Except as otherwise noted, all information in this
Prospectus assumes (i) the consummation of the Reorganization (as defined
herein), (ii) no exercise of the Underwriters' over-allotment option and (iii)
an initial offering price of $ per share (the midpoint of the range set
forth on the cover of this Prospectus). Unless the context otherwise indicates,
all references herein to the Company refer to Candlewood Hotel Company, Inc.,
together with its subsidiaries, after giving effect to the Reorganization. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
THE COMPANY
Candlewood Hotel Company, Inc. is in the business of developing, owning,
operating and franchising Candlewood extended-stay hotels. Candlewood hotels and
their amenities are designed to appeal particularly to business travelers
seeking extended-stay accommodations by combining the convenience of a hotel
with many of the comforts of an apartment and providing well appointed, high
quality lodging at affordable prices. Through the rapid development and
franchising of Candlewood hotels, the Company's goal is to capitalize on an
underserved demand for mid-priced extended-stay hotels and to develop a leading
national brand within that segment of the extended-stay market, which the
Company believes is characterized by average daily rates of approximately $40 to
$60.
As of the date of this Prospectus, the Company owns and operates one
Candlewood hotel and is constructing two additional hotels that are expected to
open in the first quarter of 1997. In 1997, the Company's objective is to open
up to 14 Company-owned hotels and to begin construction of up to 18 additional
Company-owned hotels. In pursuing this objective, the Company has 17 potential
sites under contract, has 19 potential sites under letter of intent and has made
offers on 33 additional sites. In addition, the Company is developing a
nationwide franchising program, and as part of that program has entered into
multi-hotel development agreements with two developers which currently grant the
developers the right to franchise an additional 44 Candlewood hotels over the
next three years.
The Company believes that the experience of its senior management team
will be instrumental in executing its growth strategy. Jack P. DeBoer, the
Company's founder, Chairman and President, is credited by the lodging industry
with creating the extended-stay concept. Mr. DeBoer founded the Residence Inn
chain and co-founded Summerfield Hotel Corporation, developing and franchising a
total of 116 extended-stay hotels under those two brands. This background has
provided Mr. DeBoer with numerous contacts among potential franchisees,
representatives from the construction industry and other leaders in the
hospitality industry.
The Company expects to derive substantial benefits from its strategic
alliance with Doubletree Corporation ("Doubletree"). Doubletree has agreed to
extend a five-year $15 million subordinated credit facility to the Company, of
which $9 million had been funded as of August 31, 1996. Doubletree has also
agreed to guarantee a portion of construction loans and long-term financing that
the Company has arranged for itself and its franchisees. The Company believes it
will benefit from Doubletree's central reservation system, in-room video and
service arrangement and bulk purchasing discounts on phone rates and
supplies. Candlewood also believes it will benefit from Doubletree's management
resources, extensive knowledge of local markets, and established insurance and
employee benefit programs. Doubletree is a leading hotel management company that
managed, leased or franchised 178 hotels in 31 states, the District of Columbia
and Mexico as of June 30, 1996.
The standard Candlewood hotel will contain approximately 80-131 rooms,
comprised of studios and king suites both of which contain business and other
amenities consistent with amenities found in upscale, full-service hotels. The
studios have been designed as spacious, well-appointed rooms which the Company
believes are larger than most full-service hotel rooms. Up to 25% of the rooms
in a standard Candlewood hotel may be two-room king suites designed to
accommodate guests who are willing to pay a premium rate for a bedroom separated
from the kitchen and office area. The Company believes king suites will increase
the average daily rate and the average length of stay.
The majority of extended-stay hotels are either in the upscale sector of
the market, such as Residence Inn, Homewood Suites, Hawthorn Suites and
Summerfield Suites (most with average daily rates in excess of $80), or the
budget sector, such as Suburban Lodge, Extended Stay America, Homestead Village
and Villager Lodge (most with average daily rates less than
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<PAGE> 6
$35). The Company believes that these brands do not meet the needs of a large
number of travelers who desire well appointed, high quality, spacious
accommodations with full kitchens, but with room rates in the mid-priced segment
of the extended-stay market. The Company believes that Candlewood hotels will
accommodate this underserved segment of the extended-stay market. In addition,
the Company believes that the high quality of Candlewood hotels relative to
their moderate daily rate will attract certain guests who otherwise would stay
at traditional hotels. The Company anticipates that the average daily rate at
Candlewood hotels will be approximately $45-$55 per studio, which is
significantly lower than full-service hotels with comparable room features and
amenities and generally competitive with traditional limited-service hotels that
do not offer the high quality appointments and amenities of the Company's rooms.
Accordingly, the Company believes that Candlewood hotels will be particularly
attractive to business travelers, including professionals on temporary work
assignment, consultants, travelers conducting or participating in training
seminars, and government employees.
The Company has launched a national franchising program which it believes
will accelerate the establishment of its market presence and brand awareness on
a national level, generate incremental revenues at an attractive margin, attract
franchisees and create opportunities to obtain management contracts with respect
to franchised properties. The Company intends to pursue its franchising program
not only through the sale of individual or single-site franchises, but also
through entering into development agreements under which the Company will grant
the right to construct Candlewood hotels in an exclusive geographic territory in
exchange for the franchisee's execution of a specified number of franchise
agreements and construction of hotels pursuant to a development schedule. As of
August 31, 1996, the Company had executed two development agreements with two
developers, which currently grant the developers the right to franchise 15
Candlewood hotels in 1996, 13 Candlewood hotels in 1997, 13 Candlewood hotels in
1998 and three Candlewood hotels in 1999.
The Company believes that guests will find a combination of the following
factors differentiate the Candlewood brand from other extended-stay hotels:
- - Upscale Accommodations at Moderate Prices. Candlewood hotels offer upscale
accommodations at competitive rates within the mid-priced extended-stay
market which the Company believes will be attractive to guests staying six
nights or longer.
- - Amenities for Business Travelers. Each Candlewood studio and king suite
will offer amenities designed to accommodate the needs of the business
traveler, such as two phones with two incoming direct dial phone lines and
computer connections, an oversized wooden desk with a quad-outlet to
accommodate office equipment needs, an executive chair, a bulletin board,
a guest chair and personalized phone mail.
- - High-Quality, Extended-Stay Features. Each Candlewood room will contain a
25-inch television, video cassette player, compact disc player, an iron
and ironing board and a fully equipped kitchen, including a full-size
refrigerator, full-size microwave oven, dishwasher, two burner stovetop,
coffee maker, toaster, and a complete set of utensils and cookware. Also,
each Candlewood hotel will be equipped with an exercise room, a guest
laundry facility and a convenient dry cleaning drop with same-day service.
- - Value Priced Features. Candlewood hotels will offer complimentary use of
laundry facilities, free local calls, $0.15-per- minute long distance
telephone calls and the self-service "Candlewood Cupboard," featuring
value-priced packaged foods and $0.25 beverages. Each Candlewood guest
will receive a free "First-Night Kit" complete with items such as
breakfast bars, coffee and popcorn.
The Company believes that a combination of the following factors make
Candlewood a more attractive brand choice for franchisees and investors compared
to other extended-stay brands:
- - Operating Efficiencies. By employing only six to eight full-time employees
and one part-time employee at each Candlewood hotel, the Company believes
that it will minimize operating costs. Each hotel will be equipped with
technology that will allow guests to check-in and check-out without the
assistance of hotel employees.
- - Strength of Management and Staff. In addition to Mr. DeBoer's extensive
experience in the extended-stay lodging industry, the Company has
developed the management infrastructure necessary to pursue each of its
strategies, including the formation of internal real estate, construction,
marketing, operations and franchising divisions.
- - Strategic Alliance with Doubletree. The Company has a strategic alliance
with Doubletree through which the Company and its franchisees are expected
to be able to take advantage of Doubletree's purchasing power, national
reservation system and financial support.
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- - Sales Organization. The Company has established a sales and marketing
division which, together with a dedicated on-site direct-sales employee at
each hotel, will target institutions and employers in areas proximate to
its hotels.
- - Standard Design and Low Construction Costs. The Company expects that all
Candlewood hotels, including hotels owned by its franchisees, will be
designed and built according to uniform plans and specifications and
pursuant to standard construction contracts. The Company believes that
standardization will lower construction costs and establish consistent
quality thereby enhancing its customers' loyalty and its ability to
establish a national brand. The Company has identified and approved three
major contractors in the United States, each of whom has agreed to
cost-plus contracts with a ceiling on total expense.
- - Franchisee Financing. The Company has arranged with a third party lender
to provide construction loans and long-term financing for up to 80% of the
cost of franchised hotels, subject to approval by the Company and the
lender on an individual property basis. The Company expects that the
availability of this financing will expedite and provide added certainty
to the development process by permitting the Company's franchisees to
devote more of their time to constructing, opening and operating their
hotels. Doubletree has agreed to guarantee certain portions of the loans
made to the Company's franchisees under this arrangement.
THE REORGANIZATION
The Company was incorporated in August 1996 to succeed to the business of
Candlewood Hotel Company, L.L.C., a Delaware limited liability company
("Candlewood LLC"), in anticipation of the Offering. Candlewood LLC was formed
in November 1995 to develop, own, operate and franchise Candlewood extended-stay
hotels. The membership interests in Candlewood LLC are owned 50% by Doubletree,
42.5% by JPD Corporation, a Kansas corporation owned by Mr. DeBoer and certain
members of his family, and 7.5% by the Warren D. Fix Family Partnership, L.P.
(the "Fix Partnership"), a Kansas limited partnership, the general partner and
majority owner of which is Mr. Warren Fix, a director and the Executive Vice
President and Chief Financial Officer of the Company (collectively, Doubletree,
Mr. DeBoer and the Fix Partnership are referred to herein as the "Initial
Stockholders"). Each of the Company's three properties is owned by a separate
limited liability company (the "Subsidiary LLCs"), the membership interests of
each of which are owned 98% by Candlewood LLC, 1% by DT Real Estate, Inc., a
subsidiary of Doubletree, 0.85% by JPD Corporation, and 0.15% by the Fix
Partnership.
Immediately prior to the Offering, Doubletree and the Fix Partnership will
contribute to the Company all of their outstanding membership interests in
Candlewood LLC and their minority interests in the Subsidiary LLCs. At the same
time, Mr. DeBoer and certain members of his family will contribute to the
Company 100% of the stock of JPD Corporation, the assets of which are
substantially comprised of its membership interest in Candlewood LLC. In
consideration of such transfer, each of Doubletree and the Fix Partnership will
be issued shares of Common Stock of the Company in proportion to their ownership
interests in Candlewood LLC immediately prior to such transfer and Mr. DeBoer
and certain members of his family will be issued shares of Common Stock of the
Company in proportion to JPD Corporation's ownership interest in Candlewood LLC
immediately prior to such transfer. The reorganization of Candlewood LLC, JPD
Corporation and the Subsidiary LLCs into the Company is referred to herein as
the "Reorganization." Following the Reorganization, each of the Company's three
hotel properties will be owned by a separate limited liability company, the
members of which will be the Company and JPD Corporation. See "The
Reorganization."
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THE OFFERING
Common Stock offered.................. shares(1)
Common Stock outstanding
after the Offering.................. shares(2)
Use of Proceeds....................... To fund the national expansion of
Candlewood hotels and for working
capital and other general corporate
purposes.
Proposed Nasdaq National Market Symbol CNDL
- ------------------------
(1) Excludes shares of Common Stock subject to the Underwriters' over-
allotment option.
(2) Excludes shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Equity Participation Plan (the "1996 Equity Plan").
See "Management--Compensation Plans and Arrangements."
6
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Company was incorporated in August 1996 to succeed to the business of
Candlewood LLC. "See The Reorganization." The following tables present summary
historical consolidated financial information for Candlewood LLC. The following
tables also present summary pro forma consolidated financial information for the
Company, giving effect to the Reorganization. The historical results for the six
months ended June 30, 1996 are not indicative of actual results of the year. The
summary historical and pro forma consolidated financial information should be
read in conjunction with "Selected Historical and Pro Forma Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements of Candlewood LLC, including notes thereto, included elsewhere in
this Prospectus.
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PERIOD FROM
OCTOBER 1, 1995
(INCEPTION) TO SIX MONTHS ENDED
DECEMBER 31, 1995(1) JUNE 30, 1996
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STATEMENT OF OPERATIONS DATA:
Revenues ..................................... -- $ 120,038
Hotel operating expenses ..................... -- 86,195
Corporate operating expenses ................. $ 204,361 748,348
Depreciation and amortization ................ 4,625 70,759
Operating loss ............................... (208,986) (785,264)
Interest income .............................. -- 11,496
Net loss ..................................... (208,986) (773,768)
Pro forma net loss per share..................
Pro forma weighted average shares
outstanding.................................
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JUNE 30, 1996
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COMPANY
---------------------------
CANDLEWOOD PRO FORMA
LLC PRO AS
HISTORICAL FORMA(2) ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and equivalents ............... $1,022,492 $ 1,022,492 $46,972,492
Total assets ....................... 7,029,069 7,029,069 52,979,069
Accounts payable ................... 329,828 329,828 329,828
Note payable, net of current
portion .......................... -- 7,334,614 7,334,614
Members' equity .................... 6,569,318 -- --
Stockholders' equity (deficit) ..... -- (717,836) 45,232,164
</TABLE>
(1) Although Candlewood LLC was not formed until November 16, 1995, certain
expenses applicable to its business were incurred during the period from
October 1, 1995 to November 16, 1995 and were funded by capital
contributions of members. Accordingly, the Company's statements of
operations have been presented as if the Company's operations began on
October 1, 1995.
(2) Gives effect to the Reorganization as if it had occurred on June 30, 1996,
reflecting conversion of $7,199,332 of the capital previously
contributed by Doubletree and preferred return to Doubletree of $135,282
to a long-term note payable and contribution of outstanding membership
interests of Candlewood LLC and minority interests of the Subsidiary LLC's
to the Company.
(3) Adjusted to reflect the sale of shares of Common Stock by
the Company in the Offering at an assumed public offering price of $
per share and net proceeds of $45,950,000 and the application of such net
proceeds as if the transactions contemplated hereby occurred on June 30,
1996. See "Use of Proceeds" and "Capitalization."
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RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
contained in this Prospectus. The Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below.
LIMITED OPERATING HISTORY; RISKS OF OPERATIONS
The Company began operating its first extended-stay hotel in May 1996 and
has a limited operating history upon which investors may evaluate the Company's
performance. In addition, the Company operates only one hotel which has not
generated sufficient cash to cover the Company's operating expenses. As a
result, the Company has incurred losses to date and there can be no assurance
that the Company will be profitable in the future. Given the substantial
development and financing expenses relating to the Company's expansion, it
expects to have net losses for the foreseeable future. Operation of individual
hotels and a chain of multiple hotels is subject to numerous risks including the
inability to operate the hotels at expected expense levels, the inability to
maintain high occupancy rates or to attract guests for extended stays, liability
for accidents and other events occurring at hotel properties and the inability
to achieve expected nightly rates. If the Company is unable to efficiently and
effectively operate its hotels, the Company's business and results of operations
would be materially and adversely effected.
DEVELOPMENT RISKS
The Company intends to grow primarily by developing and franchising
additional Candlewood extended-stay hotels. Development involves substantial
risks, including: costs exceeding budgeted or contracted amounts; delays in
completion of construction; failing to obtain all necessary zoning and
construction permits; financing not being available on favorable terms;
developed properties not achieving desired revenue or profitability levels once
opened; competition for suitable development sites from competitors, some of
whom have greater financial resources than the Company; incurring substantial
costs if a development project must be abandoned prior to completion; changes in
governmental rules, regulations and interpretations; and changes in general
economic and business conditions. As of the date of this Prospectus, the Company
is constructing two hotels. In 1997, the Company's objective is to open up to 14
Company-owned hotels and to begin construction of up to 18 additional
Company-owned hotels. There can be no assurance that present or future
development will proceed in accordance with the Company's expectations. There
can be no assurance that the Company will complete the development and
construction of hotels, will acquire properties and complete construction of
hotels thereon, or that any such development will be completed within budget, on
a timely basis, or at all.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company's rapid development plans will require the implementation of
specialized operational and financial systems and will require additional
management, operational and financial resources. For example, the Company will
be required to recruit and train property managers and other personnel for each
new hotel as well as additional personnel at its headquarters. There can be no
assurance that the Company will be able to manage its expanding operations
effectively. If the Company is unable to manage its growth effectively, the
Company's business and results of operations could be materially and adversely
effected.
COMPETITION FOR AND DEPENDENCE ON FRANCHISE AGREEMENTS
The Company expects to derive a portion of its revenue through franchise
agreements with hotel owners and from the management of certain franchised
hotels. Competition for franchise agreements in the lodging industry is intense.
The Company expects to compete with national and regional brand franchisors,
most of which have greater name recognition and financial resources and a more
established market presence than the Company. The Company believes that
competition for franchise agreements is based principally upon: the perceived
value and validity of the brand; the nature and quality of services provided to
franchisees; the franchisees' view of the
8
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relationship of building cost and operating expenses to the potential for
revenues and profitability during operation and upon sale; and the franchisees'
ability to finance construction and operation of the hotel. No assurance can be
given that the Company will be successful in establishing brand awareness or the
other factors on which franchisors compete, retaining its current franchisee or
competing for or obtaining additional franchisees. Failure to maintain and
attract franchisees could have a material adverse effect on the Company's
business and results of operations.
DEPENDENCE ON DEVELOPMENT AGREEMENTS
The Company has entered into two, and intends to enter into additional,
development agreements which grant development rights for the construction and
franchising of hotels within exclusive territories. By granting exclusive rights
in a territory, the Company is forced to rely on the developer to franchise
hotels at the locations and at such times as the developer chooses, at the
exclusion of the Company or other franchisees. Development agreements do not
obligate the developer to construct or operate any Candlewood hotels. Each
franchised Candlewood hotel will be constructed and operated under a separate
franchise agreement which must be signed before construction is commenced.
Further, most franchisees will require financing for the construction of their
hotel which may not be available on terms satisfactory to the franchisee, or at
all. There can be no assurance that any franchise agreements will be signed,
either as a result of development agreements or independently, or that any
Candlewood hotels will be opened pursuant to the terms and the times specified
in the development agreements, the franchise agreements or at all. Failure to
franchise hotels according to the schedules set forth in the development
agreements could result in delays in construction in certain territories and
have a material adverse effect on the Company's business and results of
operations. See "Business--Growth and Development Strategies," "--Franchise,
Development and Management Agreements."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the efforts and
abilities of its senior management and key employees, particularly, Mr. Jack P.
DeBoer, Chairman of the Board, President and Chief Executive Officer, and Mr.
Warren D. Fix, Executive Vice President and Chief Financial Officer. The loss of
the services of either of these individuals could have a material adverse effect
upon the Company's business and results of operations. The Company has entered
into an employment agreement with Mr. DeBoer under which he has agreed, subject
to certain conditions, to remain in his current position with the Company until
August 1999. See "Management--Employment Agreement."
RISKS ASSOCIATED WITH THE LODGING INDUSTRY
The lodging industry, and the extended-stay segment in which the Company
operates, may be adversely affected by changes in national or local economic
conditions and other local market conditions, such as an oversupply of hotel
space or a reduction in demand for hotel space in a geographic area, changes in
travel patterns, extreme weather conditions, changes in governmental regulations
which influence or determine wages, prices or construction costs, changes in
interest rates, the availability of financing for operating or capital needs or
changes in real estate tax rates and other operating expenses. In addition, due
in part to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits. Downturns or prolonged adverse conditions in the real
estate or capital markets or in national or local economies or the inability of
the Company or its franchisees to secure financing for the development of
Candlewood hotels could have a material adverse impact on the Company's business
and results of operations.
COMPETITION IN THE LODGING INDUSTRY
The lodging industry is highly competitive. Competitive factors within the
industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. The Company intends to build
most of its hotels in geographic locations where other extended-stay hotels may
be located. The Company expects to compete for guests and development sites with
both traditional lodging facilities and other extended-stay facilities,
including those owned and operated by competing chains and individual
extended-stay facilities. Many of these competitors have greater financial
resources and may have better relationships with prospective franchisees,
representatives of the construction
9
<PAGE> 12
industry and others in the lodging industry. The number of competitive lodging
facilities in a particular area could have a material adverse effect on
occupancy, average daily rate and revenues of the Candlewood hotels. See
"Business--Competition."
The Company believes that competition within the extended-stay lodging
market is increasing substantially and will continue to increase in the
foreseeable future. A number of other lodging chains and developers have
developed or are attempting to develop extended-stay lodging hotels that may
compete with the Company's hotels. In particular, some of these entities target
the segment of the extended-stay market in which the Company competes. The
Company may compete for guests and for new development sites with certain of
these established entities which have greater financial resources than the
Company and better relationships with lenders and real estate sellers. Further,
there can be no assurance that new or existing competitors will not
significantly reduce their rates or offer greater convenience, services or
amenities or significantly expand or improve hotels in the market in which the
Company competes or markets in which it will compete, thereby materially
adversely affecting the Company's business and results of operations.
REAL ESTATE INVESTMENT RISKS
General Risks. The Company's investment in its hotels will be subject to
varying degrees of risk related to the ownership and operation of real property.
The underlying value of the Company's real estate investments is significantly
dependent upon its ability to maintain or increase cash provided by operations.
The value of the Company's hotels and income from the hotels may be materially
adversely affected by changes in national economic conditions, changes in
general or local economic conditions and neighborhood characteristics,
competition from other lodging facilities, changes in real property tax rates,
changes in the availability, cost and terms of financing, the impact of present
or future environmental laws, the ongoing need for capital improvements, changes
in operating expenses, changes in governmental rules and policies, natural
disasters and other factors which are beyond the control of the Company.
Illiquidity of Real Estate. Real estate investments are relatively
illiquid. The ability of the Company to vary its portfolio in response to
changes in economic and other conditions will be limited. There can be no
assurance that the Company will be able to dispose of an investment when it
finds disposition advantageous or necessary or that the sale price of any
disposition will recoup or exceed the amount of the Company's investment.
Uninsured and Underinsured Losses Could Result in Loss of Value of Hotels.
The Company will maintain comprehensive insurance on each of its hotels,
including liability, fire and extended coverage, of the type and amount the
Company believes is customarily obtained for or by an owner of similar real
property assets. However, there are certain types of losses, generally of a
catastrophic nature, such as earthquakes and floods, that may be uninsurable or
not economically insurable. The Company uses its discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a view
to obtaining appropriate insurance on the Company's hotels at a reasonable cost
and on suitable terms. This may result in insurance coverage that in the event
of a loss would be insufficient to pay the full current market value or current
replacement cost of the Company's lost investment. Inflation, changes in
building codes and ordinances, environmental considerations and other factors
also might make it infeasible to use insurance proceeds to replace a hotel after
it has been damaged or destroyed. Under these circumstances, the insurance
proceeds received by the Company might not be adequate to restore its economic
position with respect to such hotel. In addition, property and casualty
insurance rates may increase depending on claims experience, insurance market
conditions and the replacement value of the Company's hotels.
DEPENDENCE ON SINGLE TYPE OF LODGING FACILITY AND SINGLE BRAND
The Company intends to develop and franchise additional Candlewood hotels.
The Company currently does not intend to develop any lodging facilities other
than extended-stay hotels in the mid-priced segment of the market and does not
intend to develop lodging facilities with other franchisors. Accordingly, the
Company will be subject to risks inherent in concentrating investments in a
single type of lodging facility and a single franchise brand, such as a shift in
demand or a reduction in business following adverse publicity related to the
brand, which could have a material adverse effect on the Company's business and
results of operations.
10
<PAGE> 13
FLUCTUATION IN OPERATING RESULTS
The lodging industry is seasonal in nature and the second and third
quarters of the year generally account for a greater proportion of annual
revenues than the first and fourth quarters. The timing of openings of new
properties could lead to fluctuations in the Company's quarterly earnings.
Quarterly earnings may be adversely affected by events beyond the Company's
control such as poor weather conditions, economic factors and other
considerations affecting travel. In addition, the loss of one or several
franchise or development agreements or management contracts, the disruption of
the Company's development of hotels, the timing of achieving incremental
revenues from new franchise agreements or management contracts and the
realization of a loss upon the sale of hotels in which the Company has an equity
interest may also adversely impact earnings comparisons.
FUTURE CAPITAL NEEDS AND RISKS OF ADDITIONAL FINANCING
The development of hotels is capital intensive. The Company is negotiating
and anticipates that prior to or shortly following the Offering it will have
secured a commitment from a third-party lender to finance up to 60% of the cost
of individual Company-developed hotels. Funding of the loans for each hotel will
be subject to approval of the third-party lender, upon satisfaction of various
conditions. In addition, Doubletree has agreed to loan the Company up to $15
million to fund operating expenses and development of Candlewood hotels, of
which approximately $9 million had been used by the Company as of August 31,
1996. The Company believes that the net proceeds from the Offering and cash flow
from operations, together with its subordinated credit facility from Doubletree,
construction financing from NationsBank of Texas, N.A. ("NationsBank") and the
proposed construction financing program with a third-party lender, will be
sufficient to provide capital for development and operations during the 12
months following the Offering. There can be no assurance that changes will not
occur that will require the Company to seek additional capital or financing at
an earlier date. In addition, the Company's line of credit and funds available
from Doubletree will bear interest at variable rates, which subject the Company
to risks associated with debt financing. To the extent the Company's capital
resources, including the proceeds of the Offering, are insufficient to meet its
operating requirements, the Company will seek additional funds through equity or
debt financing. The Company has no current arrangements with respect to, or
sources of, such additional financing. Additionally, no assurance can be given
that additional financing will be available when needed or upon terms acceptable
to the Company. After 12 months following the Offering, the Company anticipates
that it will require additional cash resources or financing, the amount and
timing of which will depend on a number of factors including the number of
hotels developed and the cash flow generated by the Company's hotels and
franchising operations. There can be no assurance that, if needed, the Company
will be able to obtain additional capital or financing on acceptable terms. If
such capital or financing is unavailable, the Company may not be able to develop
further hotels. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
GOVERNMENT REGULATION
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, the Company and its franchisees 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 a franchise agreement, including limitations on
noncompetition provisions and termination or nonrenewal of a franchise
agreement. Some states require that certain offering materials be approved
before franchises can be offered or sold in that state. The failure to obtain
permits or licenses or approvals to sell franchises, the inability to enforce
the terms of the Company's franchise agreements or an increase in the minimum
wage rate, employee benefit costs or other costs associated with employees could
adversely affect the Company's business and results of operations.
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. While the Company anticipates that its
hotels and the hotels it manages will be substantially in compliance with these
requirements, a determination that the Company is not in compliance with the ADA
could result in the imposition of fines, an award of damages to private
litigants and significant expense to the Company in bringing its hotels in
compliance. See "Business--Government Regulation."
11
<PAGE> 14
IMPACT OF ENVIRONMENTAL REGULATION
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations. In addition, in the event any future legislation is adopted, the
Company may, from time to time, be required to make significant capital and
operating expenditures in response to such legislation. The Company attempts to
minimize its exposure to potential environmental liability through its site
selection procedures. The Company typically enters into contracts to purchase
real estate subject to certain contingencies. Prior to exercising its option and
purchasing the property, the Company conducts a Phase I environmental assessment
(which generally includes a physical inspection and database search, but not
soil or groundwater analyses). 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 to toxic substances on, under or in the property. These laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. In addition, the
presence of contamination from hazardous or toxic substances, or the failure to
properly remediate the contaminated property, may adversely affect the owner's
ability to borrow using the real property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances also may be liable
for the costs of removal or remediation of these substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
could be used to impose liability for releases of hazardous materials, including
asbestos-containing materials ("ACMs"), into the environment, and third parties
may seek recovery from owners or operators of real properties for personal
injury associated with exposure to released ACMs or other hazardous materials.
Environmental laws also may impose restrictions on the manner in which property
may be used or transferred on in which businesses may be operated, and these
restrictions may require expenditures. In connection with the ownership of its
properties, the Company potentially may be liable for any such costs. The cost
of defending against claims of liability or remediating contaminated property
and the cost of complying with environmental laws could materially adversely
affect the Company's results of operations and financial condition.
POTENTIAL ANTI-TAKEOVER PROVISIONS
Preferred Stock. The Board of Directors has the authority to issue up to
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares, without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock could have the effect of entrenching the Company's Board of Directors and
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company currently has no plans to
issue shares of preferred stock. See "Description of Capital Stock--Preferred
Stock."
Articles and Bylaws; Delaware Anti-takeover Statute. The ownership
positions of Mr. DeBoer and the other executive officers and directors of the
Company as a group, together with the anti-takeover effects of certain
provisions in the Company's Articles of Incorporation and Bylaws, may have the
effect of delaying, deferring or preventing a change in control of the Company,
even if a change of control were in the stockholders' best interests. For
example, the Company's Certificate of Incorporation eliminates the right of
stockholders to act without a meeting. In addition, the Company is subject to
Section 203 of the Delaware General Corporation Law, which contains provisions
that restrict certain business combinations with interested stockholders upon
acquiring 15% or more of the Common Stock. This statute may have the effect of
inhibiting a non-negotiated merger or other business combination involving the
Company, even if such event would be beneficial to the then-existing
stockholders. See "Description of Capital Stock--Anti-takeover Provisions."
Stockholders' Agreement. Pursuant to a Stockholders' Agreement, each of
the Initial Stockholders has agreed to act in concert with respect to the
election of directors of the Company. In addition, the approval of the Initial
Stockholders is required before the Company can engage in certain transactions
including a merger or disposition of assets. These provisions may have the
effect of inhibiting a change in control of the Company. See "Description of
Capital Stock--Certain Provisions of Delaware Law" and "The Reorganization."
12
<PAGE> 15
CONTROL OF COMPANY BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS
OF INTEREST
It is expected that after consummation of the Offering, Mr. DeBoer will
beneficially own approximately % of the outstanding shares of Common Stock of
the Company and, together with the other executive officers and directors of the
Company as a group, will own % of the outstanding shares of Common Stock. In
addition, Doubletree will beneficially own approximately % of the outstanding
shares of Common Stock of the Company. By reason of such holdings, these
stockholders acting as a group will be able to control the affairs and policies
of the Company and will be able to elect a sufficient number of directors to
control the Company's Board of Directors and to approve or disapprove any matter
submitted to a vote of the stockholders, including certain fundamental corporate
transactions (such as certain mergers and sales of assets) requiring stockholder
approval. The Initial Stockholders have entered into agreements which provide
for the nomination and election of directors and certain "veto rights" with
respect to specified actions by the Company and its subsidiaries. See "The
Reorganization" and "Principal Stockholders."
Mr. DeBoer, the Chairman, President and Chief Executive Officer of the
Company, owns a majority interest in two, and a minority interest in six,
Residence Inn hotels. Two of these hotels are located in Wichita, Kansas,
proximate to the Company's initial hotel. Mr. DeBoer also owns a majority
interest in a Hawthorn Suites hotel in Houston, Texas. These hotels may now or
in the future compete for guests with Candlewood hotels. In addition, Mr. DeBoer
owns a minority interest in the limited liability company which owns and leases
the building in which the Company's headquarters are located and in the
corporation through which the Company has arranged its insurance policies. These
relationships could give rise to conflicts of interest. See "Certain
Transactions." The Company believes that its lease and insurance policies are on
terms no less favorable to the Company than those that could have been obtained
from unaffiliated third parties. The Company has a policy requiring any material
transaction or agreement with a related party be approved by a majority of the
directors not interested in such transaction or agreement.
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for shares of the
Company's Common Stock, and there can be no assurance that an active trading
market will develop or, if developed, will be sustained. The initial public
offering price of the Common Stock offered hereby has been determined by
negotiations between the Company and the representatives of the Underwriters and
there can be no assurance that the Common Stock will not trade at or below the
initial public offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results and other factors. In addition, the securities markets have
experienced significant price and volume fluctuations from time to time in
recent years that often have been unrelated or disproportionate to the operating
performance of particular companies. These broad fluctuations may adversely
affect the market price of the Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Company's Common Stock in the public market after the
Offering could adversely affect the market price of the Company's Common Stock.
Upon completion of the Offering and assuming no exercise of the Underwriters'
over-allotment option, the Company will have outstanding shares of
Common Stock ( shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, the shares sold in the Offering
( shares if the Underwriters' over-allotment option is exercised
full) will be available for resale in the public market without restriction
except by affiliates of the Company. None of the shares of Common Stock
outstanding prior to the Offering will be eligible for sale in the public
market pursuant to Rule 144 under the Securities Act until , 1998.
In addition, the Company intends to register with the Securities and Exchange
Commission a total of shares of Common Stock reserved for issuance under the
1996 Plan as soon as practicable following the date of this Prospectus. See
"Underwriting" and "Shares Eligible for Future Sale."
DILUTION
Purchasers of the Common Stock will experience immediate and substantial
dilution in net tangible book value per share of Common Stock from the initial
public offering price per share of Common Stock. See "Dilution."
13
<PAGE> 16
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Board of Directors will control the
declaration and determination of the size of dividends, if any. Pursuant to the
terms of the Stockholders Agreement among the Initial Stockholders, so long as
the Initial Stockholders hold in excess of 50% of the outstanding shares of the
Company's Common Stock, the approval of the Initial Stockholders is required
before the Company can declare or pay any dividends. The Company anticipates
that future financing, including any lines of credit, may restrict or prohibit
the Company's ability to pay dividends. See "Dividend Policy."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Prospectus, including without limitation statements containing the words
"believes," "anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: adverse changes in national or local economic
conditions, competition from other lodging properties, changes in real property
tax rates and in the availability, cost and terms of financing, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, changes in operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws, and other
factors referenced in this Prospectus. Certain of these factors are discussed in
more detail elsewhere in this Prospectus, including without limitation under the
captions "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business."
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
14
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock being offered hereby, assuming an initial public offering price of $
per share and after deducting estimated underwriting discounts and commissions
and estimated expenses of the Offering, are estimated to be approximately $
million (approximately $ million if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use the net proceeds from the Offering to fund the
national expansion of the Company through the development and franchising of
Candlewood hotels and for working capital and general corporate purposes. The
Company may also use portions of the net proceeds of the Offering to fund or
invest in the development of Candlewood hotels by its franchisees; however, it
has no current obligations or commitments to do so. Pending the use of proceeds
described above, the net proceeds will be invested in interest-bearing,
short-term, investment grade securities, certificates of deposit,
interest-bearing bank deposits, or commercial paper.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock. The Company
currently intends to retain any future earnings for reinvestment in the
development and expansion of its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. 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 other factors deemed relevant by the Board of
Directors. Pursuant to the terms of the Stockholders Agreement among the Initial
Stockholders, so long as the Initial Stockholders hold in excess of 50% of the
outstanding shares of the Company's Common Stock, the approval of the Initial
Stockholders is required before the Company can declare or pay any dividends.
The Company anticipates that future financing, including any lines of credit,
may restrict or prohibit the Company's ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "The Reorganization."
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
at June 30, 1996, which assumes completion of the Reorganization on that date,
and as adjusted to reflect (i) the sale of the shares of Common Stock
offered hereby (assuming an initial public offering price of $ per share)
and (ii) the application of the net proceeds therefrom as described under "Use
of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
COMPANY
CANDLEWOOD LLC ---------------------------
HISTORICAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Notes payable, current portion ...................................... $ -- $ -- $ --
========== =========== ===========
Notes payable, less current portion ................................. -- $ 7,334,614 $ 7,334,614
Member's equity ..................................................... $6,569,318 -- --
Stockholders' equity:
Preferred Stock, par value $.01 per share;
____________ shares authorized; no shares issued and
outstanding .............................................. --
Common Stock, par value $.01 per share; ______ shares
authorized; _______ shares issued and outstanding, actual;
______ shares issued and outstanding, as adjusted(1) ..... --
Additional paid-in capital .................................... --
Retained earnings (accumulated deficit)
Total stockholders' equity (deficit) ..................... -- (717,836) 45,232,164
---------- ----------- -----------
Total capitalization ................................ $6,569,318 $ 6,616,778 $52,566,778
========== =========== ===========
</TABLE>
(1) Excludes shares of Common Stock reserved for issuance pursuant
to the Company's 1996 Equity Plan. See "Management--Compensation Plans
and Arrangements."
16
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company at June 30, 1996 was
$ million or $ per share of Common Stock. Net tangible book value per
share represents the amount of tangible assets of the Company, less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the shares of Common Stock offered
hereby (based on an assumed initial public offering price of $ per share)
and the application of the net proceeds therefrom, the pro forma net tangible
book value of the Company at June 30, 1996 would have been $ million or $
per share. This represents an immediate increase in net tangible book value per
share of $ to existing stockholders and an immediate dilution in net
tangible book value per share of $ to new investors purchasing shares in the
Offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share .............. $
Pro forma net tangible book value per share $
at June 30, 1996.............................. _______
Increase per share attributable to new investors...
Pro forma net tangible book value per share after the Offering _______
Dilution per share to new investors........................... $
=======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share of Common
Stock paid by the existing stockholders and by the new investors in the Offering
(based upon an assumed initial public offering price of $ per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders % $ 400,200 0.8% $
New investors........ 50,000,000 99.2
------ ------- ----------- -------
Total..... % $50,400,200 100.0%
====== ======= =========== =======
</TABLE>
The foregoing tables exclude shares of Common Stock reserved for
issuance pursuant to the 1996 Equity Plan and shares of Common Stock
issuable upon the exercise of the Underwriters' over-allotment option. See
"Management--Compensation Plan and Arrangements" and "Underwriting."
17
<PAGE> 20
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Company was incorporated in August 1996 to succeed to the business of
Candlewood LLC. "See The Reorganization." The selected consolidated financial
data set forth below as of and for the period from October 1, 1995 to December
31, 1995 and the six months ended June 30, 1996 have been derived from the
audited consolidated financial statements of Candlewood LLC and notes thereto
included elsewhere in this Prospectus. The historical results for the six months
ended June 30, 1996 are not necessarily indicative of the results for a full
year. The selected pro forma consolidated financial information at June 30, 1996
give effect to the Reorganization. The selected historical and pro forma
consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements and related
notes thereto of Candlewood LLC.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1995
(INCEPTION) TO SIX MONTHS ENDED
DECEMBER 31, 1995(1) JUNE 30, 1996
-------------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ......................................... -- $ 120,038
Hotel operating expenses ......................... -- 86,195
Corporate operating expenses ..................... $ 204,361 748,348
Depreciation and amortization .................... 4,625 70,759
Operating loss ................................... (208,986) (785,264)
Interest income .................................. -- 11,496
Net loss ......................................... (208,986) (773,768)
Pro forma net loss per share .....................
Pro forma weighted average shares outstanding ....
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
COMPANY
---------------------------
CANDLEWOOD PRO FORMA
LLC PRO AS
HISTORICAL FORMA(2) ADJUSTED(3)
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents ............... $1,022,492 $ 1,022,492 $46,972,492
Total assets ....................... 7,029,069 7,029,069 52,979,069
Accounts payable ................... 329,828 329,828 329,828
Note payable, net of current portion -- 7,334,614 7,334,614
Members' equity .................... 6,569,318 -- --
Stockholders' equity (deficit) ..... -- (717,836) 45,232,164
</TABLE>
(1) Although Candlewood LLC was not formed until November 16, 1995, certain
expenses applicable to its business were incurred during the period from
October 1, 1995 to November 16, 1995 and were funded by capital
contributions of members. Accordingly, the Company's statements of
operations have been presented as if the Company's operations began on
October 1, 1995.
(2) Gives effect to the Reorganization as if it had occurred on June 30, 1996,
reflecting conversion of $7,199,332 of the capital previously contributed
by Doubletree and preferred return to Doubletree of $135,282 to a
long-term note payable and contribution of outstanding membership
interests of Candlewood LLC and minority interests of the Subsidiary LLC's
to the Company.
(3) Adjusted to reflect the sale of shares of Common Stock by
the Company in the Offering at an assumed public offering price of $
per share and net proceeds of $45,950,000 and the application of such net
proceeds as if the transactions contemplated hereby occurred on June 30,
1996. See "Use of Proceeds" and "Capitalization."
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the Company's
Financial Statements and notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
The Company began operations in October 1995 to develop, own, operate and
franchise Candlewood extended-stay hotels, designed particularly for the
business traveler. The Company began construction of its first Candlewood hotel
in Wichita, Kansas in October 1995. Construction of this hotel was completed and
the hotel opened in May 1996. In June and July 1996, respectively, the Company
began construction of two additional hotels in the Omaha, Nebraska and Denver,
Colorado areas, each of which is scheduled to open in the first quarter of 1997.
In 1997, the Company's objective is to open up to 14 Company-owned hotels
(including the Denver and Omaha area hotels) and to begin construction of up to
18 additional hotels. In pursuing this objective, as of the date of this
Prospectus, the Company has 17 potential Candlewood sites under contract, has 19
potential sites under letter of intent and has made offers on 33 additional
sites. There can be no assurance that the Company will be successful in
purchasing or developing any of these sites or that the Company will achieve its
expected rate of development. See "Risk Factors--Development Risks" and "--Real
Estate Investment Risks."
In addition to the construction of Company-owned Candlewood hotels, the
Company intends to expand through its national franchising program. On June 11,
1996 the Company entered into a development agreement with Studio West Hotel
Company, LLC ("SWHC") which currently grants SWHC the option to obtain
franchises to build 22 Candlewood hotels in Northern California, Oregon and
Washington, and on June 27, 1996 the Company entered into a development
agreement with Studio Ventures, L.L.C. ("Studio Ventures") which currently
grants Studio Ventures the option to obtain franchises to build 22 Candlewood
hotels in specific communities in Kentucky, North Carolina, Ohio, South
Carolina, and Tennessee. These two development agreements grant the developers
the right to franchise 15 Candlewood hotels in 1996, 13 Candlewood hotels in
1997, 13 Candlewood hotels in 1998, and three Candlewood hotels in 1999. See
"Business--Growth and Development Strategies--Franchising." On July 25, 1996,
the Company entered into a franchise agreement with SWHC relating to the
establishment of a Candlewood hotel in Hillsboro, Oregon. SWHC began
construction of this hotel in August 1996 and expects to commence operations in
the second quarter of 1997. Development agreements do not obligate the developer
to build or open any Candlewood hotels. There can be no assurance that any
additional franchise agreements will be signed, either as a result of
development agreements or independently, or that any Candlewood hotels will be
opened pursuant to the terms and the times specified in the development
agreements, the franchise agreements, or at all. The Company also expects to
generate revenue through the management of franchised hotels; however, as of the
date of this prospectus, the Company has not entered into any management
agreements and does not manage any hotels owned by others. See "Risk
Factors--Development Risks" and "--Competition for and Dependence on Franchise
Agreements."
19
<PAGE> 22
RESULTS OF OPERATIONS
Hotel Operations -- Wichita Hotel
The Company currently owns and operates one Candlewood hotel in Wichita,
Kansas, which opened on May 5, 1996. The following table presents summary
financial information for the Wichita, Kansas hotel for the period from May 5,
1996 to June 30, 1996. The results of operations for this period are not
necessarily indicative of the future results of operations of the Wichita hotel
or of other Company-owned hotels.
<TABLE>
<CAPTION>
MAY 5, 1996
(COMMENCEMENT OF
OPERATIONS) TO
JUNE 30, 1996
---------------
<S> <C>
Room revenue .............................................. $116,113
Other revenue ............................................. 3,925
Hotel operating expenses .................................. 86,195
Depreciation and amortization ............................. 49,056
</TABLE>
Room revenue for the period from May 5, 1996 to June 30, 1996, was
approximately $116,000. The average occupancy rate for the same period was 48%.
Occupancy rates are determined by dividing the number of guest rooms occupied on
a daily basis by the total number of guest rooms available at the facility.
During the same period, the length of stay averaged approximately nine days and
the average daily room rate was $48.15. The Company believes that the average
daily room rate was favorably affected by stays that were shorter than six days,
as these shorter stays commanded a slightly higher rate. Other revenue for the
hotel consists of guest telephone, vending and pay-per-view movie revenues.
Hotel operating expenses for the period from May 5, 1996 to June 30, 1996,
was approximately $86,000. Hotel operating expenses consists of all expenses
directly applicable to the operation of the hotel and does not include an
allocation of corporate operating expenses. The largest portion of hotel
operating expenses is salaries, wages and fringe benefits. The balance of hotel
operating expenses is comprised of normal operating items, such as electricity,
gas and other utilities, property taxes, insurance, cleaning supplies,
promotional materials, maintenance items, and similar expenses.
Depreciation and amortization expense for the period from May 5, 1996 to
June 30, 1996, was approximately $49,000. Depreciation expense is computed using
the straight-line method over the estimated useful lives of the respective
assets, ranging from three to forty years. For the period from May 5, 1996 to
June 30, 1996, depreciation expense reflects amounts for the pro-rata portion of
a full year. Pre-opening expenses and financing and closing fees were
capitalized and are being amortized over no more than the first twelve months or
two years of operations, respectively.
Corporate Operations
Corporate operating expenses include all expenses not directly related to
the development or operation of specific hotels. Such expenses, which totaled
approximately $748,000 for the six months ended June 30, 1996, are related
principally to salaries, wages and fringe benefits of the corporate staff which
has been employed in anticipation of and preparation for the addition of new
hotel facilities. The expenses for the first six months of 1996 are higher in
relation to revenue than is anticipated for future periods because of the need
to have the personnel in place during the Company's start-up period.
Depreciation and amortization for the six months ended June 30, 1996
totaled approximately $22,000 and related to the furniture, equipment and
intangible assets of the corporate office. Depreciation and amortization was
calculated using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to twenty years.
20
<PAGE> 23
The Company earned approximately $11,000 of interest income during the
period which related principally to short-term investment of funds.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through capital
provided by Doubletree. As of August 31, 1996, Doubletree had contributed $9
million to Candlewood LLC and, pursuant to the terms of the Candlewood LLC
operating agreement, Doubletree was entitled to a preferred return on its
capital contributions. In connection with the Reorganization, the funds advanced
to Candlewood LLC by Doubletree were converted into a five-year, $15 million
subordinated credit facility. The credit facility is subordinated to debt
incurred in the development of hotels and will be subordinated to the Company's
line of credit, if any. Amounts outstanding under the credit facility will bear
interest at rates of seven percent per annum for the first 12 months following
contribution, 10% per annum for the second 12 months following contribution and
15% per annum thereafter. With respect to the $9 million already contributed to
Candlewood by Doubletree, the interest rate for each portion separately
contributed will be calculated based on the contribution date of each such
portion. See "The Reorganization."
The Company is negotiating and, prior to or shortly following the Offering
anticipates that it will have secured, a commitment from a third-party lender to
finance up to 60% of the cost of individual Company-developed hotels. Funding
for loans for each hotel will be subject to approval of the third-party lender,
upon satisfaction of various conditions.
The Company, through its Subsidiary LLCs, has obtained separate term loan
commitments from NationsBank in the amounts of $3,000,000, $4,029,500 and
$4,075,000 for each of its hotels constructed or under construction in Wichita,
the Denver area and the Omaha area, respectively. Each loan commitment will be
entered into by the Subsidiary LLC that owns the property and the hotel to be
constructed and will be guaranteed by the Company and the other Subsidiary LLCs.
Interest on each loan will be payable monthly at a variable rate per annum equal
to NationsBank's prime rate plus 1/2%; provided, however, that the Company may
borrow up to three portions of the unused loan balance (in amounts of at least
$100,000) for one, two, three or six month periods at interest rates equal to
the adjusted Eurodollar rate plus 2.75%. Principal amortization payments based
on a 25-year term will begin not later than 13 months after completion of the
construction of the hotels and will continue until 2 1/2 years from the date of
the closing of the loan. Each loan may be extended for one additional year if
certain conditions are met and upon payment of a specified extension fee. During
the one year extension period, the Company will continue to make interest
payments and principal amortization payments based on a 25-year term. Amounts
borrowed under the loan commitments will be secured by the hotels and the land
on which they are constructed and certain funds deposited in a demand deposit
account assigned to NationsBank. Each loan will be funded separately, with all
loans being cross-collateralized and cross-defaulted.
The Company believes that a combination of the net proceeds from the
Offering and cash from operations, together with its subordinated credit
facility from Doubletree, construction financing from NationsBank and the
proposed construction financing program with a third-party lender, will be
sufficient to provide capital for development and operations during the next 12
months. See "Risk Factors--Future Capital Needs and Risks of Additional
Financing."
21
<PAGE> 24
BUSINESS
OVERVIEW
The Company is in the business of developing, owning, operating and
franchising Candlewood extended-stay hotels. Candlewood hotels and their
amenities are designed to appeal particularly to business travelers seeking
extended-stay accommodations by combining the convenience of a hotel with many
of the comforts of an apartment and providing well appointed, high quality
lodging at affordable prices. Through the rapid development and franchising of
Candlewood hotels, the Company's objective is to exploit an underserved demand
for mid-priced, extended-stay hotels and to develop a leading national brand
within that segment of the extended-stay market, which the Company believes is
characterized by average daily rates of approximately $40 to $60.
As of the date of this Prospectus, the Company owns and operates one
Candlewood hotel and is constructing two additional hotels that are expected to
open in the first quarter of 1997. In 1997, the Company's objective is to open
up to 14 Company-owned hotels and to begin construction of up to 18 additional
Company-owned hotels. In pursuing this objective, the Company has 17 potential
sites under contract, has 19 potential sites under letter of intent and has made
offers on 33 additional sites. In addition, the Company is developing a
nationwide franchising program, and as part of that program has entered into
multi-hotel development agreements with two developers which currently grant the
developers the right to franchise an additional 44 Candlewood hotels over the
next three years.
The Company believes that the experience of its senior management team
will be instrumental in executing its growth strategy. The Company was founded
in 1995 by Jack P. DeBoer, the Chairman, President and Chief Executive Officer
of the Company. The Candlewood concept was developed by Mr. DeBoer based on his
extensive background and experience in the extended-stay market, together with
his identification of the need for extended-stay lodging with rooms and
amenities comparable to those found in upscale hotels but at more affordable
prices. Mr. DeBoer, who launched the Residence Inn chain in the 1970's, is
credited by the lodging industry with creating the extended-stay concept.
Thereafter, he built or franchised 100 Residence Inn hotels before selling that
company to Marriott Corporation in 1987. Mr. DeBoer also co-founded Summerfield
Hotel Corporation, an upscale extended-stay hotel chain which developed 16
hotels under his leadership. He sold his interest in Summerfield in 1993. As a
result, Mr. DeBoer has numerous contacts among potential franchisees,
representatives from the construction industry and other leaders in the
hospitality industry.
The Company expects to derive substantial benefits from its strategic
alliance with Doubletree. Doubletree has agreed to extend a five-year $15
million subordinated credit facility to the Company, of which $9 million had
been funded as of August 31, 1996. Doubletree has also agreed to guarantee a
portion of construction loans and long-term financing that the Company has
arranged for itself and its franchisees. The Company believes it will benefit
from Doubletree's central reservation system, in-room video and service
arrangement and bulk purchasing discounts on phone rates and supplies.
Candlewood also believes it will benefit from Doubletree's management resources,
extensive knowledge of local markets, and established insurance and employee
benefit programs. Doubletree is a leading hotel management company that managed,
leased or franchised 178 hotels in 31 states, the District of Columbia and
Mexico as of June 30, 1996.
The standard Candlewood hotel will contain approximately 80-131 rooms, up
to 25% of which may be king suites. The king suites are two-room suites designed
to accommodate guests who are willing to pay a premium rate for a bedroom
separated from the kitchen and office area. The Company believes king suites
will increase the average daily rate and the average length of stay. Each
Candlewood room will contain business and other amenities consistent with those
found in upscale, full-service hotels, such as two phones with two incoming
phone lines and computer connections, an oversized wooden desk with a
quad-outlet to accommodate office equipment needs, an executive chair, a
bulletin board, personalized phone mail, a 25-inch television set, a video
cassette player, a compact disc player, movies on demand and an exercise
facility.
22
<PAGE> 25
The majority of extended-stay hotels are either in the upscale sector of
the market, such as Residence Inn, Homewood Suites, Hawthorn Suites and
Summerfield Suites (most with average daily rates in excess of $80), or the
budget sector, such as Suburban Lodge, Extended Stay America, Homestead Village
and Villager Lodge (most with average daily rates less than $35). The Company
believes that these hotels do not meet the needs of a large number of travelers
who desire well appointed, high quality, spacious accommodations with full
kitchens, but with room rates in the mid-priced segment of the extended-stay
market. The Company believes that Candlewood hotels will accommodate this
underserved segment of the extended-stay market. In addition, the Company
believes that the high quality of Candlewood hotels relative to their daily rate
will attract certain guests who otherwise would stay at traditional hotels. The
Company anticipates that the average daily rate at Candlewood hotels will be
approximately $45-$55 per studio which is significantly lower than full-service
hotels with comparable room features and amenities and generally competitive
with traditional limited-service hotels that do not offer the high quality
appointments and amenities of the Company's rooms. Accordingly, the Company
believes that Candlewood hotels will be particularly attractive to business
travelers, including professionals on temporary work assignment, consultants,
travelers conducting or participating in training seminars, and government
employees.
The Company believes that guests will find a combination of the following
factors differentiate the Candlewood brand from other extended-stay hotels:
- - Upscale Accommodations at Moderate Prices. Candlewood hotels offer upscale
accommodations at competitive rates within the mid-priced extended-stay
market which the Company believes will be attractive to guests staying six
nights or longer. The average nightly rate at Candlewood hotels is
expected to be approximately $45-$55 per studio, with a premium charged
for king suites.
- - Amenities for Business Travelers. Each Candlewood studio and king suite
will offer amenities designed to accommodate the needs of the business
traveler, such as two phones with two incoming direct dial phone lines
with computer connections, an oversized wooden desk with a quad-outlet to
accommodate office equipment needs, an executive chair, a bulletin board,
a guest chair and personalized phone mail.
- - High-Quality, Extended-Stay Features. In addition to extensive business
amenities, each Candlewood room will contain a fully equipped kitchen,
including a full-size refrigerator, full-size microwave oven, dishwasher,
two burner stovetop, coffee maker, toaster and a complete set of utensils
and cookware. In addition, a 25-inch television, video cassette player,
compact disc player and an iron and ironing board will be provided. Also,
each Candlewood hotel will be equipped with an exercise room, a guest
laundry facility and a convenient dry cleaning drop with same-day service.
- - Value Priced Features. Candlewood hotels will offer complimentary use of
laundry facilities, free local calls, $0.15-per-minute long distance
telephone calls and the self-service "Candlewood Cupboard," featuring
value-priced packaged foods and $0.25 beverages. Each Candlewood guest
will receive a free "First-Night Kit" complete with items such as
breakfast bars, coffee and popcorn.
The Company believes that a combination of the following factors make
Candlewood a more attractive brand choice for franchisees and investors compared
to other extended-stay brands:
- - Operating Efficiencies. By employing only six to eight full-time employees
and one part-time employee at each Candlewood hotel, the Company believes
that it will minimize operating costs. The office of each hotel generally
will be open daily from 7:00 a.m. to 8:00 p.m., although the live-in
general manager will normally be available twenty-four hours a day to
respond to guests' needs. In addition, each hotel will be equipped with
technology that will allow guests to check-in and check-out without the
assistance of hotel employees.
- - Strength of Management and Staff. Mr. DeBoer has over 20 years of
experience in the design, construction, ownership and management of
extended-stay hotels and has founded and developed two highly successful
extended-stay hotel chains. Warren D. Fix, Executive Vice President and
Chief Financial Officer, has an extensive financial background in real
estate development, management and financing, having spent a majority of
his career at The Irvine Company. Every Candlewood general manager and
director of sales will be
23
<PAGE> 26
required to complete Company-administered classroom courses and on-the-job
training to learn the marketing and operating systems specific to the
operation of an extended-stay hotel, how to maximize operating
efficiencies and how to attract extended-stay guests. The Company intends
to make opportunities to invest in its common stock available to all of
its employees in order to attract, retain and motivate the highest quality
personnel.
- - Strategic Alliance with Doubletree. The Company has a strategic alliance
with Doubletree through which the Company and its franchisees are expected
to be able to take advantage of Doubletree's purchasing power, national
reservation system and financial support.
- - Sales Organization. The Company has established a sales and marketing
division which will target institutions and employers in areas proximate
to its hotels. Each owned and franchised Candlewood hotel will have at
least one on-site employee dedicated to direct sales in support of that
hotel. By employing a dedicated on-site sales employee at every hotel, the
Company expects to be able to more effectively identify and market to
local businesses and employers who generate a large number of
extended-stay business guests.
- - Standard Design and Low Construction Costs. The Company expects that all
Candlewood hotels, including hotels owned by its franchisees, will be
designed and built according to uniform plans and specifications and
pursuant to standard construction contracts. The Company believes that
standardization will lower construction costs and establish consistent
quality, thereby enhancing its customers' loyalty and its ability to
establish a national brand. The Company has identified and approved three
major contractors in the United States, all of which have extensive
experience in the construction of lodging facilities and each of which has
agreed to cost- plus contracts with a ceiling on total expense that are
expected to limit cost overruns.
- - Uniform High-Quality Hotels. The Company intends to expand the Candlewood
hotel brand primarily through construction of new Company-owned and
franchised hotels, rather than by converting existing lodging facilities
to Candlewood hotels. The Company believes this strategy will increase the
value of the Candlewood brand by maintaining consistent hotel quality and
appearance which is expected to build guest loyalty and attract repeat
customers.
- - Franchisee Financing. The Company has arranged with a third party lender
to provide construction loans and long-term financing for up to 80% of the
cost of franchised hotels, subject to approval by the Company and the
lender on an individual property basis. The Company expects that the
availability of this financing will expedite and provide added certainty
to the development process by permitting the Company's franchisees to
devote their time to constructing, opening and operating their hotels.
Doubletree has agreed to guarantee certain portions of the loans made to
the Company's franchisees.
THE LODGING INDUSTRY
Traditional Lodging Industry
Lodging industry revenue and the room supply/demand balance have improved
in each year since 1991. The industry generated its third consecutive year of
pre-tax profits in 1995 at a record of $8.5 billion, up 55% from pre-tax profits
of $5.5 billion in 1994. Hospitality Directions, a publication of Coopers &
Lybrand, projects that industry pre-tax profits will reach $14.7 billion in
1998. Room supply and demand historically have been sensitive to shifts in
economic growth, resulting in cyclical changes in average daily room rates and
occupancy rates. The industry's profitability has been fueled by four
consecutive years in which the growth in total room demand has exceeded the
growth in total room supply by approximately 2.0%, 3.0%, 3.3% and 1.4% in 1992,
1993, 1994 and 1995, respectively, as estimated by Smith Travel Research. This
trend has continued in the first seven months of 1996, with demand growth
eclipsing supply growth by 1.1%. This sustained, favorable imbalance between
supply and demand has enabled the industry to increase revenue per available
room ("RevPAR") every year since 1991. RevPAR for the industry as a whole grew
3.4%, 4.8%, 7.5%, 6.1% and 7.5% in 1992, 1993, 1994, 1995 and the first seven
months of 1996, respectively, over each of the previous years.
24
<PAGE> 27
Extended-Stay Market
The first extended-stay hotel chain, Residence Inn, was founded and
developed by Jack P. DeBoer in the 1970s in order to provide a comfortable
alternative to traditional hotels for a growing number of travelers who desired
the convenience of a hotel with apartment style amenities. The extended-stay
segment has benefited from a strong and growing demand for extended-stay rooms
relative to a supply of such rooms. Demand for extended-stay lodging has
increased due to the increased number of corporate reorganizations and trends
toward downsizing and outsourcing, the increased mobility of the workforce and
technological improvements which have allowed businesses to relocate outside of
large metropolitan areas. These changes have increased the need for
extended-stay lodging for, among others, corporate executives and trainees,
consultants, sales representatives, government workers and people between jobs
or homes.
Of the approximately 3.3 million guest rooms available in the United
States at the end of 1995, there were only approximately 51,000 or 1.6%,
dedicated extended-stay rooms concentrated at approximately 415 properties. D.K.
Shifflet has estimated that in 1995 approximately 195 million non-convention
room nights were associated with stays of four nights or more, while there were
only approximately 18.6 million room nights available at extended-stay lodging
facilities. These statistics indicate that the majority of extended-stay
travelers are staying in traditional hotel rooms.
The table below illustrates occupancy, average daily rate ("ADR") and
RevPAR for the U.S. lodging industry as a whole and for the limited-service,
all-suite segment and the extended-stay segment. The limited-service, all-suite
hotel segment of the lodging industry contains the extended-stay segment in its
entirety and has been included because of its larger sample size.
<TABLE>
<CAPTION>
JANUARY 1 TO
YEAR ENDED DECEMBER 31, JULY 31,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
OCCUPANCY
U.S. hotels ..................... 60.6% 61.9% 63.1% 64.7% 65.5% 66.5%
Limited-service, all-suite hotels 71.9 74.6 77.4 78.1 77.8 78.9
Extended-stay hotels(1) ......... 73.9 76.9 79.9 81.1 80.8 81.1
ADR
U.S. hotels ..................... $58.87 $59.62 $61.30 $64.24 $67.34 $71.43
Limited-service, all-suite hotels 69.15 69.57 71.65 74.20 78.03 82.44
Extended-stay hotels(1) ......... 73.12 73.61 73.09 74.28 77.54 79.69
REVPAR
U.S. hotels ..................... $35.68 $36.90 $38.68 $41.56 $44.11 $47.50
Limited-service, all-suite hotels 49.72 51.90 55.48 57.95 60.71 65.05
Extended-stay hotels(1) ......... 54.04 56.61 58.40 60.24 62.65 64.63
Source: Smith Travel Research
</TABLE>
(1) Sample contains AmeriSuites, Hawthorn Suites, Homewood Suites, Lexington
Suites, Residence Inn by Marriott, Studio Plus, Summerfield Suites and
Woodfin Suites.
Mid-Priced Extended-Stay Segment
The Company believes that the majority of existing extended-stay rooms are
in the upscale and economy segments of the extended-stay market, leaving the
mid-priced segment underserved by the existing supply and type of rooms. Of the
approximately 415 extended-stay properties, approximately 295, or approximately
70%, operate in the upscale segment, approximately 80, or approximately 20%,
operate in the economy segment, and only approximately 40 properties, or 10%,
operate in the mid-priced segment. Based on the published occupancy rates for
other extended-stay hotels and D.K. Shifflet's estimate that approximately 50%
of extended-stay demand is in the mid-priced segment, the Company believes that
there is strong demand for mid-priced extended-stay hotels. The Company believes
mid-priced extended-stay hotels provide guests with many of the amenities of an
upscale extended-stay hotel at a more affordable price, attracting both upscale
guests who wish to save money and economy guests who desire high quality
amenities.
25
<PAGE> 28
GROWTH AND DEVELOPMENT STRATEGIES
The Company's goal is to become a leading national brand of extended-stay
hotels in the mid-priced segment of the extended-stay market through the
development and franchising of Candlewood hotels. The Company believes that
through its development and franchising of Candlewood hotels, it will be able to
expand rapidly in several key markets and to begin to build national brand
recognition among travelers and businesses. The Company currently owns and
operates one Candlewood hotel, is constructing two additional hotels that are
expected to open in the first quarter of 1997, has 17 sites under contract, has
19 sites under letter of intent and has made offers on 33 additional sites. The
Company is also pursuing a nationwide franchise program and has entered into two
development agreements which grant developers the right to franchise an
additional 44 Candlewood hotels.
The Company believes that the experience of its senior management team
will be instrumental in executing its growth strategy. Jack P. DeBoer, the
Company's founder, Chairman and President is credited by the lodging industry
with creating the extended-stay concept. Mr. DeBoer founded the Residence Inn
chain and co-founded Summerfield Hotel Corporation, developing a total of 116
extended-stay hotels under those two brands. This background has provided Mr.
DeBoer with numerous contacts among potential franchisees, representatives from
the construction industry and other leaders in the hospitality industry. In
addition, the Company expects to benefit from its strategic alliance with
Doubletree, which has extensive experience in sales, franchising and management
in the lodging industry.
The Company has assembled an experienced management team, hired the
personnel and developed the infrastructure necessary to pursue its growth and
development strategies. Through its real estate division, the Company
coordinates and selects sites for the development of new Candlewood hotels. The
Company's construction division coordinates and oversees the construction of
both Company-owned and franchised hotels thereby ensuring consistency and
quality. The marketing division, in conjunction with an on-site director of
sales at each hotel, will coordinate the Company's direct sales efforts in an
effort to ensure high occupancy and longer stays. The Company's franchising
division actively identifies and pursues potential franchisees and monitors and
regulates the quality of franchised hotels. Through its operations division, the
Company will monitor the quality of facilities, management and guest service at
each Company-owned hotel.
Development and Ownership
The Company currently owns and operates its initial Candlewood hotel
located in Wichita, Kansas and expects to open two hotels in the first quarter
of 1997 in the Denver, Colorado and Omaha, Nebraska areas. In 1997, the
Company's objective is to open up to 14 Company-owned hotels and to begin
construction of up to 18 additional Company-owned hotels. These hotels will be
constructed on sites the Company has under contract, on sites for which the
Company has signed letters of intent or has made offers or on sites which the
Company identifies in the future. Through the development of Company-owned
hotels, Candlewood expects to be able to ensure a presence in key markets and to
achieve economies of scale in management, marketing and purchasing.
The Company's real estate division is evaluating a variety of sites for
purchase and construction of Candlewood hotels. The Company has entered into
agreements with several commercial brokers, including CB Commercial, New America
Network and certain independent brokers, that identify potential sites for
Candlewood hotels. The Company intends to build Candlewood hotels within 15
minutes of employment centers, including large corporate headquarters, and
within five minutes of services such as restaurants and grocery stores.
26
<PAGE> 29
As of August 31, 1996, the Company had acquired or contracted to acquire
the following sites for Candlewood hotels in the following areas:
SITE STATUS
-------------------------- -------------------
Wichita, Kansas Completed
Denver, Colorado Under construction*
Omaha, Nebraska Under construction*
Baltimore, Maryland Under contract
Birmingham, Alabama Under contract
Cincinnati, Ohio Under contract
Colorado Springs, Colorado Under contract
Denver, Colorado Under contract
Irvine, California Under contract
Kansas City, Kansas Under contract
Louisville, Kentucky Under contract
Madison, Wisconsin Under contract
Ogden, Utah Under contract
Philadelphia, Pennsylvania Under contract
Phoenix, Arizona Under contract
Ramsey, New Jersey Under contract
Rochester, New York Under contract
Salt Lake City, Utah (2) Under contract
Southfield, Michigan Under contract
- -------------
* Anticipated opening in the first quarter of 1997.
In addition, as of August 31, 1996 the Company had executed letters of
intent with respect to the purchase of an additional 19 sites in 10 states and
had made offers on 33 additional sites in 15 states. The contracts which the
Company enters into for the purchase of potential hotel sites provide for
numerous investigations and other diligence, including environmental studies and
title reports, prior to the closing of the sale of the real property. The
Company reserves the right to terminate each contract if it is not satisfied
with the results of the investigations and diligence. There can be no assurance
that the Company will be successful in purchasing or developing any of the sites
that are under contract or are subject to a letter of intent or an offer, or
that the Company will achieve its expected rate of development. See "Risk
Factors--Development Risks" and "--Real Estate Investment Risks."
The Company's construction division is responsible for the oversight and
coordination of the construction of Candlewood hotels owned by the Company. The
construction division has identified and approved three major contractors in
various regions of the United States, each of which have extensive experience in
the construction of lodging facilities. Each of the approved contractors has
agreed to construction contracts on a cost-plus basis with a ceiling on total
expense that are expected to limit cost overruns. Any savings in the
construction costs will be shared by the Company and the general contractors.
The Company's construction division will be responsible for site visits and
inspection during construction and upon completion of construction must approve
a hotel's quality before it can commence operations. The Company estimates that
average construction time on each hotel will be approximately eight months,
subject to delays due to weather and other circumstances.
The Company has developed uniform plans and specifications for the design
of Candlewood facilities. The Company expects that the standard Candlewood hotel
will contain approximately 80-131 rooms, up to 25% of which may be king suites.
The king suites are designed for guests who prefer a suite in which the bedroom
is separated from the kitchen and office area. The Company expects to make
design variations, including changes in the number of studios and king suites,
based on market demographics and site restrictions, among other factors. The
Company believes that its coordination of the construction of Candlewood hotels
and use of uniform plans and specifications, will lower costs and result in
consistent quality and appearance.
27
<PAGE> 30
The Company's 107 room hotel in Wichita, Kansas was developed for a cost,
excluding land, of approximately $3.8 million (or approximately $35,500 per
room), including building structure, improvements, furniture, fixtures,
equipment and pre-opening costs. The Company estimates that the total cost of
the 131 room Candlewood hotels under construction in the Denver and Omaha areas
will be approximately $4.9 million and $5.1 million, respectively (or
approximately $37,000 and $39,000, respectively, per room), excluding land.
Neither the Company's hotel in Wichita nor its hotels under construction in the
Denver and Omaha areas will contain king suites. The Company believes that its
construction costs are relatively low due to a number of factors, including
careful site selection, economical and durable exterior and interior finishes,
high-quality room furnishings and refined and standardized building systems and
processes. The Company anticipates, however, that the cost to develop a facility
will vary significantly by geographic location in large part due to variable
real estate and construction costs. The cost of the Company's real estate in the
Denver, Omaha and Wichita areas was approximately $625,000, $435,000 and
$284,000, respectively.
The Company believes that a combination of the net proceeds from the
Offering and cash from operations, together with its subordinated credit
facility from Doubletree, construction financing from NationsBank and the
proposed construction financing program with a third party lender, will be
sufficient to provide capital for development and operations during the next 12
months. However, there can be no assurance that additional capital will not be
needed at an earlier time. See "Risk Factors--Future Capital Needs and Risks of
Additional Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Liquidity and Capital Resources."
Franchising
The Company has launched a national franchising program which it believes
will accelerate the establishment of its market presence and brand awareness on
a national level, generate incremental revenues at an attractive margin, attract
franchisees and create opportunities to obtain management contracts with respect
to franchised properties. The Company intends to pursue its franchising program
not only through the sale of single-site franchises but also through entering
into development agreements under which the Company will grant the right to
construct Candlewood hotels in an exclusive geographic territory in exchange for
the franchisee's construction of a specified number of hotels pursuant to a
development schedule. As of August 31, 1996 the Company had executed two
development agreements, which together currently grant developers the right to
franchise 15 Candlewood hotels in 1996, 13 Candlewood hotels in 1997, 13
Candlewood hotels in 1998 and three Candlewood hotels in 1999. In pursuing its
franchising strategy, the Company intends to draw upon Mr. DeBoer's experience
with the Residence Inn chain, which included approximately 60 franchised hotels
at the time of its sale to Marriott. In addition, the Company intends to draw on
the experience of Doubletree which has developed an aggressive franchising
program and as of June 30, 1996 had franchised 37 hotels. By accelerating the
roll-out of Candlewood hotels through its franchising program, the Company's
objective is to benefit from economies of scale in management, marketing and
purchasing.
The Company believes that several elements of the Candlewood concept
should be attractive to prospective franchisees, including the experience of the
Company's management team in the extended-stay market, the Company's strategic
alliance with Doubletree, the competitive pricing and operating efficiencies of
the Candlewood product, the Company's commitment to direct sales and the
availability of financing. The Company intends to make the services and
expertise of its real estate, construction and operations divisions available to
its franchisees in order to ensure high quality facilities and customer service.
The Company's real estate division intends to work with its franchisees to
identify sites for development of franchised hotels. The Company's construction
division will advise on the construction and development of franchised hotels. A
representative of the Company's construction division will visit franchised
hotel sites during the construction phase and will inspect and approve each
franchised Candlewood hotel before it commences operations. In addition, after
commencing operations, all franchised Candlewood hotels will be subject to
periodic inspection and verification that they are in compliance with the
Company's strong quality control program and strict maintenance and updating
standards. While the Company may grant franchises in geographic locations where
the Company owns and operates hotels, in such circumstances the Company intends
to require that it manage the hotels owned by its franchisees in order to
coordinate direct sales efforts in the region.
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The Company has arranged with a third party lender for financing for the
development of hotels by its franchisees. As part of its financial relationship
with the Company, the third party lender is expected to provide construction
loans of up to 80% of the cost of new Candlewood hotels, upon satisfaction of
various conditions by the franchisee. Following stabilization, franchisees are
expected to be able to convert these construction loans into long-term financing
through the third party lender. Doubletree has agreed to guarantee certain
portions of the loans made to the Company's franchisees pursuant to this
arrangement, in exchange for a fee and a participation in cash flow and any
residual on the franchised property.
The Company believes that through its development agreements it will be
able to expand Candlewood hotels rapidly into multiple geographic areas and
thereby build brand recognition. In June 1996 the Company entered into
development agreements with SWHC and Studio Ventures, which grant the developers
options to franchise hotels in the following regions:
DEVELOPER REGION COVERED NUMBER OF HOTELS
SWHC Northern California, Oregon and 22
Washington
Studio Ventures Cincinnati, Columbus, Dayton and 22
Toledo, Ohio; Louisville, Kentucky;
Columbia and Greenville, South
Carolina; Greensboro, Charlotte (2),
Winston-Salem and Raleigh, North
Carolina; Nashville, Tennessee
These development agreements call for the submission of site approvals and
applications and execution of franchise agreements for 15 Candlewood hotels in
1996, 13 hotels in 1997, 13 hotels in 1998 and three hotels in 1999. The Company
is exploring opportunities to sign franchise and development agreements with
several other entities; however, no additional definitive agreements have been
entered into to date. See "--Franchise, Development and Management Agreements."
Franchise agreements are executed when the Company and the franchisee
agree on a site and prior to commencement of construction. Pursuant to the
development agreement with SWHC, the Company has entered into a franchise
agreement for the establishment of a Candlewood hotel in Hillsboro, Oregon. SWHC
commenced construction of this hotel in August 1996 and expects to commence
operations in the second quarter of 1997. SWHC has informed the Company that it
has raised $30 million of equity financing for the development of Candlewood
hotels in its territory.
Development agreements do not obligate the developer to build or open any
Candlewood hotels. Each franchised Candlewood hotel will be constructed and
operated under a separate franchise agreement which must be signed before
construction is commenced. However, if a developer fails to franchise any hotels
according to the developer's development schedule, the Company will be entitled
to revoke the developer's exclusive territorial rights. There can be no
assurance that the franchised hotel in Oregon will be opened at the time
specified in the agreement, or at all. There can be no assurance that any
additional franchise agreements will be signed, either as a result of
development agreements or independently, or that any Candlewood hotels will be
opened pursuant to the terms and the times specified in the development
agreements, the franchise agreements, or at all. See "Risk Factors--Development
Risks" and "--Competition for and Dependence on Franchise Agreements."
Management of Franchised Hotels
The Company intends to make its hotel management services available to its
franchisees and anticipates that many franchisees will want to utilize the
Company's experience and expertise to manage their hotels. If in excess of 75%
of the cost of a franchised hotel is financed by the third party lender,
Doubletree will require that the Company manage the franchisee's hotel as a
condition to guaranteeing a portion of the loan. The Company expects
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to receive approximately 5% of hotel revenue in exchange for management
services. As of the date of this Prospectus, the Company has not entered into
any management agreements and does not manage any hotels owned by others. See
"Franchise, Development and Management Agreements."
OPERATING STRATEGIES
The Company's primary operating strategies are to provide its guests with
well-appointed, high quality lodging at affordable prices, ensure guest
satisfaction through a commitment to excellence in customer service and achieve
above industry-average operating margins through, among other things, direct
sales efforts and implementation of operating efficiencies at each of its
facilities.
The Company has designed Candlewood hotels to provide high quality,
comfortable and attractive accommodations together with the amenities desired by
the extended-stay business traveler. The rooms contain high quality furniture
and fixtures, consistent with those found in upscale full-service hotels, to
achieve the highest level of guest satisfaction and to reduce maintenance cost.
The Company believes that the high quality of its rooms will attract business
travelers in the mid-priced segment of the extended-stay market, which the
Company believes is underserved by the current supply of rooms. The Company also
believes that its design and pricing will result in longer stays, higher
occupancy rates and a more stable revenue stream.
In order to offer the Company's customers daily rates lower than those
offered by most traditional hotels, Candlewood hotels have been designed to
maximize operating efficiencies. The Company expects, following an initial
phase-in period, that six to eight full-time employees and one part-time
employee will staff each property. These employees include a general manager who
lives on site, an assistant general manager, a director of sales, an engineer,
two or more housekeepers and a part-time desk clerk. The Company believes that
cost efficiencies will be achieved in part through the reduction of high-cost
amenities and features such as restaurants. In addition, full maid service will
be provided on a weekly rather than daily basis, no food and beverage services
will be provided except for self-service machines, and most Candlewood hotels
will not have pools. Towels will be changed twice weekly and upon request at the
reception desk. Following an initial phase-in period, front desk transactions
are expected to be minimal (approximately 15-20 daily) because of the nature and
length of extended-stay. Each Candlewood hotel will be equipped with technology
that will allow most guests to check-in and check-out without the assistance of
hotel employees. Guests can gain access to the room key by entering their name
on a keypad of a personal mailbox. Guests can check-out using a computer program
available through the televisions in their rooms. Candlewood hotels will also
have state-of-the-art energy management systems to maximize energy efficiency.
To ensure quality customer service, every Candlewood general manager and
director of sales must successfully complete classroom courses and an on-the-job
training program covering direct sales, hotel operations, marketing and
maximization of operating efficiencies. Each hotel will have an on-site general
manager who will be responsible for the Company's quality control standards and
procedures which govern management, operations, maintenance, regulatory
compliance, reporting and marketing. The Company's operations division will
conduct periodic inspections of each Candlewood hotel to ensure compliance with
the Company's quality control standards.
The Company's sales and marketing division is targeting institutions and
employers located in proximity to its hotel in Wichita and its properties in the
Denver and Omaha areas. The sales and marketing division has also developed an
extensive, high quality direct mail campaign. In addition, each hotel will have
an on-site director of sales dedicated to marketing and direct sales efforts.
Through these direct sales efforts, the Company believes it can maintain
consistently high occupancy levels and generate longer stays by its guests.
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FRANCHISE, DEVELOPMENT AND MANAGEMENT AGREEMENTS
Franchise Agreements
General. The Company enters into separate hotel non-exclusive franchise
agreements for the construction of each Candlewood franchised hotel which must
be signed before construction is commenced. The agreements specify the period of
time during which the hotel must be built and the specific site. The Company's
franchise agreement provides for an initial term of 20 years, with an option
exercisable by the franchisee to renew the agreement for two additional
consecutive terms of 10 years, each subject to certain conditions, including the
execution of a commitment agreement which may require the franchisee to upgrade,
at its own expense, the Candlewood hotel to conform to then-current standards
and specifications of the Company.
Fees. Under the current Company franchise agreement, the franchisee is
required to pay an initial franchise fee for a single hotel equal to the greater
of $40,000 or $400 per room, all of which will be refundable to the franchisee,
except a $5,000 application fee, if the application is not approved by the
Company. Subsequent to the opening of the tenth Candlewood hotel, each
franchisee will pay 4% of room revenues for two years beginning in the fiscal
period immediately following the opening of the tenth hotel, and 5% of room
revenues thereafter. Franchisees that open a hotel after the opening of the
tenth hotel will pay 4% of such hotel's room revenues for two years, and 5% of
such hotel's room revenues thereafter. Upon a vote of a majority of the
franchisees, each franchisee is also required to contribute up to 2.5% of its
fiscal period room revenues to the Company's marketing, advertising and direct
sales fund which is administered by The International Association of Candlewood
Hotel Owners (the "IACHO"), an association of Candlewood hotel owners. The
marketing fund contribution percentage is subject to adjustment from time to
time upon a majority vote of the members of IACHO. Association dues to be paid
by franchisees, if any, will be determined annually by IACHO.
Services. The Company has prepared comprehensive operations and
development manuals and will provide services to assist each franchisee in
developing and operating Candlewood hotels. The Company will make available to
its franchisees prototype plans and specifications for a standard Candlewood
hotel, consultation and advisory services concerning the construction and
operation of the Candlewood hotel, and an operating manual and training programs
for the franchisee's employees. The Company expects to offer a reservations
system, a property management system, a Candlewood hotel directory and a
marketing resource guide to each of its franchisees.
Quality Control. To maintain quality and consistency within the Candlewood
hotel system, the current franchise agreement specifies certain management,
operational, maintenance, regulatory compliance, reporting and marketing
standards and procedures with which each franchisee must comply. Each franchisee
is also obligated to obtain and maintain a specified amount of insurance. To
ensure compliance with the Company's quality control standards, the Company will
conduct periodic inspections of its franchised facilities.
Termination. The Company has the right to terminate a franchise agreement
for a variety of reasons, including failure to open the franchised hotel within
the time schedule agreed to in the agreement, failure to comply with any
covenant or provision of the agreement, failure to operate the hotel or
knowingly making any false statements in any report or document submitted to the
Company. The franchisee may terminate the agreement only if, after operating the
hotel for two years, it is unable, after acting in good faith and after using
all reasonable and diligent efforts, to operate the franchised hotel at a
profit. Many state franchise laws limit the ability of a franchisor to terminate
or refuse to renew a franchise. See "--Government Regulation."
Covenants. During the term of the franchise agreement, each franchisee
agrees not to compete or be associated with any business in competition with the
Company and, for a period of two years after any termination of the franchise
agreement, each franchisee agrees not to compete or be associated with any
business that provides lodging accommodations on a daily-stay basis with kitchen
facilities and limited maid service at a moderate to economy price. Many state
franchise laws impose substantive requirements on franchise agreements and may
limit the enforceability or noncompetition provisions therein. See "--Government
Regulation." Each franchisee also agrees not to divulge any of the Company's
trade secrets or any confidential information received from the Company's
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operating and development manuals. A franchisee may not sell any direct or
indirect interest in its franchise without the prior written consent of the
Company.
Development Agreements
The Company has entered and will enter into development agreements with
hotel developers whereby the Company grants options to obtain franchises to
establish and operate multiple Candlewood hotels. The standard development
agreement provides the developer with an assigned territory in which the Company
agrees not to establish or allow any other franchisee to establish a Candlewood
hotel until the expiration of the development schedule set forth in the
agreement or until an earlier default under the agreement by the developer. To
exercise a development option, the developer must submit a franchise
application, together with the franchise fee, a market feasibility study for the
site and such other information or materials as the Company may reasonably
require, including a copy of a letter of intent or other evidence satisfactory
to the Company, which confirm the developer's favorable prospects for obtaining
the site. If the developer fails to comply with the development schedule or any
terms or conditions of a franchise agreement, the Company may terminate the
agreement, reduce the number of options for franchises granted to the developer,
reduce the developer's protected territory or terminate the territorial
exclusivity granted to the developer. The Company cannot predict the number of
additional development agreements it will enter into, if any.
PROPERTIES
The Company currently owns the property in Wichita Kansas on which its 107
room hotel is located. The Company has also purchased properties in the Denver,
Colorado and Omaha, Nebraska areas and has commenced construction of Candlewood
hotels at those sites. Each of those hotels, when completed, is expected to
contain 131 studios and 57,237 square feet. See "--Growth and Development
Strategies--Development and Ownership."
In addition to the properties described above, the Company also maintains
its corporate headquarters in Wichita, Kansas. The Company leases its office
space on a short-term basis. These offices are sufficient to meet the Company's
present needs, and the Company does not anticipate any difficulty in securing
additional office space, as needed, on terms acceptable to the Company. See
"Certain Transactions."
COMPETITION
The lodging industry is highly competitive. Competitive factors within the
industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. The Company intends to build
most of its properties in geographic locations where other extended-stay hotels
may be located. The Company expects to compete for guests and development sites
with both traditional lodging facilities and other extended-stay facilities,
including those owned and operated by competing chains and individual
extended-stay facilities. Many of these competitors have greater financial
resources and may have better relationships with prospective franchisees,
representatives of the construction industry and others in the lodging industry.
The number of competitive lodging facilities in a particular area could have a
material adverse effect on occupancy, average daily rate and revenues of the
Candlewood hotels.
The Company anticipates that competition within the extended-stay lodging
market will increase substantially in the foreseeable future. A number of other
lodging chains and developers have developed or are attempting to develop
extended-stay lodging facilities that may compete with the Company's facilities.
In particular, some of these entities target the mid-priced segment of the
extended-stay market in which the Company competes. The Company may compete for
guests and for development sites with certain of these established entities that
have greater financial resources than the Company and better relationships with
lenders and real estate sellers. Further, there can be no assurance that new or
existing competitors will not significantly reduce their rates or offer greater
convenience, services or amenities or significantly expand or improve facilities
in markets in which the Company competes, thereby materially adversely affecting
the Company's business and results of operations.
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PROPRIETARY RIGHTS
The Company filed applications to register the service marks "Candlewood,"
"Your Studio Hotel" and the Company's logo as service marks in the United States
and has registered those service marks in the State of Kansas. The Company also
claims the common law rights to the trade name and service marks for various
"Candlewood" products. If the Company is denied protection of its service marks
or is required to change its trademarks, it could result in significant expenses
and have a material adverse effect on the Company's business, financial
condition and results of operations.
GOVERNMENT REGULATION
The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, the Company and its franchisees 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 permits or 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's business and results of operations. Both at the federal and state
level from time to time, there are proposals under consideration to increase the
minimum wage.
Under the Americans With Disabilities Act, all public accommodations are
required to meet certain federal requirements related to access and use by
disabled persons. Although the Company has attempted to satisfy ADA requirements
in the designs for its facilities, no assurance can be given that a material ADA
claim will not be asserted against the Company, which could result in a judicial
order requiring compliance, and the expenditure of substantial sums to achieve
compliance, an imposition of fines, or an award of damages to private litigants.
These and other initiatives could adversely affect the Company as well as the
lodging industry in general. See "Risk Factors--Government Regulation."
INSURANCE
The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company of its size in its 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. See "Certain Transactions."
EMPLOYEES
As of August 26, 1996, the Company and its subsidiaries employed 30
persons, eight of whom were employed at the Company's hotel in Wichita and 22 of
whom were employed in the Company's corporate headquarters. The Company expects
that it will significantly increase the number of its employees as it expands
its business. The Company's employees are not subject to any collective
bargaining agreements, and management believes that its relationship with its
employees is good.
LEGAL PROCEEDINGS
The Company has not been and is not now a party to any litigation or
claims.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding each person
who is a director or executive officer of the Company. Shortly following the
Offering, the Company will add two additional directors, both of whom will be
independent of the Company.
Name Age Position
---- --- --------
Jack P. DeBoer 65 Chairman of the Board, Chief Executive Officer and
President
Richard J. Ferris 60 Director
Peter V. Ueberroth 59 Director
Warren D. Fix 58 Director, Executive Vice President, Chief Financial
Officer and Secretary
Larry D. Bowers 44 Vice President--Construction
Kent L. Brown 49 Vice President--Controller and Assistant Secretary
Jeffrey F. Hitz 51 Vice President--Real Estate
James E. Korroch 30 Vice President--Operations
David A. Redfern 30 Vice President--Sales and Marketing
Jack P. DeBoer has served as Chairman of the Board, President and Chief
Executive Officer of the Company since its inception. From October 1993 to
September 1995, Mr. DeBoer was self-employed and was engaged in the development
of the Candlewood extended-stay hotel concept. From 1988 to 1993, Mr. DeBoer
co-founded and developed Summerfield Hotel Corporation, an upscale extended-stay
hotel chain. In 1975, Mr. DeBoer founded the Residence Inn Company, an upscale
extended-stay chain which he built to 100 hotels before selling the company to
Marriott Corporation in 1987.
Richard J. Ferris has served as a director of the Company since its
inception. Since June 1992, Mr. Ferris has served as Co-Chairman of Doubletree.
From June 1987 to June 1992, Mr. Ferris was a private investor. Mr. Ferris is
the former Chairman and Chief Executive Officer of UAL Corporation, a position
he held from April 1976 to June 1987. Mr. Ferris serves as a director of The
Proctor and Gamble Company, Amoco Corporation, Evanston Hospital Corporation and
as a director and Chairman of the Board of the PGA Tour Policy Board, for which
he serves as Chairman.
Peter V. Ueberroth has served as a director of the Company since its
inception. Since June 1992, Mr. Ueberroth has served as Co-Chairman of
Doubletree. From April 1989 to the present, Mr. Ueberroth has been Managing
Director and a Principal of The Contrarian Group, an investment management
company. From March 1984 to March 1989, Mr. Ueberroth served as the sixth
Commissioner of Major League Baseball. Mr. Ueberroth serves as a director of The
Coca-Cola Company, Transamerica Corporation and Ambassadors International, Inc.,
for which he serves as Co-Chairman.
Warren D. Fix has served as a director and the Executive Vice President,
Chief Financial Officer and Secretary of the Company since its inception. From
July 1994 to October 1995, Mr. Fix was a Consultant to Doubletree, primarily
developing debt and equity sources of capital for hotel acquisitions and
refinancings. Additionally, Mr. Fix was a partner in The Contrarian Group from
December 1992 to October 1995. From 1989 to December 1992, Mr. Fix served as
President of the Pacific Company, a real estate investment and development
company. From 1964 to 1989, Mr. Fix held numerous positions within The Irvine
Company, including most recently, Chief Financial Officer. Mr. Fix serves on the
boards of directors of El Dorado Bank and Alexander Haagan Properties, Inc.,
both publicly traded companies.
Larry D. Bowers has served as Vice President of Construction of the
Company since March 1996. From September 1991 to March 1996, Mr. Bowers owned
and operated Bowers Construction & Development, Inc., a general contracting and
consulting company. From February 1984 to September 1991, Mr. Bowers served as a
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Division President of Robertson Homes. From November 1981 to February 1984, Mr.
Bowers owned and operated Construction Management Services, a general
contracting company.
Kent L. Brown has served as Vice President--Controller and Assistant
Secretary of the Company since August 1996. From September 1993 to August 1996,
Mr. Brown held the position of Manager--Financial Analysis for THORN Americas,
Inc., and from September 1990 to September 1993, he served as Director of
Financial Reporting and Taxes for Foodbrands America, Inc. From September 1982
to September 1990, Mr. Brown served in various positions with the accounting
firm of Ernst & Young, most recently as Senior Manager in the auditing
department. Mr. Brown is a certified public accountant.
Jeffrey F. Hitz has served as Vice President of Real Estate of the Company
since May 1996. From July 1995 to May 1996, Mr. Hitz was a consultant to several
retail chains on site selection and concept development. From October 1994 to
July 1995, Mr. Hitz was Senior Vice President, Operations for EZCorp, Inc., a
publicly traded retail chain. From August 1989 to October 1994, Mr. Hitz held
several positions with THORN Americas, Inc., including most recently, Vice
President, Development. From 1986 to 1989, Mr. Hitz was a multi-unit franchisee
of two restaurant concepts in California and Arizona.
James E. Korroch has served as Vice President of Operations of the Company
since its inception. From April 1990 to June 1995, Mr. Korroch held numerous
sales, marketing and operations positions with Summerfield Hotel Corporation,
most recently as General Manager of the Summerfield Suites Hotel in Schaumburg,
Illinois. Mr. Korroch also served as Chairman of the Committee on Technology and
the Committee on Corporate Communications at Summerfield.
David A. Redfern has served as Vice President of Sales and Marketing of
the Company since December 1995. From August 1994 to December 1995, Mr. Redfern
served as the National Sales Director for the Summerfield Suites Hotel chain.
From June 1993 to January 1995, Mr. Redfern served as a Task Force Manager for
Summerfield Suites. From September 1991 to June 1993, Mr. Redfern attended the
University of California-Irvine, where he received his MBA degree. From January
to June 1993, Mr. Redfern was also employed by Cruttenden & Co., Inc. as a
research analyst. From August 1990 to September 1991, Mr. Redfern served as
Director of Sales for the Summerfield Suites hotel in San Francisco, California.
From 1988 to August 1990, Mr. Redfern was a Sales Manager for the Residence Inn
by Marriott in La Jolla, California.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Concurrently with the closing of the Offering, the Board
of Directors will establish an Audit Committee which will consist of two or more
independent directors. The Audit Committee will be established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
Compensation Committee. Concurrently with the closing of the Offering, the
Board of Directors will establish a Compensation Committee, which will be
comprised of two or more non-employee or independent directors to the extent
required by Rule 16b-3 under the Exchange Act. The Compensation Committee will
be established to determine compensation for the Company's executive officers
and determine awards under the Company's 1996 Equity Plan.
The membership of the committees of the Board of Directors will be
established after the closing of the Offering. The Board of Directors may from
time to time form other committees as circumstances warrant. Such committees
will have authority and responsibility as delegated by the Board of Directors.
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DIRECTOR COMPENSATION
The Company's outside directors (the "Outside Directors") will receive
directors' fees of $4,000 for each Board of Directors meeting attended. In
addition, each Outside Director will receive $1,000 for each committee meeting
attended on a day the Board of Directors is not otherwise meeting. Pursuant to
the Company's 1996 Equity Plan, each of the Company's existing directors (other
than Messrs. DeBoer and Fix) will receive immediately prior to the commencement
of the Offering a grant of non-qualified stock options to purchase 10,000 shares
of Common Stock at the initial public offering price. Also pursuant to the 1996
Equity Plan, each person who becomes a director subsequent to the Offering will
receive a grant of non-qualified stock options to purchase 10,000 shares of
Common Stock at the fair market value of the Common Stock on the date such
person becomes a member of the Board of Directors. Each director may be
reimbursed for certain expenses incurred in connection with attendance at Board
and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company did not have a Compensation Committee
and all compensation decisions were made by Mr. DeBoer and Mr. Fix, except for
compensation decisions with respect to Messrs. DeBoer and Fix which were made by
Messrs. Ferris and Ueberroth.
The Company has implemented a policy requiring any material transaction or
agreement with a related party to be approved by a majority of the directors not
interested in such transaction or agreement, provided that they determine that
the terms of any such transaction or agreement are no less favorable to the
Company than those that could be obtained from an unaffiliated third party. In
addition, pursuant to the terms of the Stockholders Agreement among the Initial
Stockholders, the Company may not enter into any related party transactions (as
defined therein) without the prior approval of the Initial Stockholders. See
"The Reorganization."
DIRECTORS AND OFFICERS INSURANCE
The Company has applied for directors and officers liability insurance
policy with coverage typical for a public company such as the Company. The
directors and officers liability insurance policy will become operative upon the
effectiveness of the Registration Statement and will insure (i) the directors
and officers of the Company from any claim arising out of an alleged wrongful
act by these persons while acting as directors and officers of the Company, (ii)
the Company to the extent it has indemnified the directors and officers for such
loss and (iii) the Company for losses incurred in connection with claims made
against the Company for covered wrongful acts.
EXECUTIVE COMPENSATION
The Company was formed and began operations in November 1995. During
fiscal 1995, Jack P. DeBoer, the Chairman of the Board, President and Chief
Executive Officer of the Company, received total compensation of $24,000 (an
annualized salary of $96,000). None of the other executive officers of the
Company received total compensation greater than $100,000 during fiscal 1995.
The Company anticipates that during fiscal 1996 its most highly compensated
executive officers, with estimated base salary amounts listed for each
individual on an annualized basis, will be Mr. DeBoer, $96,000, Mr. Warren D.
Fix, $96,000, and Mr. Korroch, $80,000 (the "Named Executive Officers"). The
Named Executive Officers may be entitled to performance bonuses pursuant to
their employment agreements, if any, or the Company's planned incentive
compensation plan, as determined by the Compensation Committee.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Mr. DeBoer under
which he has agreed, subject to certain conditions, to continue to serve as the
Company's President and Chief Executive Officer until August 1999. Mr. DeBoer
will receive annual cash compensation pursuant to the employment contract, which
is renewable from year to year thereafter. Mr. DeBoer shall be eligible for a
bonus to be set by the Compensation Committee. The contract provides that upon a
change of control of the Company or termination of employment under certain
circumstances, Mr. DeBoer will be entitled to a payment equal to three times his
average annual salary
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<PAGE> 39
for the previous three years. The contract provides that, during the term of the
contract and for two years thereafter, except with respect to certain passive
investments in lodging companies and hotel properties and activities related to
properties held at the time of the offering, Mr. DeBoer will not engage in the
acquisition, founding, development, operation or management of any new hotel
companies or chains. See "Certain Transactions."
COMPENSATION PLANS AND ARRANGEMENTS
1996 Equity Participation Plan
The Company has established the 1996 Equity Participation Plan (the "1996
Equity Plan") to enable executive officers, other key employees, Independent
Directors and consultants of the Company. The 1996 Equity Plan is designed to
attract and retain executive officers, other key employees, Independent
Directors and consultants of the Company. The 1996 Equity Plan provides for the
award to executive officers, other key employees, Independent Directors and
consultants of the Company of a broad variety of stock-based compensation
alternatives such as nonqualified stock options, incentive stock options,
restricted stock and performance awards. Awards under the 1996 Equity Plan may
provide participants with the right to acquire shares of Common Stock.
The 1996 Equity Plan will be administered by the Compensation Committee,
which is authorized to select from among the eligible participants the
individuals to whom options, restricted stock purchase rights and performance
awards are to be granted and to determine the number of shares to be subject
thereto and the terms and conditions thereof, including the exercise or sale
price, the number of shares subject to the award and the exercisability thereof.
The Compensation Committee is also authorized to adopt, amend and rescind rules
relating to the administration of the 1996 Equity Plan.
Nonqualified stock options will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the date
of grant (but not less than par value), and usually will become exercisable in
installments after the grant date. The term of nonqualified stock options
granted under the 1996 Equity Plan may not exceed ten years.
Incentive stock options will be designed to comply with the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), and will be subject
to restrictions contained in the Code, including exercise prices equal to at
least 100% of fair market value of the Common Stock on the grant date and a ten
year restriction on their term, but may be subsequently modified to disqualify
them from treatment as an incentive stock option.
Restricted stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions are
not met. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and may
receive dividends prior to the time when the restrictions lapse.
Deferred stock may be awarded to participants, typically without payment
of consideration, but subject to vesting conditions based upon a vesting
schedule or performance criteria established by the Compensation Committee.
Unlike restricted stock, deferred stock will not be issued until the deferred
stock award has vested, and recipients of deferred stock generally will have no
voting or dividend rights prior to the time the vesting conditions are
satisfied.
Stock appreciation rights may be granted in connection with a stock option
or independently. Stock appreciation rights granted by the Compensation
Committee in connection with a stock option typically will provide for payments
to the holder based upon increases in the price of the Company's Common Stock
over the exercise price of the related option. There are no limitations
specified upon the exercise of stock appreciation rights or upon the amount of
gain realizable from the exercise of stock appreciation rights. The Compensation
Committee may elect to pay stock appreciation rights in cash or in Common Stock
or in a combination of cash and Common Stock.
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<PAGE> 40
Performance awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of the Common Stock
over a predetermined period. Performance awards may also include bonuses which
may be granted by the Compensation Committee on an individual or group basis and
which may be payable in cash or in Common Stock or in a combination of cash and
Common Stock.
Stock payments include payments in the form of shares of Common Stock,
options or other rights to purchase shares of Common Stock, made as part of a
deferred compensation arrangement and in lieu of all or any portion of
compensation that would otherwise be paid to an employee. Stock payments may be
based upon the fair market value, book value, net profits or other measure of
value of the Company's Common Stock or other specific performance criteria
determined appropriate by the Compensation Committee, determined on the date
such stock payment is made or on any date thereafter.
Prior to the closing of the Offering, the Company anticipates that it will
issue to executive officers, other key employees, Independent Directors and
consultants of the Company options to purchase approximately unregistered shares
of Common stock pursuant to the 1996 Equity Plan. The term of each such option
will be ten years from the date of grant. Except as otherwise described herein,
each such option shall vest 25% per year over four years and will be exercisable
at a price per share equal to the initial price per share of Common Stock sold
to the public in the Offering.
A maximum of shares have been reserved for issuance under the 1996
Equity Plan.
401(k) Profit Sharing Plan
Effective as of June 1, 1996, the Company adopted the Candlewood Hotel
Company 401(k) Profit Sharing Plan (the "401(k) Plan"). The 401(k) Plan is a
profit sharing plan designed to be qualified under applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). The 401(k) Plan covers
all employees of the Company who have attained age 21 and have completed 1,000
hours of service, as that term is defined in the 401(k) Plan, and who have
twelve months of service with the Company. Participants will receive service
credit for employment with the predecessor of the Company.
A participant in the 401(k) Plan may contribute up to 15% of his or her
compensation on a pre-tax basis under the 401(k) Plan. Also, under the 401(k)
Plan, the Company may, in its discretion, make matching contributions based on
the pre-tax contributions of a participant that are not in excess of 6% of
compensation. The matching contributions shall be proportionate to the
participant's pre-tax contributions subject to matching. The Company may make in
its discretion, certain additional contributions that generally will be
allocated to participants in proportion to compensation. Discretionary profit
sharing contributions for any plan year will be allocated to participants who
have been credited with 500 or more hours of service during the plan year and to
participants who terminate employment during the plan year due to death,
disability or retirement. The total annual contribution for each participant may
not exceed the lesser of (a) 25% of the participant's taxable compensation for
such year or (b) the greater of (i) 25% of the defined benefit dollar limitation
then in effect under Section 415(b)(1)(A) of the Code, or (ii) $30,000.
Contributions made by, or on behalf of, a participant, and interest,
earnings, gains or losses on such amounts, are credited to accounts maintained
for the participant under the 401(k) Plan. A participant under the 401(k) Plan
is fully vested in his or her pre-tax contributions accounts. Vesting in a
participant's remaining account is based upon his or her years of service with
the Company. A participant is initially 20% vested after the completion of one
year of service with the Company. A participant's vested percentage increases by
20% for each subsequent year of service with the Company, so that a participant
is 100% vested after the completion of five years of service. In addition, a
participant becomes fully vested in his or her accounts upon retirement due to
permanent disability,
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<PAGE> 41
attainment of age 65 or death. Finally, the 401(k) Plan provides that the
Company may at any time declare the 401(k) Plan partially or completely
terminated, in which event, the accounts of each participant with respect to
whom the 401(k) Plan is terminated will become fully vested. In addition, in the
event of a termination, partial termination or complete discontinuance of
contributions, the accounts of each affected participant will become fully
vested.
Incentive Compensation Plan
The Company intends to establish an incentive compensation plan for
officers and key employees of the Company after the closing of the Offering.
This plan will provide for the payment of an annual bonus to participating
officers and key employees if certain performance objectives established for
each individual are achieved. Each participant's performance objectives, to be
established at the beginning of the year by the Compensation Committee, will
vary from year to year and may be based on measures of profitability, cash flow
and other measures for the Company and various segments of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware Law, a director of the Company shall not be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under current Delaware Law, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provision of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior), except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Company's
Certificate of Incorporation provides that the Company shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.
The Company also contemplates entering into agreements (the
"Indemnification Agreements") with each of the directors and officers of the
Company pursuant to which the Company will agree to indemnify such director or
officer from claims, liabilities, damages, expenses, losses, costs, penalties or
amounts paid in settlement incurred by such director or officer in or arising
out of his capacity as a director, officer, employee and/or agent of the Company
or any other corporation of which he is a director or officer at the request of
the Company to the maximum extent provided by applicable law. In addition, such
director or officer will be entitled to an advance of expenses to the maximum
extent authorized or permitted by law.
To the extent that the Board of Directors or the stockholders of the
Company may in the future wish to limit or repeal the ability of the Company to
provide indemnification as set forth in the Company's Certificate of
Incorporation, such repeal or limitation may not be effective as to directors
and officers who are parties to the Indemnification Agreements, because their
rights to full protection would be contractually assured by the Indemnification
Agreements. It is anticipated that similar contracts may be entered into, from
time to time, with future directors and officers of the Company.
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CERTAIN TRANSACTIONS
The Company leases the office space for its corporate headquarters in
Wichita, Kansas from MSI Building, LLC ("MSI Building"), a limited liability
company. The Company began occupying its office space on February 23, 1996 and
as of August 31, 1996 had paid rent in the amount of $47,077 to MSI Building.
The Company's lease has a term of 5 years. In addition, the Company leases
certain equipment from MSI Building and has reimbursed MSI Building for certain
leasehold improvements for the Company's office space. Such payments for the
eight months ended August 31, 1996 totaled $42,640. There were no such payments
to MSI Building in 1995. Mr. DeBoer is a minority member of MSI Building.
The Company obtains business insurance, such as property, liability,
workers' compensation and group medical coverages, through Manning & Smith
Insurance. The Company believes that the types and amounts are consistent with
those obtained by similar businesses. For the period from October 1, 1995 to
December 31, 1995 and the eight months ended August 31, 1996, the Company had
paid insurance premiums to Manning & Smith for such coverages in the amounts of
$2,072 and $28,882, respectively. Mr. DeBoer owns a minority interest in Manning
and Smith Insurance.
As part of its strategic alliance with Doubletree, Candlewood enjoys the
benefits of Doubletree's bulk phone rates, in-room video and television service
arrangement and bulk purchase of supplies and other goods. The Company expects
to utilize Doubletree's central reservations system and to benefit from
Doubletree's established insurance and benefit programs. Mr. Richard J. Ferris
and Mr. Peter V. Ueberroth, directors of the Company, are each Co-Chairman of
Doubletree.
The Company has arranged with a third party lender to provide construction
loans and long-term financing for up to 80% of the cost of franchised hotels,
subject to approval by the Company and the lender on an individual property
basis. Doubletree has agreed to guarantee certain portions of the loans made to
the Company's franchisees under this arrangement in exchange for a fee and a
participation in cash flow and any residual on the franchised property.
In connection with the Reorganization, Doubletree has agreed to extend a
five-year $15 million subordinated credit facility to the Company. The $9
million previously contributed by Doubletree to Candlewood LLC will be converted
into amounts outstanding under the credit facility. See "The Reorganization."
THE REORGANIZATION
The Company was incorporated in August 1996 to succeed to the business of
Candlewood LLC in anticipation of the Offering. Candlewood LLC was formed in
November 1995 to develop, own, operate and franchise Candlewood extended-stay
hotels. The membership interests in Candlewood LLC are owned 50% by Doubletree,
42.5% by JPD Corporation and 7.5% by the Fix Partnership. Each of the Company's
three properties is owned by a separate limited liability company, the
membership interests of each of which are owned 98% by Candlewood LLC, 1% by DT
Real Estate, Inc., 0.85% by JPD Corporation, and 0.15% by the Fix Partnership.
Immediately prior to the Offering, Doubletree and the Fix Partnership will
contribute to the Company all of their outstanding membership interests in
Candlewood LLC and their minority interests in Subsidiary LLCs. At the same
time, Mr. DeBoer and certain members of his family will contribute to the
Company 100% of the stock of JPD Corporation, the assets of which are
substantially comprised of its membership interest in Candlewood LLC. In
consideration of such transfer, each of Doubletree and the Fix Partnership will
be issued shares of Common Stock of the Company in proportion to their ownership
interests in Candlewood LLC and Mr. DeBoer and certain members of his family
will be issued shares of Common Stock of the Company in proportion to JPD
Corporation's ownership interest in Candlewood LLC. Following the
Reorganization, JPD Corporation will become a wholly-owned subsidiary of the
Company. In connection therewith, Mr. DeBoer has agreed to indemnify the Company
for any liabilities associated with JPD Corporation arising out of facts or
circumstances existing prior to the
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Reorganization. In addition, following the Reorganization, each of the Company's
three hotel properties will be owned by a separate limited liability company,
the members of which will be the Company and JPD Corporation.
Prior to the Reorganization, Doubletree had committed to advance
Candlewood LLC up to $15 million to fund development costs. As of August 31,
1996, Doubletree had contributed $9 million of that commitment to Candlewood
LLC. In connection with the Reorganization, the funds advanced to Candlewood LLC
by Doubletree were converted into a $15 million subordinated credit facility.
The credit facility is subordinated to debt incurred in the development of
hotels and the Company's line of credit. Amounts outstanding under the credit
facility will bear interest at rates of seven percent per annum for the first 12
months following contribution, 10% per annum for the second 12 months following
contribution and 15% per annum thereafter.
Registration Rights Agreement. As part of the Reorganization, the Initial
Stockholders (Doubletree, Mr. DeBoer and the Fix Partnership) entered into an
Incorporation and Registration Rights Agreement (the "Registration Rights
Agreement"). The Registration Rights Agreement provides for the incorporation of
the Company and the transfer to the Company of the membership interests in
Candlewood LLC and the Subsidiary LLCs held by the Initial Stockholders in
connection with the Offering.
The Registration Rights Agreement provides the Initial Stockholders with
certain rights with respect to the registration under the Securities Act of
shares of Common Stock issued to them in the Reorganization, including rights
(subject to certain limitations) to include such shares in any registration
under the Securities Act effected for the benefit of the Company or at the
request of another holder. Doubletree has demand registration rights pursuant to
which it may require (subject to certain limitations) the Company to register
the shares received in the Reorganization under the Securities Act. In general,
the Company is only required to effect two such demand registrations. Upon the
exercise of a demand registration, the Company may, at its option and in lieu of
effecting such registration, purchase from Doubletree the shares requested to be
registered for a cash amount equal to the estimated net proceeds (as defined in
the Registration Rights Agreement) Doubletree would have received upon the
registered public sale of such shares. The Company is not required to file a
registration statement upon exercise of these demand registration rights within
180 days following any underwritten public offering of Common Stock or
securities, convertible into or exercisable or exchangeable for Common Stock.
All expenses of any registration relating to securities as provided in the
Registration Rights Agreement (other than underwriting discounts and commissions
and fees and expenses of counsel for selling stockholders) are to be borne by
the Company. The Initial Stockholders have agreed to waive their rights to
include shares of Common Stock in the Offering.
Stockholders Agreement. The Stockholders Agreement among the Company and
the Initial Stockholders entitles the Initial Stockholders, among other things,
to nominate directors to the Company's Board of Directors. Prior to the
Offering, the Company's Board of Directors consisted of four directors, of which
two were nominated by JPD Corporation and the Fix Partnership and two were
nominated by Doubletree. See "Management--Directors and Executive Officers."
Pursuant to the Stockholders Agreement, following the completion of the
Offering, the Board of Directors will be expanded to include at least two
directors who are not affiliated with any Initial Stockholder, which individuals
shall be initially elected by the unanimous vote of the directors then in
office. Each of JPD Corporation and the Fix Partnership, acting jointly, and
Doubletree will be entitled to nominate one-half of the number of directors,
other than the unaffiliated directors. Each of the Initial Stockholders has
agreed to vote its shares of Common Stock in favor of individuals nominated
pursuant to the Stockholders Agreement. Each of these stockholders has agreed to
vote for the removal of a director if the Initial Stockholder that nominated
such director so requests.
The Stockholders Agreement also provides the Initial Stockholders with
certain "veto rights" with respect to specified actions by the Company and its
subsidiaries. In general, without the written approval of the Initial
Stockholders, the Company may not amend its certificate of incorporation or
bylaws or declare or pay any dividends or make any other distributions with
respect to its capital stock, and neither the Company nor any of its
subsidiaries may engage in certain acquisitions or dispositions, or make capital
expenditures, involving consideration in excess of $10 million, purchase or
redeem any of its capital stock, issue or sell any capital stock, options or
similar derivative securities or file any registration statement with respect
thereto, authorize or effect any stock dividend or stock split, incur or assume
any indebtedness in excess of $10 million, engage in any business not
significantly
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related to the business in which Candlewood LLC was engaged at the time the
Company was incorporated, enter into certain related party transactions, change
accountants or accounting principles or practices, establish arrangements for
compensating officers, directors of employees in excess of certain levels or
enter into other transactions or arrangements not in the ordinary course of
business. In addition, without the written approval of each of the Initial
Stockholders, the Company may not engage in certain transactions involving a
merger, consolidation or liquidation of the Company, engage in certain
acquisitions or dispositions, increase the size of its Board of Directors or
engage in certain transactions involving the liquidation or sale of certain of
its subsidiaries. The Initial Stockholders have consented to the registration,
offer and sale of the shares of Common Stock offered hereby.
The Stockholders Agreement also provides to Doubletree certain purchase
rights with respect to future sales of Common Stock or securities convertible
into or exchangeable for Common Stock. In general, if the Company intends to
sell such securities for cash, subject to certain exceptions with respect to
sales to employees, the Company must first offer to sell such securities to
Doubletree in proportion to the number of Subject Shares (as defined therein)
held by Doubletree. Doubletree has agreed to waive its purchase rights as they
relate to the Offering.
The Stockholders Agreement will terminate ten years after the commencement
of the Offering.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of , 1996, and as adjusted to reflect the
sale by the Company of the shares offered hereby (i) by each person who is known
by the Company to beneficially own more than five percent of the Common Stock,
(ii) by each of the Company's directors, (iii) by each of the Named Executive
Officers and (iv) by all executive officers and directors as a group. Except as
otherwise indicated, the persons named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OWNERSHIP AFTER
OFFERING OFFERING
----------------------- -----------------------
NAME AND ADDRESS OF NUMBER OF NUMBER OF
BENEFICIAL OWNER SHARES PERCENTAGE SHARES PERCENTAGE
- ----------------------------------------- --------- ---------- --------- ----------
<S> <C> <C>
Doubletree Corporation
410 N. 44th Street
Phoenix, Arizona 85008................... 50.0%
JPD Corporation
Lakepoint Office Park
9342 East Central
Wichita, Kansas 67206.................... 42.5%
Warren D. Fix Family Partnership......... 7.5%
Jack P. DeBoer (1)....................... 42.5%
Richard J. Ferris........................ -- --
Peter V. Ueberroth....................... -- --
Warren D. Fix (2)........................ 7.5%
James E. Korroch......................... -- --
All directors and executive officers as a
group (9 persons).................. 50.0%
</TABLE>
* Less than one percent
(1) Includes shares held by JPD Corporation.
(2) Includes shares held by Warren D. Fix Family Partnership. Mr. Fix
disclaims beneficial ownership of these shares except to the extent of his
interest in the Fix Partnership.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
The authorized capital stock of the Company consists of shares of
Common Stock, par value $.01 per share, and shares of Preferred Stock in
one or more series. Immediately following the completion of the Offering
(assuming the Underwriters' over-allotment option is not exercised), an
aggregate of shares of Common Stock will be issued and outstanding, and no
shares of preferred stock will be issued or outstanding.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of agreements governing the Company's
long-term debt. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and after
satisfaction of the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion or redemption
rights and are not subject to further class or assessments by the Company.
Immediately upon consummation of the Offering, all of the then outstanding
shares of Common Stock will be validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of Preferred Stock with such dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of Preferred Stock may possess voting, dividend,
liquidation and redemption rights superior to those of the Common Stock. The
rights of holders of Common Stock will be subject to and may be adversely
affected by the rights of the holders of any Preferred Stock that may be issued
in the future. Issuance of a new series of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of entrenching the Company' Board of
Directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any series of
Preferred Stock.
REGISTRATION RIGHTS
Certain holders of Common Stock have registration rights with respect to
the Common Stock. See "The Reorganization--Registration Rights Agreement."
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Delaware Law"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting or stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by persons who are both officers
and directors of the corporation and shares held by certain employee stock
ownership plans), or (iii) following the
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<PAGE> 47
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and assuming no exercise of the
Underwriters' over-allotment option, the Company will have outstanding
shares of Common Stock. Of these shares, the shares sold in the Offering will be
available for resale in the public market without restriction or further
registration under the Securities Act, except for shares purchased by affiliates
of the Company. The remaining outstanding shares (the "Restricted Shares")
of Common Stock are "restricted securities" as that term is defined under Rule
144 promulgated under the Securities Act and may be sold only pursuant to
registration under the Securities Act or pursuant to an exemption therefrom,
such as that provided by Rule 144.
Upon completion of the Offering, none of the Restricted Shares will be
eligible for sale under Rule 144 and none of the Restricted Shares will be
eligible prior to , 1998. On or after such date, the sale of the
Restricted Shares will be subject to certain volume and other resale
restrictions of Rule 144.
The Company and each of its directors, officers and existing stockholders
have agreed with the Underwriters that, except under certain circumstances, they
will not issue, sell or dispose of any shares of Common Stock of the Company or
any shares convertible or exchangeable into any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including an "affiliate" of the Company, would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock of the Company
(approximately shares after giving effect to the Offering, assuming no
exercise of the Underwriters' over-allotment option and no conversion of the
Company's convertible securities or exercise of outstanding warrants) or the
average weekly trading volume in the Common Stock during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Securities and Exchange Commission, provided certain manner of sale and notice
requirements and requirements as to the availability of current public
information about the Company are satisfied. In addition, "affiliates" of the
Company must comply with the restrictions and requirements of Rule 144, other
than the two-year holding period requirement, in order to sell shares of Common
Stock that are not "restricted securities" (such as shares of Common Stock
acquired by "affiliates" in the Offering). Under Rule 144(k), a holder of
"restricted securities" who is not deemed an "affiliate" of the Company at any
time during the 90 days immediately preceding a sale by such holder, who has
beneficially owned shares for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the limitations and requirements
described above. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly, or indirectly through the use of one or more intermediaries,
controls, or is controlled by, or is under common control with, such issuer.
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UNDERWRITING
The Underwriters named below, represented by Montgomery Securities and
Schroder Wertheim & Co. Incorporated ("the Representatives"), have severally
agreed, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------ ----------------
<S> <C>
Montgomery Securities...............
Schroder Wertheim & Co. Incorporated
----------------
Total.....................
================
</TABLE>
The Representatives propose initially to offer the Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus. The Underwriters may allow to selected dealers a concession of not
more than $ per share; and the Underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other
dealers. The Common Stock is offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part. After the initial public offering, the public
offering price, allowances, concessions and other selling terms may be changed
by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of additional shares to be purchased by the Underwriters. To the extent
that the Underwriters exercise this option, the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this officer.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, its directors, executive officers and existing stockholders,
will agree that, except under certain circumstances, for a period of 180 days
after the date of its Prospectus, they will not, without the consent of the
Representatives, issue, sell or dispose of any shares of the Common Stock or any
shares convertible or exchangeable into any shares of Common Stock. See "Shares
Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common
Stock of the Company. Accordingly, the offering price of the Common Stock will
be determined by negotiations between the Company and the Representatives. Among
the factors to be considered in determining such price will be the history of,
and the prospects for, the industry in which the Company competes, an assessment
of the Company's management, its financial condition, its past and present
operations, its past and present earnings and the trend of such earnings, the
46
<PAGE> 49
prospects for future earnings of the Company, the general condition of the
economy and the securities markets and the market prices for similar securities
of generally comparable companies at the time of the Offering.
The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
EXPERTS
The consolidated financial statements of Candlewood Hotel Company L.L.C.
and subsidiaries as of December 31, 1995 and June 30, 1996, and for the period
from October 1, 1995 (date of inception) to December 31, 1995 and for the
six-months ended June 30, 1996, have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by Latham & Watkins. Certain legal
matters relating to the Offering will be passed upon for the Underwriters by
O'Melveny & Myers LLP.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, filed as part of the Registration Statement, does not contain
all of the information included in the Registration Statement and the exhibits
and schedules thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement, financial statements, exhibits and schedules
filed therewith. Statements contained in this Prospectus by reference as to the
contents of any contract, agreement or other document referred to are not
necessarily complete and in each such instance, reference is made to the copy of
such contract, agreement or other document filed as an exhibit to the
Registration Statement for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge and copied at the offices of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained at the prescribed rates from the Commission's Public
Reference Section at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site at
http://www.sec.gov. that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
As a result of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish holders of the Common Stock with annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. The Company also intends to furnish such other reports as it may determine
or as may be required by law.
47
<PAGE> 50
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...................................... F-2
Consolidated Balance Sheets at December 31, 1995 and June 30, 1996 F-3
Consolidated Statements of Operations for the period from October
1, 1995 (Date of Inception) to December 31, 1995 and the Six
Months Ended June 30, 1996 ................................. F-4
Consolidated Statements of Members' Equity for the Period from
October 1, 1995 (Date of Inception) to December 31, 1995 and
the Six Months Ended June 30, 1996.......................... F-5
Consolidated Statements of Cash Flows for the Period from October
1, 1995 (Date of Inception) to December 31, 1995 and the Six
Months Ended June 30, 1996.................................. F-6
Notes to Consolidated Financial Statements........................ F-7
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Candlewood Hotel Company, L.L.C.:
We have audited the accompanying consolidated balance sheets of Candlewood Hotel
Company, L.L.C. and subsidiaries as of December 31, 1995 and June 30, 1996, and
the related consolidated statements of operations, members' equity and cash
flows for the period from October 1, 1995 (date of inception) to December 31,
1995 and for the six months ended June 30, 1996. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Candlewood Hotel
Company, L.L.C. and subsidiaries as of December 31, 1995 and June 30, 1996, and
the results of their operations and their cash flows for the period from October
1, 1995 (date of inception) to December 31, 1995 and for the six months ended
June 30, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Wichita, Kansas
August 23, 1996
F-2
<PAGE> 52
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and June 30, 1996
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 123,384 $1,022,492
Accounts receivable ......................................... 2,975 55,107
Pre-opening costs, net of accumulated amortization of $24,260 -- 88,163
Prepaid expenses ............................................ 945 35,771
---------- ----------
Total current assets ............................. 127,304 1,201,533
---------- ----------
Construction in progress - hotel property ................... 842,656 1,266,268
Property and equipment, net of accumulated depreciation
of $301 and $37,531, respectively ..................... 37,639 3,873,070
Intangible assets, net of accumulated amortization
of $4,324 and $13,593, respectively ................... 239,345 230,438
Pre-acquisition costs ....................................... 6,397 294,715
Other assets ................................................ 30,000 163,045
---------- ----------
$1,283,341 $7,029,069
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable ............................................ $ 64,695 $ 329,828
Accrued expenses ............................................ 27,532 82,463
---------- ----------
Total current liabilities ........................ 92,227 412,291
---------- ----------
Minority interests .......................................... 8,427 47,460
Members' equity ............................................. 1,182,687 6,569,318
Commitments
---------- ----------
$1,283,341 $7,029,069
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 53
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from October 1, 1995 (Date of Inception) to December 31, 1995 and
the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
REVENUE:
Room revenue ................................. $ -- $ 116,113
Other revenue ................................ -- 3,925
--------- ---------
Total revenue ..................... -- 120,038
--------- ---------
COSTS AND EXPENSES:
Hotel operating expenses ..................... $ -- $ 86,195
Corporate operating expenses ................. 204,361 748,348
Depreciation and amortization ................ 4,625 70,759
--------- ---------
Total costs and expenses .......... 208,986 905,302
--------- ---------
Loss from operations ......................... (208,986) (785,264)
Interest income .............................. -- 11,496
--------- ---------
Net loss .......................... $(208,986) $(773,768)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
For the Period from October 1, 1995 (Date of Inception) to December 31, 1995 and
the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Warren D. Fix
Doubletree JPD Family Total
Corporation Corporation Partnership, L.P. Members' Equity
----------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance at October 1, 1995 . $ -- $ -- $ -- $ --
Capital contribution ....... 1,191,573 200,000 100 1,391,673
Net loss ................... (104,493) (88,819) (15,674) (208,986)
----------- --------- -------- -----------
Balance at December 31, 1995 1,087,080 111,181 (15,574) 1,182,687
Capital contribution ....... 6,160,399 -- -- 6,160,399
Net loss ................... (386,884) (328,851) (58,033) (773,768)
----------- --------- -------- -----------
Balance at June 30, 1996 ... $ 6,860,595 $(217,670) $(73,607) $ 6,569,318
=========== ========= ======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 55
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period from October 1, 1995 (Date of Inception) to December 31, 1995 and
the Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (208,986) $ (773,768)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization ............................... 4,625 70,759
Change in:
Accounts receivable ......................................... (2,975) (52,132)
Pre-opening costs ........................................... -- (112,423)
Prepaid expenses ............................................ (945) (34,826)
Other assets ................................................ -- (13,557)
Accounts payable ............................................ 64,695 265,133
Accrued expenses ............................................ 27,532 54,931
----------- -----------
Net cash used in operating activities ....................... (116,054) (595,883)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment ........................... (880,596) (4,296,273)
Pre-acquisition costs ............................................. (6,397) (288,318)
Certificates of deposit ........................................... (30,000) (119,488)
Expenditures for capitalized intangible assets .................... (43,669) (362)
----------- -----------
Net cash used in investing activities ....................... (960,662) (4,704,441)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' capital contributions .................................... 1,191,673 6,160,399
Capital contributions to subsidiaries by minority interest partners 8,427 39,033
----------- -----------
Net cash provided by financing activities ................... 1,200,100 6,199,432
----------- -----------
Net increase in cash and cash equivalents ......................... 123,384 899,108
Cash and cash equivalents at beginning of period .................. -- 123,384
----------- -----------
Cash and cash equivalents at end of period .................. $ 123,384 $ 1,022,492
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Candlewood Hotel Company, L.L.C. ("Candlewood") and its 98% owned subsidiaries,
Candlewood Wichita Northeast, LLC ("Wichita"), Candlewood Omaha, LLC ("Omaha"),
and Candlewood Englewood, LLC ("Englewood"), collectively referred to as the
Company. Candlewood was formed on November 16, 1995 and is owned 50% by
Doubletree Corporation ("Doubletree"), 42.5% by JPD Corporation and 7.5% by
Warren D. Fix Family Partnership, L.P. (collectively referred to as the
"Members"). Wichita, Omaha and Englewood are each owned 98% by Candlewood, 1% by
DT Real Estate, Inc., .85% by JPD Corporation and .15% by Warren D. Fix Family
Partnership, L.P. Candlewood and all of the subsidiaries are limited liability
companies and as such have limited lives (Candlewood, Omaha and Englewood - 30
years; Wichita - 100 years). Certain expenses applicable to the Company's
business which were incurred during the period from October 1, 1995 to November
16, 1995 and were funded by the Members' capital contributions have been
reflected herein as expenses of the Company. All significant intercompany
balances and transactions have been eliminated.
b. DESCRIPTION OF BUSINESS
The Company intends to develop, construct, own, operate, manage and
franchise a new nationwide hotel chain under the name Candlewood Hotel. The
hotels will be designed to serve extended stay, value oriented, guests with high
quality, fully equipped studio units. The first hotel commenced operations on
May 5, 1996, and as of June 30, 1996, the Company has one hotel in operation in
Wichita, Kansas and one hotel under construction in Omaha, Nebraska.
Construction began in July, 1996 on a hotel in Englewood, Colorado. Prior to
opening the hotel in Wichita, the Company was in the development stage.
The Members have entered into a Limited Liability Company Agreement (the
"Agreement") under which Doubletree agrees to contribute up to $15 million to
the Company subject to certain requirements. Net income or loss of the Company
is allocated to the Members in accordance with their respective membership
interests. Cash distributions may be made as agreed to by the Members. Cash
distributions must be made to the Members to the extent the Company has
available cash and Doubletree has not been repaid for all of its capital
contributions, subject to the maintenance of funds and reserves for working
capital, investment in additional hotel properties, capital expenditures and
other cash uses as agreed upon by the Members. Cash distributions will be
allocated among the Members first to provide Doubletree with a preferred return
(as defined) on its capital contributions and, second, to the Members in
proportion to their relative unrepaid capital contributions. The Agreement also
places various restrictions on the sale or transfer of a Member's ownership
interest.
c. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, ranging
from three to forty years. Maintenance and repairs are charged to operations as
incurred.
d. INTANGIBLE ASSETS
Pursuant to the terms of the Agreement, JPD Corporation contributed the
ownership rights, title and interest in the Candlewood Hotel name and logo to
the Company at the agreed-upon value of $200,000. Such amount is included in
intangible assets and is being amortized using the straight-line method over a
period of twenty years. Intangible assets also include certain other
organization costs which are being amortized using the straight-line method over
a period of five years.
F-7
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
e. PRE-OPENING COSTS
Costs which are incurred prior to the opening of a property and are
related to the hiring and training of hotel personnel, such as compensation,
travel and relocation, are capitalized and amortized over the shorter of the
estimated period of benefit or twelve months.
f. PRE-ACQUISITION COSTS
The Company incurs various costs related to the acquisition of property
sites. These costs are recorded as pre-acquisition costs until the property is
acquired, at which time the costs are reclassified to construction in progress
hotel property. In the event that the acquisition is not consummated, the costs
are charged to operations.
g. INCOME TAXES
The accompanying financial statements do not include a provision for
income taxes since the Company is not a taxpaying entity. Each Member's
proportionate share of the Company's taxable income or loss is included in the
Member's tax return.
h. STATEMENT OF CASH FLOWS
The Company considers all short-term, highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents. At the
balance sheet date, cash and cash equivalents consist of demand deposit accounts
in a bank. Noncash financing and investing activities for the period from
October 1, 1995 to December 31, 1995 include a capital contribution of $200,000
made by a Member in the form of intangible assets.
i. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Hotel property and equipment:
Land ............................... $ -- $ 266,760
Buildings and improvements ......... -- 2,720,638
Furniture, fixtures and equipment .. -- 653,595
--------- ----------
-- 3,640,993
Less accumulated depreciation .. -- 24,796
--------- ----------
-- 3,616,197
--------- ----------
Corporate property and equipment:
Furniture, fixtures and equipment .. 13,295 226,310
Leasehold improvements ............. 24,645 43,298
--------- ----------
37,940 269,608
Less accumulated depreciation .. 301 12,735
--------- ----------
37,639 256,873
--------- ----------
Total property and equipment $ 37,639 $3,873,070
========= ==========
</TABLE>
F-8
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Operating rights ....................... $200,000 $200,000
Organization costs ..................... 43,669 44,031
-------- --------
243,669 244,031
Less accumulated amortization ...... 4,324 13,593
-------- --------
$239,345 $230,438
======== ========
</TABLE>
4. OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Certificates of deposit ............. $30,000 $149,488
Loan application fees ............... -- 10,000
Other ............................... -- 3,557
------- --------
Total other assets .............. $30,000 $163,045
======= ========
</TABLE>
Certificates of deposit are pledged as collateral for letters of credit on
behalf of the Company in connection with deposits made pursuant to contracts for
the acquisition of real estate.
5. LEASES
The Company leases corporate office space and certain equipment under
operating leases expiring at various dates through May 2001. Rental expense for
the period ended December 31, 1995 and the six months ended June 30, 1996 was
$13,188 and $28,195, respectively.
Future minimum lease payments under noncancelable operating leases having
remaining terms in excess of one year at June 30, 1996 are as follows:
<TABLE>
<S> <C>
December 31, 1996 .................... $ 54,747
December 31, 1997 .................... 109,493
December 31, 1998 .................... 109,493
December 31, 1999 .................... 106,755
December 31, 2000 .................... 102,138
--------
$482,626
========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company obtains insurance coverages and leases its corporate office
space and certain equipment from a related party which is partially owned by the
Company's president. Such payments for insurance coverages totaled $14,568 for
the six months ended June 30, 1996 and were not significant for the period ended
December 31, 1995. Such payments for rent of corporate office space and
equipment and reimbursement for leasehold improvements totaled $58,066 for the
six months ended June 30, 1996.
F-9
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 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 carrying values of the Company's
financial instruments, which include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses, approximate fair values due
to the short maturities of such instruments.
8. EMPLOYEE BENEFITS PLANS
Effective June 1, 1996, the Company established the Candlewood Hotel
Company 401(k) Profit Sharing Plan (the "Plan") for its employees. Generally,
all full-time employees who are over 21 years of age and have completed 12
months of service are eligible to participate in the Plan and are permitted to
contribute up to 15% of their individual compensation, subject to certain
limitations established by the Internal Revenue Service for plans of this type.
The Company may, but is not obligated to, make contributions on behalf of each
participant at the rate of 50% of the participants compensation, not to exceed
6% of the employee's compensation. For the six months ended June 30, 1996, there
were no matching contributions provided by the Company.
9. SUBSEQUENT EVENTS
Public Offering and Reorganization. In August 1996, the Members of the
Company formed Candlewood Hotel Co., Inc. ("Candlewood Inc.") in anticipation of
Candlewood Inc.'s filing a Registration Statement with the Securities and
Exchange Commission for an initial public offering of shares of its common
stock. It is anticipated that such Registration Statement will be filed in
September 1996. Immediately prior to the effective date, all the outstanding
membership interests of the Company and the minority interests in the
Subsidiaries will be contributed to Candlewood Inc. In consideration for such
contributions, each of the contributors will be issued shares of common stock of
Candlewood Inc. in proportion to their respective ownership interests in the
Company immediately prior to such transfer.
Immediately following the reorganization described above, capital in
excess of $200,100 previously contributed by Doubletree will be converted to a
long-term note payable. The note will mature in five years and will bear
interest at rates of seven percent per annum for the first 12 months following
contribution, 10% per annum for the second 12 months following contribution and
15% per annum thereafter. Interest-only payments will be due each calendar
quarter.
Shareholder Agreements. The Company has entered into an arrangement which
provides that, concurrent with the effective date of the initial public
offering, Candlewood Inc. will enter into an agreement with the initial
stockholders of Candlewood Inc. (the "Stockholders Agreement") which will
entitle the initial stockholders, among other things, to nominate directors to
the Board of Directors of Candlewood Inc. and to exercise certain "veto rights."
The Stockholders Agreement will terminate ten years after the commencement of
the initial public offering or at such time that the shares of common stock
initially issued to the initial stockholders and still held by them represent,
in the aggregate, less than a majority of the total number of shares of common
stock outstanding.
F-10
<PAGE> 60
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the dates as of which information is given in this Prospectus.
This Prospectus does not constitute an offer or solicitation by anyone in any
jurisdiction in which such offer or solicitation is not COMMON STOCK authorized
or in which the person making such offer or solicitation is not qualified to do
so or to any person to whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ....................................................... 3
Risk Factors ............................................................. 8
Use of Proceeds .......................................................... 15
Dividend Policy .......................................................... 15
Capitalization ........................................................... 16
Dilution ................................................................. 17
Selected Historical and Pro Forma Consolidated
Financial Information ................................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................... 19
Business ................................................................. 22
Management ............................................................... 34
Certain Transactions ..................................................... 39
The Reorganization ....................................................... 40
Principal Stockholders ................................................... 43
Description of Capital Stock ............................................. 44
Shares Eligible For Future Sale .......................................... 45
Underwriting ............................................................. 46
Experts .................................................................. 47
Legal Matters ............................................................ 47
Additional Information ................................................... 47
Index to Consolidated Financial Statements ............................... F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
_________ SHARES
[CANDLEWOOD LOGO]
COMMON STOCK
-------------------------------
PROSPECTUS
-------------------------------
Montgomery Securities
Schroder Wertheim & Co.
, 1996
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Company in connection with the issuance and distribution of the Common Stock
being registered (all amounts are estimated except the SEC and NASD registration
fees):
<TABLE>
<S> <C>
SEC registration fee ........... $ 19,828
Blue sky fees and expenses ..... 50,000
Printing and engraving expenses 100,000
Legal fees and expenses ........ 250,000
NASD filing fee ................ 6,250
Accounting fees and expenses ... 75,000
Transfer agent ................. 15,000
Miscellaneous .................. 33,922
--------
Total ............... $550,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, the Certificate of
Incorporation of the Company, a copy of which is filed as Exhibit 3.1 hereto,
eliminates the liability of directors to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent otherwise required by the Delaware General Corporation Law.
The Certificate of Incorporation provides that the Company will indemnify
each person who was or is made a party to any proceeding by reason of the fact
that such person is or was a director or officer of the Company against all
expense, liability and loss reasonably incurred or suffered by such person in
connection therewith to the fullest extent authorized by the Delaware General
Corporation Law. The Company's Bylaws, a copy of which is filed as Exhibit 3.2
hereto, provide for a similar indemnity to directors and officers of the Company
to the fullest extent authorized by the Delaware General Corporation Law.
Prior to the completion of the Offering, the Company anticipates entering
into indemnification agreements with certain of its Directors and officers that
require the Company to indemnify such Directors and officers to the fullest
extent permitted by applicable provisions of the Delaware General Corporation
Law, provided that any settlement of a third party action against a Director or
officer is approved by the Company, and subject to limitations for actions
initiated by the Director or officer, penalties paid by insurance, and
violations of Section 16(b) of the Securities Exchange Act of 1934 and similar
laws.
The Underwriting Agreement, a copy of which is filed as Exhibit 1.1
hereto, provides for indemnification by the Underwriters of the Company and its
officers and Directors, and by the Company of the Underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1996, an aggregate of shares of common stock will be issued
to Doubletree Corporation, JPD Corporation and the Fix Partnership in exchange
for the Membership Interests in Candlewood LLC and the Subsidiary LLCs. This
issuance will be effected in reliance upon exemption from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering.
II-1
<PAGE> 62
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements.
(b) Schedules Included in Part II: None
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(c) Exhibits.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
4.1 Specimen Certificate of Common Stock.*
4.2 Stockholder Agreement dated as of September ___, 1996 among
Doubletree Corporation, JPD Corporation and the Warren D. Fix Family
Partnership, L.P.*
5.1 Opinion of Latham & Watkins regarding legality of shares.*
10.1 Form of Indemnification Agreement for executive officers and
directors.
10.2 1996 Equity Participation Plan and form of stock option agreement.*
10.3 Employment Agreement between the Registrant and Jack P. DeBoer dated
as of September 1, 1996.
10.4 Form of Development Agreement between the Registrant and developers.
10.5 Form of Franchise Agreement between the Registrant and its
franchisees.*
10.6 Incorporation and Registration Rights Agreement dated as of September
1, 1996 among Doubletree Corporation, JPD Corporation and the Warren
D. Fix Family Partnership, L.P.
11.1 Computation of pro forma net loss per share.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Latham & Watkins (contained in Exhibit 5.1).*
23.2 Consent of KPMG Peat Marwick, LLP.
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
- -----------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 14, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
II-2
<PAGE> 63
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
the registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wichita, State of Kansas,
on September 13, 1996.
CANDLEWOOD HOTEL COMPANY, INC.
a Delaware corporation
By: /s/ Jack P. DeBoer
------------------------------------------
Jack P. DeBoer
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Jack P. DeBoer and Warren D. Fix, or any one of them, as his attorneys-in-fact
and agents, with full power of substitution and resubstitution for him in any
and all capacities, to sign any or all amendments or post-effective amendments
to this Registration Statement, and to file the same, with exhibits thereto and
other documents in connection therewith or in connection with the registration
of the Common Stock under the Securities Act of 1933, as amended, with the
Securities and Exchange Commission, granting unto each of such attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing 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 substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title
/s/ Jack P. DeBoer President, Chief Executive Officer September 13, 1996
- ---------------------- and Chairman of the Board
Jack P. DeBoer (Principal Executive Officer)
/s/ Warren D. Fix Director, Executive Vice September 13, 1996
- ---------------------- President, Chief Financial Officer
Warren D. Fix and Director (Principal Financial
and Principal Accounting Officer)
/s/ Richard J. Ferris Director September 13, 1996
- ----------------------
Richard J. Ferris
/s/ Peter V. Ueberroth Director September 13, 1996
- ----------------------
Peter V. Ueberroth
II-4
<PAGE> 65
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
4.1 Specimen Certificate of Common Stock.*
4.2 Stockholder Agreement dated as of September ___, 1996 among
Doubletree Corporation, JPD Corporation and the Warren D. Fix Family
Partnership, L.P.*
5.1 Opinion of Latham & Watkins regarding legality of shares.*
10.1 Form of Indemnification Agreement for executive officers and
directors.
10.2 1996 Equity Participation Plan and form of stock option agreement.*
10.3 Employment Agreement between the Registrant and Jack P. DeBoer dated
as of September 1, 1996.
10.4 Form of Development Agreement between the Registrant and developers.
10.5 Form of Franchise Agreement between the Registrant and its
franchisees.*
10.6 Incorporation and Registration Rights Agreement dated as of September
1, 1996 among Doubletree Corporation, JPD Corporation and the Warren
D. Fix Family Partnership, L.P.
11.1 Computation of pro forma net loss per share.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Latham & Watkins (contained in Exhibit 5.1).*
23.2 Consent of KPMG Peat Marwick, LLP.
24.1 Power of Attorney (contained on signature page).
27.1 Financial Data Schedule.
- -----------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made as of the ____ day of September ___, 1996, by
and between Candlewood Hotel Company, Inc., a Delaware Corporation (the
"Company"), and __________________, a Director of the Company (the
"Indemnitee"), with reference to the following facts:
RECITALS:
A. The Indemnitee is currently serving as a Director of the
Company and the Company wishes the Indemnitee to continue in such capacity. The
Indemnitee is willing, under certain circumstances, to continue serving as a
Director of the Company.
B. The Indemnitee has indicated that he does not regard the
indemnities available under the Company's Certificate of Incorporation as
adequate to protect him against the risks associated with his service to the
Company and has noted that the Company's directors' and officers' liability
insurance policy has numerous exclusions and a deductible and thus does not
adequately protect Indemnitee. In this connection the Company and the Indemnitee
now agree they should enter into this Indemnification Agreement in order to
provide greater protection to Indemnitee against such risks of service to the
Company.
C. Section 145 of the General Corporation Law of the State of
Delaware, under which Law the Company is organized, empowers corporations to
indemnify a person serving as a director, officer, employee or agent of the
corporation and a person who serves at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise, and said Section 145 and the Certificate of
Incorporation of the Company specify that the indemnification set forth in said
Section 145 and in the Certificate of Incorporation, respectively, shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise.
D. In order to induce the Indemnitee to continue to serve as a
Director of the Company and in consideration of his continued service, the
Company has determined and agreed to enter into this agreement with the
Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's continued
service as a Director of the Company, the parties hereto agree as follows:
1. INDEMNITY. The Company will indemnify the Indemnitee, his
executors or administrators, for any Damages or Expenses (as defined below)
which the Indemnitee is or becomes legally obligated to pay in connection with
any Proceeding. As used in this Agreement the term "Proceeding" shall include
any threatened, pending or completed claim, action, suit or proceeding, whether
brought by or in the right of the Company or otherwise and whether of a civil,
criminal, administrative or investigative nature, in which the Indemnitee may be
or may have been involved as a party or otherwise, by reason of the fact that
Indemnitee is or was a director or officer of the Company, by
<PAGE> 2
reason of any actual or alleged error or misstatement or misleading statement or
omission made or suffered by the Indemnitee, by reason of any action taken by
him or of any inaction on his part while acting as such director or officer, or
by reason of the fact that he was serving at the request of the Company as a
director, trustee, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise; provided, that in each
such case Indemnitee acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company, and, in
the case of a criminal proceeding, in addition had no reasonable cause to
believe that his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
Indemnitee did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful. As used in this Agreement, the term "other
enterprise" shall include (without limitation) employee benefit plans and
administrative committees thereof, and the term "fines" shall include (without
limitation) any excise tax assessed with respect to any employee benefit plan.
References to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries, and if Indemnitee acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan he shall be deemed to have acted in a manner "not
opposed to the best interests of the Company" as referred to above.
2. EXPENSES. As used in this Agreement, the term "Expenses"
shall include, without limitation, damages, judgments, fines, penalties,
settlements and costs, attorneys' fees and disbursements and costs of attachment
or similar bonds, investigations, and any expenses of establishing a right to
indemnification under this Agreement and the term "Damages" shall include
damages, judgments, fines, penalties and settlements.
3. ENFORCEMENT. If a claim or request under this Agreement is
not paid by the Company, or on its behalf, within thirty days after a written
claim or request has been received by the Company, the Indemnitee may at any
time thereafter bring suit against the Company to recover the unpaid amount of
the claim or request and if successful in whole or in part, the Indemnitee shall
be entitled to be paid also the Expenses of prosecuting such suit. The Company
shall have the right to recoup from the Indemnitee the amount of any item or
items of Expenses (other than Damages) theretofore paid by the Company pursuant
to this Agreement, to the extent such Expenses are not reasonable in nature or
amount; provided, however, that the Company shall have the burden of proving
such Expenses to be unreasonable. The burden of proving that the Indemnitee is
not entitled to indemnification for any other reason shall be upon the Company.
4. SUBROGATION. In the event that the Company pays any
Expenses under this Agreement, the Company shall be subrogated to the extent of
such payment to all of the rights of recovery of the Indemnitee, who shall
execute all papers required and shall do everything that may be necessary to
secure such rights, including the execution of such documents necessary to
enable the Company effectively to bring suit to enforce such rights.
2
<PAGE> 3
5. EXCLUSIONS. Notwithstanding the foregoing, the Company
shall not be liable under this Agreement to pay any Expenses in connection with
any Proceeding:
(a) to the extent that payment of such Expenses is
actually made to the Indemnitee under a valid, enforceable and collectible
insurance policy;
(b) to the extent that the Indemnitee is indemnified
and actually paid otherwise than pursuant to this Agreement;
(c) in connection with a judicial action by or in the
right of the Company, in respect of any claim, issue or matter as to which the
Indemnitee shall have been adjudged to be liable to the Company unless and only
to the extent that the Court of Chancery of the State of Delaware or the court
in which such Proceeding was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, the Indemnitee is fairly and reasonably entitled to indemnity for such
Expenses as such court shall deem proper;
(d) if it is proved by final judgment in a court of
law or other final adjudication that the Indemnitee had in fact gained any
personal profit or advantage to which he was not legally entitled;
(e) for a disgorgement of profits made from the
purchase and sale by the Indemnitee of securities pursuant to Section 16(b) of
the Securities Exchange Act of 1934 and amendments thereto or similar provisions
of any state statutory law or common law;
(f) brought about or contributed to by the dishonesty
of the Indemnitee seeking payment hereunder; however, notwithstanding the
foregoing, the Indemnitee shall be protected under this Agreement as to any
Proceeding brought against him by reason of any alleged dishonesty on his part,
unless a judgment or other final adjudication thereof adverse to the Indemnitee
shall establish that he committed (i) acts of active and deliberate dishonesty,
(ii) with actual dishonest purpose and intent and (iii) such acts were material
to the cause of action so adjudicated; or
(g) for any Damages which the Company is prohibited
by applicable law from paying as indemnity.
6. INDEMNIFICATION OF EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding any other provision of this Agreement, to the extent that the
Indemnitee has been successful on the merits or otherwise in defense of any
Proceeding or in defense of any claim, issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified against any and all
Expenses actually and reasonably incurred in connection therewith.
7. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled
under any provision of this Agreement to indemnification by the Company for some
or a portion of Expenses, but not, however, for the total amount thereof, the
Company shall nevertheless
3
<PAGE> 4
indemnify the Indemnitee for the portion of such Expenses to which the
Indemnitee is entitled.
8. ADVANCE OF EXPENSES. Expenses incurred by the Indemnitee in
connection with any Proceeding, except the amount of any Damages, shall be paid
by the Company in advance of the final disposition thereof upon request of the
Indemnitee that the Company pay such Expenses. The Indemnitee hereby undertakes
to repay to the Company the amount of any Expenses theretofore paid by the
Company to the extent that it is ultimately determined that such Expenses were
not reasonable or that the Indemnitee is not entitled to indemnification
therefor. Notwithstanding the foregoing, the Company shall not be required to
advance such expenses to Indemnitee if Indemnitee (i) commences any action, suit
or proceeding as a plaintiff unless such advance is specifically approved by a
majority of the Board of Directors or (ii) is a party to an action, suit or
proceeding brought by the Company and approved by a majority of the Board of
Directors which alleges willful misappropriation of corporate assets by
Indemnitee, disclosure of confidential information in violation of Indemnitee's
fiduciary or contractual obligations to the Company, or any other willful and
deliberate breach of Indemnitee's duty to the Company or its stockholders.
9. APPROVAL OF PAYMENT OF DAMAGES. No payment of Damages for
which indemnity shall be sought under this Agreement, other than those in
respect of judgments and verdicts actually rendered, shall be incurred without
the prior consent of the Company, which consent shall not be unreasonably
withheld.
10. NOTICE OF CLAIM. The Indemnitee, as a condition precedent
to his right to be indemnified under this Agreement, shall give to the Company
notice in writing as soon as reasonably practicable of any Proceeding against
him for which indemnity will or could be sought under this Agreement. Notice to
the Company shall be given at its principal office and shall be directed to the
Corporate Secretary (or such other address as the Company shall designate in
writing to the Indemnitee); notice shall be deemed given on the earlier of the
date of receipt or the seventh day after it is sent by properly addressed,
prepaid registered or certified mail, return receipt requested. In addition, the
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within the Indemnitee's power. With respect
to any such action, suit or proceeding as to which Indemnitee notifies the
Company of the commencement thereof:
(a) the Company will be entitled to participate
therein at its own expense;
(b) except as otherwise provided below, to the extent
that it may wish, the Company jointly with any other indemnifying party
similarly notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Indemnitee. After notice from the Company to
Indemnitee of its election so as to assume the defense thereof, the Company will
not be liable to Indemnitee under this Agreement for any legal or other expenses
subsequently incurred by Indemnitee in connection with the defense thereof other
than reasonable costs of investigation or as otherwise provided below.
Indemnitee shall have the right to employ its own counsel in such action, suit
or proceeding but the fees and expenses of such counsel incurred after notice
from the Company of its assumption of the
4
<PAGE> 5
defense thereof shall be at the expense of Indemnitee unless (i) the employment
of counsel by Indemnitee has been authorized by a majority of the Board of
Directors, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of the
defense of such action or (iii) the Company shall not in fact have employed
counsel to assume the defense of such action, in each of which cases the fees
and expenses of Indemnitee's separate counsel shall be at the expense of the
Company. The Company shall not be entitled to assume the defense of any action,
suit or proceeding brought by or on behalf of the Company or as to which
Indemnitee shall have made the conclusion provided for in (ii) above; and
(c) the Company shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any action
or claim effected without its written consent. The Company shall be permitted to
settle any action except that it shall not settle any action or claim in any
manner which would impose any penalty, limitation or admission of Indemnitee's
liability on Indemnitee without Indemnitee's written consent. Neither the
Company nor Indemnitee will unreasonably withhold its consent to any proposed
settlement.
11. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one instrument.
12. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. Nothing herein
shall be deemed to diminish or otherwise restrict the Indemnitee's right to
indemnification under any provision of the Certificate of Incorporation or
By-Laws of the Company and amendments thereto or under law.
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with Delaware law.
14. SAVING CLAUSE. Wherever there is conflict between any
provision of this Agreement and any applicable present or future statute, law or
regulation contrary to which the Company and the Indemnitee have no legal right
to contract, the latter shall prevail, but in such event the affected provisions
of this Agreement shall be curtailed and restricted only to the extent necessary
to bring them within applicable legal requirements.
15. COVERAGE. The provisions of this Agreement shall apply
with respect to the Indemnitee's service as a Director of the Company prior to
the date of this Agreement and with respect to all periods of such service after
the date of this Agreement, even though the Indemnitee may have ceased to be a
Director of the Company and shall inure to the benefit of the heirs, executors
and administrators of Indemnitee.
16. SURVIVAL OF AGREEMENT. For purposes of this Agreement, any
reference to the "Company" shall include, in addition to the resulting or
surviving corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation,
5
<PAGE> 6
or is or was serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
CANDLEWOOD HOTEL COMPANY, INC.,
A DELAWARE CORPORATION
By:____________________________________
Name:__________________________________
Title:_________________________________
6
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT CONTRACT
CANDLEWOOD HOTEL COMPANY, INC.,
a Delaware corporation
THIS EMPLOYMENT CONTRACT ("Contract") is executed on September 1,
1996, by and between CANDLEWOOD HOTEL COMPANY, INC., a Delaware corporation
("Company"), and Jack P. DeBoer ("Employee").
1. EMPLOYMENT. The Company hereby employs Employee and Employee hereby
accepts employment upon the terms and conditions set forth below.
2. TERM AND RENEWAL
2.1 Term. The term of this Contract shall be deemed to have
commenced on the date of this Contract (the "Effective Date"), and shall
continue for three (3) years from the Effective Date (the "Original Employment
Term"), on the terms and conditions set forth below, unless sooner terminated
as provided in Section 5.
2.2 Extension. Following the expiration of the Original
Employment Term and provided that this Contract has not been terminated
pursuant to Section 5, and every year thereafter, the Contract shall be
automatically renewed for an additional 12-month period, effective on each
anniversary date of the Effective Date.
3. COMPENSATION
3.1 Base Compensation. For the services to be rendered by
Employee under this Contract, Employee shall be entitled to receive, commencing
as of the Effective Date, an initial annual base compensation ("Base
Compensation") of $96,000 payable monthly. This base compensation shall be
reviewed prior to January 1, 1997 and thereafter reviewed and adjusted annually
as determined by the Compensation Committee of the Board of Directors (the
"Board"), but in no event will the annual Base Compensation be less than the
initial amount set forth above.
3.2 Insurance Benefits.
(a) The Company shall provide to Employee, his spouse and
children, at its sole cost, such health, dental and optical insurance as the
Company may from time to time make available to its other executive employees.
(b) The Company shall provide Employee such disability
and/or life insurance as the Company in its sole discretion may from time to
time make available to its other executive employees.
<PAGE> 2
3.3 Bonus Compensation. At least annually, the Compensation
Committee of the Board shall review Employee's performance and cause the
Company to award Employee a cash bonus which the Board shall reasonably
determine as fairly compensating and awarding Employee for service to the
Company and/or as an incentive for continued service to the Company pursuant to
the Company's incentive compensation plan. The amount of such cash bonus is
dependent on, among other things, the achievement of certain performance levels
by the Company. The amount, if any, of such bonus shall be determined in the
sole and absolute discretion of the Compensation Committee of the Board.
3.4 Method Of Payment. The monetary compensation payable to
Employee hereunder may be paid in whole or in part, from time to time, by the
Company, its subsidiaries and/or its affiliates, but shall at all times remain
the responsibility of the Company.
4. DUTIES
4.1 Service. Employee shall serve as Chairman of the Board,
President and Chief Executive Officer of the Company. At the request of the
Board, subject to shareholder approval when required, Employee shall serve as a
director and/or officer of such of the Company's subsidiaries and/or affiliates
as the Board may request. Employee may, at his discretion, serve the Company
in other offices and capacities in addition to the foregoing, but shall not be
required to do so. In the event the Company and Employee voluntarily agree
that Employee shall terminate his service in any one or more of the
aforementioned capacities, or Employee's service in one or more of the
aforementioned capacities is terminated, Employee's compensation, as specified
in this Contract, shall not be diminished or reduced in any manner.
Any change of Employee's status as an officer of the Company as herein
provided or any material decrease in Employee's authority or responsibilities
hereunder, without Employee's written consent, shall, at Employee's election,
constitute a material breach of this Contract and immediate termination without
cause of Employee's employment hereunder.
4.2 Devotion Of Time and Effort. Employee shall use his good
faith best efforts and judgment in performing his duties as required hereunder
and to act in the best interests of the Company. Employee shall devote such
time, attention and energies to the business of the Company as are reasonably
necessary to satisfy Employee's required responsibilities and duties hereunder.
4.3 Other Activities. Employee may engage in other activities for
his own account during the term of this Contract including charitable
activities, community activities and/or other activities, subject to Section 7.
4.4 Vacation. It is understood and agreed that Employee shall be
entitled to four (4) weeks vacation per year. During such vacation periods,
Employee shall not be relieved of his
2
<PAGE> 3
duties under this Contract and there will be no abatement or reduction of
Employee's compensation hereunder.
4.5 The Company's Obligations. The Company shall provide Employee
with any and all necessary or appropriate current financial information and
access to current information and records regarding all material transactions
involving the Company and/or its subsidiaries and/or affiliates, including but
not limited to acquisition of assets, personnel contracts, dispositions of
assets, service agreements and registration statements or other state or
federal filings or disclosures, reasonably necessary for Employee to carry out
his duties and responsibilities hereunder. In addition, the Company agrees to
provide Employee, as a condition to his services hereunder, such staff,
equipment and office space as is reasonably necessary for Employee to perform
his duties hereunder.
5. TERMINATION.
5.1 By Company Without Cause. The Company may terminate this
Contract without "cause" (as that term is hereinafter defined), provided that
the Company first delivers to Employee the Company's written election to
terminate this Contract at least ninety (90) days prior to the effective date
of termination.
5.2 Severance Payment
(a) Amount. In the event the Company terminates
Employee's services hereunder pursuant to Section 5.1, Employee shall continue
to render services pursuant hereto until the date of termination and shall
continue to receive compensation, as provided hereunder, through the
termination date. In addition to other compensation payable to Employee for
services through the termination date, the Company shall pay Employee, as a
single severance payment, an amount equal to three times the Employee's average
annual Base Compensation paid hereunder for the preceding thirty-six month
period (or, if Employee has been employed less than thirty-six months, the
average annual Base Compensation for the period employed) (the "Severance
Amount").
(b) Limitation. The foregoing notwithstanding, the total
of such severance payments shall be reduced to the extent that the payment of
such amount would cause Employee's total termination benefits (as determined by
Employee's tax advisor) to constitute an "excess" parachute payment under
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and
by reason of such excess parachute payment Employee would be subject to an
excise tax under Section 4999(a) of the Code, but only if Employee determines
that the after-tax value of the termination benefits calculated with the
foregoing restriction exceed those calculated without the foregoing
restriction.
5.3 By The Company For Cause. The Company may terminate Employee
for cause at any time, upon written notice. For the purposes hereof, "cause"
shall mean:
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(a) Employee's conviction for commission of a
felony; or
(b) Employee's conviction for the crime of theft,
embezzlement or misappropriation against the Company; or
(c) The final determination by a court of
competent jurisdiction or by the Board that Employee has materially
breached Section 4, Section 6 or Section 7 of this Contract, if such
breach is incurable; or, if curable, a determination that Employee had
been given reasonable opportunity to cure and has not done so; or
(d) Employee's death or permanent disability.
In the event Employee is terminated for cause pursuant to this Section
5.3, Employee shall have the right to receive his compensation as otherwise
provided under this Contract through the effective date of termination.
Employee shall have no further right to receive compensation or other
consideration from the Company, or have any other remedy whatsoever against the
Company, as a result of this Contract or the termination thereof.
The foregoing notwithstanding, in the event Employee is terminated by
reason of his permanent disability (but not death), the Company shall
immediately pay Employee a single severance payment equal to the Severance
Amount. Said payment shall be in addition to any disability insurance payments
or other compensation earned hereunder.
5.4 Employee's Termination For Cause. Employee may terminate this
Agreement at any time if:
(a) The Company is in material breach of its
obligations hereunder; and
(b) Either such breach is incurable or, if
curable, has not been cured within fifteen (15) days following receipt
of written notice by Employee to the Company of such breach by the
Company.
In no event, however, may the Employee terminate this Agreement
without providing the Company with at least ten (10) days' written notice of
his intent to terminate this Agreement. In the event that Employee terminates
this Contract pursuant to this Section 5.4, Employee shall have the same rights
and remedies against the Company as he would have had if the Company had
terminated his employment without cause pursuant to Section 5.1 (including the
right to payment under Section 5.2).
5.5 Employee's Voluntary Termination. Employee may, at any time,
terminate this Contract without cause upon written notice delivered to the
Company at least ninety (90) days prior to the effective date of termination.
In the event of such voluntary termination Employee
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shall have the right to monetary compensation as provided hereunder through the
effective date of termination, but shall have no further right to compensation
thereafter.
The Company and Employee shall not have any further right or remedy
against one another in the event Employee terminates this Contract pursuant to
this Section 5.5 except as provided in Sections 6, 7, 8 and 9 hereof which
shall remain in full force and effect.
5.6 Change of Control. The Employee may terminate his employment
under this Agreement any time within two (2) years after a "change in control"
of the Company. For purposes of this Agreement, a "change in control" shall be
deemed to have occurred upon (a) the acquisition by any person of 50% or more
of the stock of the Company, (b) a change in majority of the members of the
Board in connection with a tender offer, merger, sale of assets, etc., (c) the
sale of all or substantially all of the Company's assets or (d) a dissolution
or liquidation of the Company. In the event Employee terminates his employment
within two (2) years after a change in control, Employee shall continue to
render services pursuant hereto until the date of termination and shall
continue to receive compensation, as provided hereunder, through the
termination date. In addition to other compensation payable to Employee for
services through the termination date, the Company shall pay Employee, as a
single severance payment, an amount equal to the Severance Amount.
6. UNFAIR COMPETITION
6.1 Trade Secrets. During the term of employment under this
Contract, Employee will have access to and become acquainted with various
information not generally available to the public consisting of records,
documents, drawings, specifications, customer lists, procedural and operational
manuals and information, financial records and accounts, projections and
budgets, and similar information, all of which are owned by the Company and
regularly used in the operation of the Company's business. Such assets of the
Company are secret, are not generally available to the public and give the
Company an advantage over competitors who do not know of or use such
information. Employee agrees such information and documents constitute "trade
secrets" of the Company. All such information and documents relating to the
business of the Company, whether they are prepared by Employee or come into
Employee's possession in any other way, are owned by the Company, shall remain
the exclusive property of the Company and shall not be removed from the
premises of the Company under any circumstances whatsoever, without prior
written consent of the Company.
6.2 Misuse Of Trade Secrets. Employee covenants that he shall not
misuse, misappropriate or disclose any of the trade secrets described above,
directly or indirectly, or use them in any way, either during the term of this
Contract or at any time thereafter, except as required in the course of his
employment with the Company, unless such action is either previously agreed to
in writing by the Company or required by law.
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<PAGE> 6
6.3 Non-Disclosure Of Trade Secrets. Employee acknowledges and
agrees that the sale or unauthorized use or disclosure of any of the Company's
trade secrets, as above described, including information concerning the
Company's current, future and/or proposed work, services or investments, the
fact that any such work, services or investments are planned, under
consideration, or under negotiation, as well as any descriptions thereof,
constitute "unfair competition". Employee promises and agrees not to engage in
any unfair competition with the Company, either during the term of this
Contract or at any time thereafter.
7. NON-COMPETITION DURING EMPLOYMENT
7.1 Competitive Activities. During the term of this Contract,
Employee shall not, without the Company's prior written consent, directly or
indirectly, whether or not for compensation, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer, director
or in any other individual or representative capacity, engage or participate
in, or render, directly or indirectly, any services in connection with any
business that is in competition, in any manner whatsoever, with the business of
the Company. In addition, Employee shall not directly or indirectly acquire,
hold or retain any material interest in any business competing with or of
similar nature to the business of the Company except as provided in Section
4.3.
7.2 Exceptions. The foregoing shall exclude, however, (i) the
expenditure of a reasonable amount of time for educational, charitable and/or
professional activities, and; (ii) participation in activities based in or
related to investments of Employee which were owned prior to employment
hereunder, including association with Candlewood, or any successor to the
business or assets of the Company, Doubletree or Innkeepers, provided such
activities do not materially interfere with the services required under this
Contract, none of which shall be deemed a breach of this Contract.
7.3 Passive Investments. During the term of this Contract and for
two years thereafter, except with respect to passive investments in lodging
companies and hotel properties, and except for those activities described in
Section 7.2 hereof, Employee shall not engage in the acquisition, development,
operation or management of other mid-priced extended-stay hotels outside of the
Company.
8. SOLICITATION OF EMPLOYEES. During the term of his employment with the
Company, and for a period of two (2) years thereafter, Employee shall not,
directly or indirectly, make known to any person, firm or company the substance
or content of any relationship of the Company with any employee, independent
contractor or provider of goods or materials to the Company. Employee agrees
that he shall not solicit, take away or induce any such person to end their
relationship with the Company, or to attempt to do any of the foregoing, or
recruit, hire or otherwise induce any such person to perform services for
Employee, or any other person, firm or company.
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9. NON-COMPETITION AFTER TERMINATION. Employee shall not, for a period
of two (2) years following the date of termination, except with respect to
passive investments in lodging companies and hotel properties and except for
those activities described in Section 7.2 hereof, engage in the acquisition,
founding, development, operation or management of any new hotel companies or
chains other than those related to the Company, Doubletree or Innkeepers.
Nothing herein shall relieve or limit Employee's obligation to comply with
Sections 6, 7 and 8. The restrictions set forth in this Section shall not
apply if Employee is terminated pursuant to Section 5.1.
10. INDEMNIFICATION. The Company shall indemnify Employee for all losses
sustained by Employee as a direct or indirect consequence of the discharge of
his duties on behalf of the Company to the fullest extent permitted under
applicable law so long as Employee acted in good faith and in a manner which he
believed to be in the best interests of the Company with respect to the matter
giving rise to the claim or loss for which Employee seeks indemnification.
11. BUSINESS EXPENSES. The Company shall promptly, but in no event later
than ten (10) days after submission of a claim of expenditure, reimburse
Employee for all reasonable business expenses incurred by him in connection
with the business of the Company and/or its subsidiaries and/or affiliates,
upon presentation to the Company of written receipts for such expenses. Such
reimbursement shall include, but not be limited to, reimbursement for all
reasonable travel expenses, including all airfare, hotel and rental car
expenses, incurred by Employee in travelling in connection with the business of
the Company.
12. MISCELLANEOUS PROVISIONS
12.1 Binding Effect: Assignment. This Contract shall be binding
upon and inure to the benefit of any successor or successors of the Company and
the personal representatives of Employee. This Contract may be assigned by
Employee only with the Company's prior written consent. The Company may freely
assign this Contract to its subsidiaries or any affiliate.
12.2 Attorney's Fees. If any legal action, arbitration or other
proceeding, is brought for the enforcement of this Contract, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Contract, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which that party would be entitled.
12.3 Entire Contract. This Contract constitutes the entire
agreement of the parties, and supersedes all prior agreements, understandings
and negotiations, whether written or oral, between the Company and Employee
with respect to the employment of Employee by the Company, its
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subsidiaries and/or affiliates. This Contract may not be changed orally, but
only by agreement in writing, signed by all parties.
12.4 Provisions Severable. In case any one or more provisions of
this Contract shall be invalid, illegal or unenforceable, in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not, in any way, be affected or impaired thereby. If any
provision hereof is determined by any court of competent jurisdiction to be
invalid or unenforceable by reason of such provision extending the covenants
and agreements contained herein for too great a period of time or over too
great a geographical area, or being too extensive in any other respect, such
provision shall be interpreted to extend only over the maximum period of time
and geographical area, and to the maximum extent in all other respects, as to
which it is valid and enforceable, all as determined by such court in such
action.
12.5 Governing Law. This Contract shall be governed by and
construed under the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
duly executed and signed as of the day and year first above written.
CANDLEWOOD HOTEL COMPANY, INC.,
a Delaware Corporation
By: /s/ WARREN D. FIX
---------------------------------
Name: Warren D. Fix
Title: Executive Vice President
EMPLOYEE
/s/ JACK P. DeBOER
-------------------------------------
Jack P. DeBoer
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EXHIBIT 10.4
CANDLEWOOD HOTEL COMPANY, L.L.C.
DEVELOPMENT AGREEMENT
<PAGE> 2
CANDLEWOOD HOTEL COMPANY, L.L.C.
DEVELOPMENT AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Recitals ..................................................................................................... 1
Article 1 Grant of Options............................................................................ 1
Article 2 Development Fee; Franchise Application Fees................................................. 3
Article 3 Development Schedule and Manner of Exercising Options....................................... 3
Article 4 Term and Right of First Refusal............................................................. 4
Article 5 Duties of the Parties....................................................................... 5
Article 6 Default..................................................................................... 6
Article 7 Transferability............................................................................. 7
Article 8 Covenants................................................................................... 7
Article 9 Notices..................................................................................... 8
Article 10 Independent Contractor and Indemnification.................................................. 8
Article 11 Approvals................................................................................... 9
Article 12 Non-Waiver.................................................................................. 9
Article 13 Severability and Construction............................................................... 10
Article 14 Entire Agreement - Applicable Law........................................................... 10
Article 15 Remedies and Disputes....................................................................... 11
Article 16 Developer Acknowledgments................................................................... 13
Guaranty...................................................................................................... 15
Attachment A Assigned Area .............................................................................. A-1
Attachment B Development Sch dule ....................................................................... B-1
Attachment C Franchise Application....................................................................... C-1
Attachment D Franchise Agreement ........................................................................ D-1
</TABLE>
<PAGE> 3
CANDLEWOOD HOTEL COMPANY, L.L.C.
DEVELOPMENT AGREEMENT
THIS DEVELOPMENT AGREEMENT (the or this "Agreement") made and entered
into at Wichita, Kansas this _____ day of _____________________, 19___, by and
between CANDLEWOOD HOTEL COMPANY, L.L.C., a Delaware limited liability company
(hereinafter referred to as "CHC"), and ______________________________________
_________________________________________ (hereinafter referred to as
"Developer"), whose principal business address is ____________________________
_________________________________________________.
RECITALS
A. CHC has developed and owns a concept and distinctive system
(hereinafter, the "System") for the design, establishment, and operation of
hotels under the name "Candlewood Hotel" and "Candlewood/A Studio Hotel" (such
names and any other trade names, service marks, trademarks, logos, emblems, or
other indication of origin as are now or hereafter designated by CHC as part of
the System are hereinafter referred to as the "Proprietary Marks").
B. Developer wishes to obtain certain options for the development of
Candlewood Hotels in the area described in this Agreement.
C. CHC is relying upon the business skill, financial capacity, and
character of Developer and its principals, and the guarantee by the principals
of Developer's obligations, if applicable, as attached to this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the promises
contained herein, the parties agree as follows:
ARTICLE 1. GRANT OF OPTIONS.
A. CHC hereby grants to Developer, pursuant to the terms and conditions
of this Agreement, options to obtain franchises to establish and operate _______
Candlewood Hotels
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(the "Hotels") under the System within the area described in Attachment A to
this Agreement (hereinafter "Assigned Area").
B. Except as otherwise provided in this Agreement, CHC shall not
establish, nor franchise another to establish, any Candlewood Hotel under the
System (a "System Hotel") in the Assigned Area prior to the earlier of the
expiration of the development schedule set forth in Attachment B hereto (the
"Development Schedule") or Developer's default under this Agreement.
C. If at anytime prior to the earlier of the expiration of the
Development Schedule or Developer's default under this Agreement, CHC acquires
any hotels in the Assigned Area which it desires to convert to System Hotels
(hereinafter, whether one or more, "Conversion Hotels"), CHC shall provide
written notice to Developer within a reasonable time of its intent to convert
the Conversion Hotels into System Hotels. Such notice shall provide Developer
with a right of first refusal to acquire such Conversion Hotels from CHC on the
terms provided below if the sale by CHC of such hotels to Developer is allowed
by applicable law. Subject to the foregoing, Developer shall have the right and
option, exercisable within 30 days after receipt of such written notification,
to provide written notice to CHC that Developer desires to purchase the
Conversion Hotels and to convert all of such hotels to Hotels under the System.
In the event Developer elects to purchase and convert the Conversion Hotels,
Developer must close on such purchase and execute a Franchise Agreement in the
form attached hereto as Attachment D (which shall require payment of the initial
franchise fee) within 60 days from the date of notice to CHC of Developer's
election to purchase and convert. The purchase price to be paid by Developer for
the Conversion Hotels shall be the cash equivalent of the fair value to CHC for
each of the Conversion Hotels, as determined by an independent appraiser
selected and retained by CHC in CHC's sole discretion. In the event Developer
does not elect to purchase and convert the Conversion Hotels as provided in this
Paragraph, Developer shall have no further right or option to acquire such
Conversion Hotels, and CHC may sell such Conversion Hotels to another franchisee
under the System or Franchisor or its affiliates may own and operate the
Conversion Hotels under the System.
D. Notwithstanding Paragraph B and Paragraph C of this Article,
Developer acknowledges and agrees that CHC's members and the subsidiaries and
affiliates, shareholders, and owners of CHC and its members including without
limitation Doubletree Corporation, a Delaware corporation, and its affiliates
(hereinafter, the "Affiliated Companies") have and retain the right to develop,
acquire, participate in, and operate and license others to develop, acquire,
participate in, and operate hotels, lodging facilities, or other business
operations of any type whatsoever, including locations within the Assigned Area
and locations adjacent, adjoining, or proximate to the Assigned Area, including,
without limitation, hotels using any of the Proprietary Marks or any other trade
name including, but not limited to, any of the following specific trade names:
Doubletree, Doubletree Guest Suites, Club Hotels by Doubletree, Residence Inn by
Marriott, and The Residence Inn. Notwithstanding anything to the contrary
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<PAGE> 5
in the foregoing CHC may operate within the Assigned Area any hotel, motel, or
other business that provides lodging accommodations on a daily-stay basis with
kitchen facilities and limited (not on a daily basis) maid service at a moderate
to economy price when an option has been declined by Developer under Paragraph C
of Article 1 or Paragraph B of Article 4, or as otherwise provided in this
Agreement. Developer also agrees that CHC and the Affiliated Companies are not
restricted from using the System or engaging in or licensing any business
activity including System Hotels or other hotels at any location not within the
Assigned Area. Developer understands that such business operations may compete
with and adversely affect the operation of any Hotels developed by Developer
pursuant to this Agreement. Developer agrees that CHC and the Affiliated
Companies may exercise any and all such rights from time to time without notice
to Developer and Developer covenants that it shall not take any action,
including a cause of action in a court of law or equity, which may interfere
with the exercise of such rights by either CHC or any of the Affiliated
Companies.
ARTICLE 2. DEVELOPMENT FEE; FRANCHISE APPLICATION FEES.
In consideration of the development rights granted herein, Developer
shall pay to CHC upon execution of this Agreement a development fee of $1.00.
For each Hotel developed pursuant to this Agreement, Developer shall pay by
certified check a franchise application fee equal to the greater of (a) $40,000
or (b) $400 times the number of rooms of the Hotel as specified in the Franchise
Application for the Hotel. Upon payment by Developer of the franchise
application fee upon submission of the Franchise Application, the initial
franchise fee for the Hotel set forth in Section 4.1.A of the Franchise
Agreement shall be deemed paid in full, unless the number of rooms of the Hotel
specified in Exhibit A to the Franchise Agreement exceeds the number of rooms of
the Hotel specified in the Franchise Application for the Hotel, and in such
case, the balance of the initial franchise fee shall be paid to CHC by Developer
contemporaneously with Developer's execution and delivery of the Franchise
Agreement for the Hotel.
ARTICLE 3. DEVELOPMENT SCHEDULE AND MANNER OF EXERCISING OPTIONS.
A. Developer shall exercise each development option granted hereunder
in the manner specified in Paragraph B below. Recognizing that time is of the
essence, Developer agrees to exercise its options in accordance with the
Development Schedule set forth in Attachment B hereto. Any failure by Developer
to exercise any option within the time specified for such option in the
Development Schedule shall constitute a material default under this Agreement
allowing CHC to terminate this Agreement under Article 6.
B. To exercise a development option for a site in the Assigned Area,
Developer shall submit to CHC for its approval a Franchise Application, in the
form attached hereto as
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Attachment C, together with a market feasibility study for the site as described
in the Franchise Application, and such other information or materials as CHC may
reasonably require, including, but not limited to, a copy of a letter of intent
or other evidence satisfactory to CHC which confirms Developer's favorable
prospects for obtaining the site. The Franchise Application shall also be
accompanied by the franchise application fee for the Hotel. CHC shall have 30
days after receipt of the Franchise Application and all other such information
and materials required by CHC to approve or disapprove the Franchise Application
for any reason. If CHC rejects the Franchise Application, CHC shall retain
$5,000 of the franchise application fee to compensate CHC for its administrative
and other expenses in reviewing the Franchise Application, and shall return the
balance of the franchise application fee to Developer and Developer shall have
90 days to submit and obtain approval of another Franchise Application for the
exercise of that option. If a second Franchise Application is submitted, it will
be subject to the same terms and conditions stated above, including payment of
the full Franchise Application Fee, and will be approved or disapproved under
the same terms and conditions described above. Franchisor shall have no
obligation to consider more than two Franchise Applications for any hotel
required by the development schedule. No extensions under this Paragraph shall
extend any other time periods specified in the Development Schedule for the
exercise of options by Developer. Within ten days of obtaining CHC's approval of
the Franchise Application, Developer shall provide CHC an originally executed
Franchise Agreement in the form of Attachment D hereto for the site approved in
the Franchise Application. Developer acknowledges that CHC's approval of the
Franchise Application and the site does not in any way guarantee that the site
will become a profitable Hotel. Developer expressly acknowledges that CHC's
approval of the Franchise Application and the site shall not be deemed to be or
construed as a warranty or guarantee, express or implied, as to the potential
volume, profits, or success of the Hotel to be located on the site.
ARTICLE 4. TERM AND RIGHT OF FIRST REFUSAL.
A. Unless sooner terminated in accordance with the terms of this
Agreement, the term of this Agreement and all rights granted hereunder (except
for the right of first refusal provided in Paragraph B of this Article) shall
expire on the date of CHC's acceptance and execution of a Franchise Agreement
for the last of the Hotels to be established pursuant to the Development
Schedule.
B. If at any time within 5 years following the expiration of the
Development Schedule, CHC determines that it is desirable to establish
additional Hotels under the System in the Assigned Area, and provided that
Developer has opened all of the Hotels described in the Development Schedule and
is then in compliance with all terms and conditions of all Franchise Agreements
between Developer and CHC, Developer shall have a right of first refusal to
purchase the options to establish such additional Hotels upon CHC's then-current
terms and conditions. In that event, CHC shall submit to Developer a development
agreement offering
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<PAGE> 7
such options, which agreement shall supersede in all respects this Agreement,
and Developer shall have 30 days after receipt to execute and return the
agreement to CHC. In the event that Developer does not exercise this right of
first refusal, CHC may thereafter elect to establish additional Hotels itself or
grant options to others to do so in the Assigned Area.
ARTICLE 5. DUTIES OF THE PARTIES.
A. CHC shall furnish to Developer the following:
1. A Development Manual, on loan, setting forth site selection
guidelines, and containing a set of prototype plans and specifications
(not for construction) for a System Hotel.
2. On-site evaluation as CHC deems advisable in response to
Developer's request for site approval; provided, however, the CHC shall
not provide on-site evaluation for any proposed site prior to its
receipt from Developer of a market feasibility study for such site
prepared by Developer pursuant to Paragraph B of Article 3 of this
Agreement.
B. Developer accepts the following obligations:
1. Developer shall comply with all terms and conditions set
forth in this Agreement.
2. Developer shall at all times preserve in confidence the
Development Manual and any and all materials and information furnished
or disclosed to Developer by CHC and designated by CHC as confidential,
and Developer shall disclose such information or materials only to such
of its employees or agents who must have access to it in connection
with their employment. Developer shall not at any time, without CHC's
prior written consent, copy, duplicate, record, or otherwise reproduce
the Development Manual or other materials or information, in whole or
in part, nor otherwise make the same available to any unauthorized
person.
3. Developer shall comply with all requirements of federal,
state, and local laws, rules, ordinances, and regulations.
4. Developer shall comply with all terms and conditions set
forth in any Franchise Agreement, and any other related agreement or
instrument entered into by Developer in connection with any Hotel.
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ARTICLE 6. DEFAULT.
A. The options and territorial rights granted to Developer in this
Agreement have been granted in reliance on Developer's representations and
assurances, among others, that the Development Schedule set forth in Attachment
B to this Development Agreement will be met by Developer in a timely manner.
B. Developer shall be deemed in default under this Agreement, and all
rights granted herein shall automatically terminate without notice, if Developer
is adjudicated a bankrupt, becomes insolvent, suffers temporary or permanent
count-appointed receivership of substantially all of Developer's property, makes
a general assignment for the benefit of creditors or suffers the filing of a
voluntary or involuntary bankruptcy petition which is not dismissed within 90
days after filing.
C. If Developer fails to comply with (i) the Development Schedule, (ii)
any terms and conditions of any Franchise Agreement, (iii) any other terms and
conditions of this Agreement, (iv) or any other agreement between Developer and
CHC or the Affiliated Companies, such action shall constitute a default under
this Agreement. Upon such default, CHC, in its discretion, may, without giving
Developer prior notice or the right to cure any such default, do any one or more
of the following:
1. Terminate this Agreement and all rights granted hereunder
without affording Developer any opportunity to cure the default,
effective immediately upon Developer's receipt of written notice from
CHC;
2. Reduce the number of options granted Developer in Article 1
of this Agreement;
3. Reduce the territory described in Article 1 of this
Agreement;
4. Terminate the territorial exclusivity granted Developer in
Article 1 of this Agreement.
D. Upon termination of this Agreement by Developer's default, all
remaining options shall be null and void. Developer shall have no right to
establish or operate any Hotel for which a Franchise Agreement has not been
executed by CHC. Default under this Development Agreement shall not constitute a
default under any existing Franchise Agreement between the parties hereto.
E. No right or remedy herein conferred upon or reserved to CHC is
exclusive of any other right or remedy provided or permitted by law or equity.
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<PAGE> 9
ARTICLE 7. TRANSFERABILITY.
A. CHC shall have the right to transfer all or any part of its rights
or obligations herein to any person or legal entity.
B. Developer understands and acknowledges that the rights and duties
set forth in this Agreement are personal to Developer and are granted in
reliance upon the personal qualifications of Developer. Developer has
represented to CHC that Developer is entering into this Agreement with the
intention of complying with its terms and conditions and not for the purpose of
resale of the developmental rights hereunder. Neither Developer nor any partner,
member, or shareholder thereof shall, without CHC's prior written consent (which
consent shall not be unreasonably withheld), directly or indirectly, sell,
assign, transfer, convey, give away, pledge, mortgage, or otherwise encumber any
interest in this Agreement or in Developer. Any such proposed assignment
occurring by operation of law or otherwise, including any assignment by the
trustee in bankruptcy, without CHC's prior written consent (which consent shall
not be unreasonably withheld) shall be a material default of this Agreement.
CHC's consent to a transfer of any interest in this Agreement or in Developer
shall be subject to the terms and conditions set forth in Article 13 of the
Franchise Agreement (Attachment C hereto); provided, however, if a proposed
transfer hereunder would trigger the requirements of Section 13.2 of the
Franchise Agreement, the transferee, in lieu of complying with subsections F
through I of Section 13.2 of the Franchise Agreement, shall execute this
Agreement and any ancillary agreements and pay to CHC a transfer fee of $5,000.
Notwithstanding any provision to the contrary contained in this Article,
Developer may transfer not more than an aggregate of 25% of the outstanding
voting shares or ownership interest of a Developer operating as a corporation,
partnership, or limited liability company to employees of Developer who are
actively engaged in Developer's Hotel operations, if such transfers, alone or
together with other previous, simultaneous, or proposed transfers, do not have
the effect of transferring a controlling interest (as reasonably determined by
CHC) in the Developer. The ownership of such shares or ownership interest by
such employees will be subject to all of the terms and conditions set forth in
this Agreement and the Franchise Agreement, including, without limitation,
Articles 11 and 13 of the Franchise Agreement. Developer shall provide CHC with
written notice of any such proposed transfer and all pertinent information
regarding the same not later than 30 days prior to the proposed date of
transfer.
ARTICLE 8. COVENANTS.
Developer covenants that, except as otherwise approved in writing by
CHC, Developer shall not do or engage in any act prohibited by Article 11 of the
Franchise Agreement (Attachment D). Developer further covenants that during the
term of this Agreement Developer shall not compete, or be associated, directly
or indirectly as an owner, shareholder, officer, director, employee, consultant,
manager, or otherwise, in any business in competition with the
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<PAGE> 10
System, and, for a period of two years after any transfer or termination of this
Agreement for any reason, Developer shall not compete, or be associated,
directly or indirectly as an owner, shareholder, officer, director, employee,
consultant, manager, or otherwise, in any hotel, motel, or any other business,
that provides lodging accommodations on a daily-stay basis with kitchen
facilities and limited (not on a daily basis) maid service at a moderate to
economy price, anywhere in the world, which shall expressly include, but shall
not be limited to, the United States of America and all its territories and
possessions, and all other countries in North America. Unless the context
otherwise requires, the term "Developer" as used in this Article shall include,
individually and collectively, all partners, officers, directors, and managers
of Developer and holders, directly or indirectly (and any partners, officers or
directors of any such holder), of five percent or more of the beneficial
interest in Developer.
ARTICLE 9. NOTICES.
Any and all notices required or permitted under this Agreement shall be
in writing and shall be personally delivered or mailed by certified mail, return
receipt requested, to the respective parties at the following addresses unless
and until a different address has been designated by written notice to the other
party:
Notices to CHC: Candlewood Hotel Company, L.L.C.
9342 East Central
Wichita, Kansas 67206
Attn: Franchise Department
Notices to Developer:
------------------------------
------------------------------
------------------------------
Attn:
------------------------
Any notice by certified mail shall be deemed to have been given at the
date and time of mailing.
ARTICLE 10. INDEPENDENT CONTRACTOR AND INDEMNIFICATION.
A. It is understood and agreed by the parties hereto that this
Agreement does not create a fiduciary relationship between them, that nothing in
this Development Agreement is intended to constitute either party an agent,
legal representative, subsidiary, joint venturer,
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<PAGE> 11
partner, employee, or servant of the other for any purpose whatsoever. Each
party to this Agreement is an independent contractor, and neither shall be
responsible for the obligations, debts, or liabilities incurred by the other.
B. Developer shall hold itself out to the public to be an independent
contractor operating pursuant to this Agreement. Developer agrees to take such
reasonable actions as shall be necessary to that end.
C. Developer understands and agrees that nothing in this Development
Agreement authorizes Developer to make any contract, agreement, warranty or
representation on CHC's behalf, or to incur any debt or other obligation in
CHC's name; and that CHC assumes no liability for, nor shall be deemed liable by
reason of, any act or omission of Developer in Developer's conduct under this
Development Agreement, or any claim or judgment arising therefrom. Developer
shall indemnify and hold CHC and the Affiliated Companies and CHC's and the
Affiliated Companies' officers, directors, employees, shareholders, owners,
managers, agents, representatives, and affiliates harmless against any and all
such claims directly or indirectly from, as a result of, or in connection with
Developer's operations hereunder, as well as the costs, including attorneys'
fees, of defending against them.
ARTICLE 11. APPROVALS.
A. Whenever this Development Agreement requires the prior approval or
consent of CHC, Developer shall make a timely written request to CHC therefor;
and, except as otherwise provided herein, any approval or consent granted shall
be in writing.
B. CHC makes no warranties or guarantees upon which Developer may rely
and assumes no liability or obligation to Developer or any third party to which
it would not otherwise be subject, by providing any waiver, approval, advice,
consent, or services to Developer in connection with this Development Agreement,
or by reason of any neglect, delay, or denial of any request therefor.
ARTICLE 12. NON-WAIVER.
No failure of CHC to exercise any power reserved to it in this
Agreement or to insist upon compliance by Developer with any obligation or
condition in this Development Agreement, and no custom or practice of the
parties at variance with the terms hereof, shall constitute a waiver of CHC's
rights to demand exact compliance with the terms of this Agreement. Waiver by
CHC of any particular default shall not affect or impair CHC's right in respect
to any subsequent default of the same or of a different nature, nor shall any
delay, forbearance, or omission of CHC to exercise any power or right arising
out of any breach or default by
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<PAGE> 12
Developer of any of the terms, provisions, or covenants of this Agreement,
affect or impair CHC's rights, nor shall such constitute a waiver by CHC of any
rights hereunder or rights to declare any subsequent breach or default.
ARTICLE 13. SEVERABILITY AND CONSTRUCTION.
A. Should any one or more parts of this Agreement be declared invalid
for any reason by a court of competent jurisdiction, such decision shall not
affect the validity of any remaining portions of the Agreement, which shall
remain in full force and effect as if the Agreement had been executed without
such invalid parts, except to the extent the absence of the provisions
invalidated would frustrate or make it impossible to achieve the purposes for
which the Agreement was made. Should the requirements of any applicable law or
regulation change or modify the terms of this Agreement or conflict with its
provisions, such change or modification shall not be applicable to this
Agreement unless such change is lawfully mandated by the authority making the
same, in which case only the provisions affected by such law or regulation shall
be affected, and the Agreement shall otherwise remain in full force and effect,
as modified to be consistent with such law or regulation.
B. Nothing in this Agreement shall confer upon any person or legal
entity other than CHC or Developer and such of their respective successors and
assigns as may be contemplated by Article 7 of this Agreement, any rights or
remedies under or by reason of this Agreement.
C. All captions in this Agreement are intended solely for the
convenience of the parties, and none shall be deemed to affect the meaning or
construction of any provision hereof. Time is of the essence of this Agreement
in all respects.
D. All references herein to gender and number shall be construed to
include such other gender and number as the context may require, and all
acknowledgments, promises, covenants, agreements and obligations herein made or
undertaken by Developer shall be deemed jointly and severally undertaken by all
those executing this Agreement on behalf of Developer.
E. This Agreement may be executed in several parts, and each copy so
executed shall be deemed an original.
ARTICLE 14. ENTIRE AGREEMENT - APPLICABLE LAW.
This Agreement, the documents referred to herein, and the Attachments
attached hereto constitute the entire, full, and complete agreement between CHC
and Developer concerning the subject matter hereof and supersede any and all
prior agreements. No amendment, change, or
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<PAGE> 13
variance from this Agreement shall be binding on either party unless executed in
writing. This Agreement shall be governed by the laws of the State of Kansas.
ARTICLE 15. REMEDIES AND DISPUTES.
A. Developer and CHC agree to submit, prior to arbitration, all
unsettled claims, disputes, controversies, and other matters in question between
them arising out of or relating to this Agreement (including but not limited to
any claim that the Agreement or any of its provisions is invalid, illegal, or
otherwise voidable or void), the dealings or relationship between Developer and
CHC, or Developer's development of any Hotel ("Disputes") to mediation in
Wichita, Kansas and in accordance with the Commercial Mediation Rules of the
American Arbitration Association currently in effect. Demand for mediation shall
be made within a reasonable time, not to exceed thirty (30) days, after
cessation of negotiations between Developer and CHC.
1. Mediation shall be private, voluntary, and nonbinding. Any
party may withdraw from the mediation at any time before signing a
settlement agreement upon written notice to each other party and to the
mediator. The mediator shall be neutral and impartial. The mediator's
fees shall be shared equally by the parties. The mediator shall be
disqualified as a witness, consultant, expert, or counsel for either
party with respect to the matters in Dispute and any related matters.
2. Unless the parties agree otherwise, the entire mediation
process shall be confidential and without prejudice. The parties and
the mediator shall not disclose any information, documents, statements,
positions, or terms of settlement. Nothing said or done or provided by
the parties in the course of mediation shall be reported or recorded
or, except as ordered by a court of competent jurisdiction, placed in
any legal proceeding or construed for any purpose as an admission
against interest. Nevertheless, evidence otherwise discoverable or
admissible is not excluded from discovery or admission as a result of
its use in mediation.
If a Dispute cannot be resolved through mediation, the parties agree to submit
the Dispute to arbitration, subject to the terms and conditions of this Article.
B. Subject to Paragraph A of this Article, all Disputes between
Developer and CHC will be submitted for binding arbitration to the American
Arbitration Association on demand of either party. Such arbitration proceeding
will be conducted in Wichita, Kansas and, except as otherwise provided in this
Agreement, will be heard by one arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect. All
matters relating to arbitration will be governed by the federal Arbitration Act
(9 U.S.C. Sections 1 et.seq.) and not by any state arbitration law.
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<PAGE> 14
1. The arbitrator will have the right to award or include in
his award any relief which he deems proper under the circumstances,
including, without limitation, money damages (with interest on unpaid
amounts from the date due), specific performance, injunctive relief,
and attorneys' fees and costs, provided that the arbitrator will not
have the right to declare any of CHC's proprietary marks, generic or
otherwise, invalid or to award exemplary or punitive damages. The award
and decision of the arbitrator will be conclusive and binding upon all
parties hereto, and judgment upon the award may be entered in any court
of competent jurisdiction.
2. Developer and CHC agree to be bound by the provisions of
any limitation on the period of time in which claims must be brought
under applicable law. Developer and CHC further agree that, in
connection with any such arbitration proceeding, each must submit or
file any claim which would constitute a compulsory counterclaim (as
defined by Rule 13 of the Federal Rules of Civil Procedure) within the
same proceeding as the claim to which it relates. Any such claim which
is not submitted or filed as described above will be forever barred.
3. Developer and CHC agree that arbitration will be conducted
on an individual, not a class-wide, basis, and that an arbitration
proceeding between Developer and CHC may not be consolidated with any
other arbitration proceeding involving Developer or CHC and another
party.
C. Notwithstanding anything to the contrary contained in this Article,
Developer and CHC each have the right in a proper case to obtain temporary
restraining orders and temporary or preliminary injunctive relief from a court
of competent jurisdiction; provided, however, that Developer and CHC must
contemporaneously submit the Dispute for non-binding mediation under Paragraph A
of this Article and then for arbitration under Paragraph B of this Article on
the merits as provided herein if such Dispute cannot be resolved through
mediation. Developer acknowledges that a proper case to obtain temporary
restraining orders and temporary or permanent injunctive relief from a court of
competent jurisdiction contemporaneously with submitting the Dispute to
mediation and then to arbitration shall include, but not be limited to, the
following:
1. Any Dispute involving actual or threatened disclosure or
misuse of the contents of the Development Manual or any other
confidential information or trade secrets of CHC;
2. Any Dispute involving the ownership, validity, use of, or
right to use or license CHC's marks;
3. Any action by CHC to enforce the covenants set forth in
Article 7 and Article 8 of the Agreement; and
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<PAGE> 15
4. Any action by CHC to stop or prevent any threat or danger
to public health or safety resulting from the construction of a Hotel.
The provisions of Paragraphs A and B of this Article are intended to benefit and
bind certain third party non-signatories and will continue in full force and
effect subsequent to and notwithstanding the expiration or termination of this
Agreement.
D. In the event that Developer commences any action against CHC with
respect to any Dispute, such action shall be brought only in a federal or state
court sitting within Sedgwick County, Kansas. Developer consents to the exercise
of jurisdiction by courts within Sedgwick County, Kansas over any claims or
counterclaims against Developer.
E. In the event CHC incurs legal fees or costs or other expenses to
enforce any obligation of Developer under this Agreement, or to defend against
any claim, demand, action or proceeding by reason of Developer's failure to
perform or observe any obligation imposed upon Developer by this Agreement, then
CHC shall be entitled to recover from Developer the amount of all legal fees,
costs and expenses, including reasonable attorneys' fees, whether incurred prior
to, in preparation for, or contemplation of the filing of any claim, demand,
action, or proceeding or in connection with the prosecution or defense thereof.
F. Nothing contained in this Article shall bar CHC's right to obtain
injunctive relief against threatened conduct that will cause it loss or damage,
under the usual equity rules, including the applicable rules for obtaining
restraining orders and preliminary injunctions.
ARTICLE 16. DEVELOPER ACKNOWLEDGMENTS.
A. Developer acknowledges that the success of the business venture
contemplated by this Agreement involves substantial business risks and will be
largely dependent upon the ability of Developer as an independent business
person. CHC expressly disclaims the making of, and Developer acknowledges
Developer has not received, any warranty or guarantee, express or implied, as to
the potential volume, profits, or success of the business venture contemplated
by this Agreement.
B. Developer acknowledges that Developer received a copy of this
Agreement, the attachments thereto, if any, and agreements relating thereto, if
any at least five business days prior to the date this Agreement was executed;
and that CHC has accorded Developer ample time and opportunity to consult with
advisors of Developer's own choosing about the potential benefits and risks of
entering into this Agreement. Developer further acknowledged that Developer has
received a copy of CHC's franchise offering disclosure document required by the
trade regulation rule of the Federal Trade Commission at least ten business days
prior to the date this Agreement was executed.
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<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Agreement as of the day and year first above written.
CANDLEWOOD HOTEL COMPANY, L.L.C.
DATED: By:
----------- --------------------------------
Its:
--------------------------------
"CHC"
-------------------------------------
DATED: By
----------- --------------------------------
"Developer"
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<PAGE> 1
EXHIBIT 10.6
INCORPORATION AND
REGISTRATION RIGHTS AGREEMENT
This Incorporation and Registration Rights Agreement, dated as
of September 1, 1996, is made by and among Doubletree Corporation, a Delaware
corporation ("Doubletree"), JPD Corporation, a Kansas corporation ("JPD
Corporation"), Mr. Jack P. DeBoer, as the sole shareholder of JPD Corporation
("DeBoer") and the Warren D. Fix Family Partnership, L.P. (the "Fix
Partnership") (collectively, the "Parties" or the "Members").
BACKGROUND
A. Prior to the date of this Agreement, all of the outstanding
membership interests in Candlewood Hotel Company, LLC ("Candlewood LLC") were
owned 50% by Doubletree, 47.2% by JPD Corporation and 7.5% by the Fix
Partnership and all of the outstanding membership interests in Candlewood
Wichita Northeast, LLC, a Kansas limited liability company, Candlewood
Englewood, LLC, a Delaware limited liability company, and Candlewood Omaha, LLC,
a Delaware limited liability company (collectively, the "Subsidiary LLCs") were
owned 98% by Candlewood LLC, 1% by DT Real Estate, Inc., a subsidiary of
Doubletree, .85% by JPD Corporation, and .15% by the Fix Partnership.
B. In anticipation of the transactions contemplated by this
Agreement, Doubletree, JPD Corporation and the Fix Partnership have formed
Candlewood Hotel Corporation, Inc., a Delaware corporation (the "Company"), to
succeed to the business, assets and liability of Candlewood LLC and the
Subsidiary LLCs.
C. The Parties desire to provide in this Agreement for the
reorganization of Candlewood LLC and the right to liquidate all or a portion of
their respective investments in Candlewood LLC through (i) the formation and
reorganization of the Company which is to succeed, directly or indirectly, to
the assets and liabilities of, or hold each of the Members' respective
membership interests in, Candlewood LLC and the Subsidiary LLCs (collectively,
the "Reorganization"), (ii) an initial public offering of the Common Stock of
the Company (the "IPO"), in accordance with this Agreement and (iii) the receipt
of certain rights to register shares of common stock of the Company received in
connection with the Reorganization. The Parties intend that the IPO shall occur
as soon as practicable, the exact timing of which shall be determined by the
board of directors of the Company in the exercise of sound business judgment
giving due consideration to the needs of Candlewood LLC and the Members and that
the Reorganization shall be contingent only upon and occur immediately preceding
the IPO.
NOW, THEREFORE, in consideration of the foregoing and
intending to be legally bound, the Parties agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Commission" means the United States Securities and Exchange
Commission.
<PAGE> 2
"Eligible Securities" means the shares of common stock of the
Company (the "Common Stock") to be issued to the Members upon the reorganization
of the Company.
"Holder" means a registered holder of outstanding Eligible
Securities.
"Securities Act" means the Securities Act of 1933 or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
2. Reorganization of the Company; Required Registration.
(a) At any time after the date of this Agreement, the Company
may, by resolution duly adopted by its Board of Directors, authorize and require
(a) the contribution of the assets and liabilities of Candlewood LLC and the
Subsidiary LLCs to the Company in exchange for securities of the Company (an
"Reorganization Resolution") and (b) the filing by the Company of a registration
statement (which the Company shall use its best efforts to cause to become
effective) under the Securities Act with respect to the securities of the
Company specified by the Members in such resolution (a "Registration
Resolution").
At any time after 180 days from the date of the initial public
offering of the Company's common stock, Doubletree may deliver to the Company a
written request that the Company file and use its best efforts to cause to
become effective a registration statement under the Securities Act with respect
to such number of the Eligible Securities owned by Doubletree as shall be
specified in such request (a "Registration Request"). Except as otherwise
provided in Section 2(b)(ii)(C) hereof, the Company shall not be required to
file and use its best efforts to cause to become effective, pursuant to a
Registration Request under this Section 2, more than two registration statements
at the demand of Doubletree. Doubletree, following delivery of a Registration
Request is hereinafter referred to as the "Requesting Holder."
Promptly following adoption and approval of a Reorganization
Resolution in accordance with this Section 2(a), the Company and all Holders
shall use their best efforts to cause the Company to be reorganized in
accordance with this Agreement as soon as practicable thereafter. In connection
with the Reorganization of the Company, the Company and the Holders shall enter
into a stockholders agreement in the form attached hereto as Exhibit 1 (the
"Stockholders Agreement"). In addition, the Parties shall cause to be filed a
certificate of incorporation in the form attached hereto as Exhibit 2, and the
Company shall thereafter adopt, and the Members shall take all such actions as
are within their respective powers to cause the Company to adopt, by-laws in the
form attached hereto as Exhibit 3. The initial directors of the Company shall be
Jack DeBoer, Richard Ferris, Warren Fix, and Peter Ueberroth, and the initial
officers of the Company shall be those persons designated by the directors. As
part of the Reorganization of the Company, each of Doubletree and the Fix
Partnership shall transfer to the Company its Membership interest in Candlewood
LLC and the Subsidiary LLCs, in each case free and clear of all liens, and
encumbrances and in consideration for a percentage of the shares of Common Stock
outstanding immediately after the reorganization of the Company equal to the
percentage interest in Candlewood LLC held by such Member immediately prior to
the Reorganization of the Company, and DeBoer, and the other shareholders of JPD
Corporation, if
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<PAGE> 3
any, acting through DeBoer, will contribute all of the outstanding stock of JPD
Corporation, free of all liens and encumbrances, in consideration for a
percentage of the shares of Common Stock outstanding immediately after the
reorganization of the Company equal to the percentage interest in Candlewood LLC
held by JPD Corporation immediately prior to the Reorganization of the Company.
In addition, Mr. DeBoer will enter into an Indemnification Agreement in the form
attached hereto as Exhibit 4.
If, prior to the Reorganization of the Company, any Member
shall transfer all or any portion of its membership interest in Candlewood LLC
as provided in Sections 10, 12 or 13 of the LLC Agreement, such transferor shall
require such transferee to transfer all of such interest to the Company in
consideration for its pro rata portion of the shares of Common Stock to be
outstanding immediately after the Reorganization (in the same manner as though
such transferee were an original party to this Agreement). The Parties and
Candlewood LLC agree that the Company shall be reorganized as provided in this
Section 2(a) immediately prior to, and contingent only upon, the IPO.
(b) As soon as practicable following the adoption of the
Registration Resolution or receipt of a Registration Request, the Company will
use its best efforts to register under the Securities Act, for public sale in
accordance with the method of disposition specified in such Registration
Resolution or Registration Request, the number of shares of Eligible Securities
specified in such Registration Resolution or Registration Request (and in the
case of a Registration Request, the number of Eligible Securities specified in
all notices received from Holders within 20 days after their receipt of notice
delivered pursuant to Section 3 hereof); provided however, that, in the case of
a Registration Request, the number of Eligible Securities requested for
inclusion in the registration statement by any Holder (other than as provided in
Section 2(b)(ii)(C) hereof) shall not exceed 50% of the total number of Eligible
Securities owned by such Holder immediately following the reorganization of the
Company. The Company will also be entitled to include in any registration
statement filed pursuant to a Registration Request, for sale in accordance with
the method of disposition specified in such Registration Request, such number of
shares of Common Stock as the Company shall desire to sell for its own account.
If the method of sale designated is an underwritten public offering, the
managing underwriter or underwriters must be reasonably acceptable to both the
Requesting Holder (if any) and the Company, which acceptance shall not be
unreasonably withheld. Notwithstanding the foregoing provisions of this
paragraph (b), to the extent that, in the opinion of the underwriter or
underwriters (if the method of disposition shall be an underwritten public
offering), marketing considerations require the reduction of the number of
shares of Common Stock covered by any such registration, the number of shares of
Common Stock to be registered and sold pursuant to such registration shall be
reduced as follows:
(i) if the Registration Request is not the
last to which such Holder is entitled under Section 2(a):
(A) the number of shares of
Eligible Securities to be registered on behalf of each Holder
(excluding the Requesting Holder) shall be reduced (to zero,
if necessary) pro rata according to the number of shares
requested to be registered by each Holder;
3
<PAGE> 4
(B) if any additional reduction in
the number of shares of Common Stock to be registered shall be
necessary in the opinion of the underwriter or underwriters,
the number of shares of common stock to be registered on
behalf of the Company and the Requesting Holder shall be
reduced (to zero, if necessary) pro rata according to the
number of shares requested to be registered by the Company and
the Requesting Holder, respectively;
(ii) the Registration Request is the last
Registration Request to which the Holder is entitled under Section
2(a).
(A) the number of Eligible
Securities to be registered on behalf of each Holder
(excluding the Requesting Holder) shall be reduced (to zero,
if necessary) pro rata according to the number of shares
requested to be registered by each Holder;
(B) if any additional reduction in
the number of shares of Common Stock to be registered shall be
necessary, in the opinion of the underwriter or underwriters,
the number of shares of Common Stock to be registered on
behalf of the Company shall be reduced (to zero, if
necessary); and
(C) the number of shares of Common
Stock to be registered on behalf of the Requesting Holder
shall not be reduced; provided, however, that if in case of
the first Registration Request by the Requesting Holder, the
number of Eligible Securities requested to be registered by
the Requesting Holder had been reduced, the Requesting Holder
shall be entitled in its second Registration Request to
register up to the amount by which the number of shares
requested in the first Registration Request had been reduced,
in addition to a number of shares equal to 50% of the total
number of Eligible Securities owned by the Requesting Holder
immediately following the Reorganization of the Company,
notwithstanding anything to the contrary herein; provided
further, however, that if in case of the second Registration
Request by the Requesting Holder, the number of Eligible
Securities requested to be registered by the Requesting Holder
had been reduced (other than by the volume limitations set
forth herein), the Requesting Holder shall be entitled to
request one registration in addition to the two requests for
registration to which the Requesting Holder is entitled under
Section 2(a) hereof; and
(iii) if there is no Requesting Holder
because such registration is being effected pursuant to the
Registration Resolution:
(A) the number of shares of
Eligible Securities to be registered on behalf of each Holder
shall be reduced (to zero, if necessary) pro rata according to
the number of shares requested to be registered by each
Holder, and
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<PAGE> 5
(B) the number of shares of Common
Stock to be registered on behalf of the Company shall not be
reduced.
(c) Notwithstanding the foregoing provisions of this Section
2, the Company shall not be obligated to file a registration statement at the
demand of any Holder pursuant to this Section 2 within 180 days following any
underwritten public offering of Common Stock or of securities of the Company
convertible into or exercisable or exchangeable for Common Stock.
(d) Notwithstanding the foregoing provisions of this Section
2, the Company may elect, by written notice given to the Requesting Holder
within 20 days after the Company's receipt of a Registration Request from the
Requesting Holder, in lieu of filing a registration statement at the demand of
the Requesting Holder, to purchase from the Requesting Holder the number of
Eligible Securities specified in the Requesting Holder's Registration Request
for cash equal to the Net Proceeds thereof. "Net Proceeds" shall mean the
estimated proceeds that the Requesting Holder would have received from a public
offering of the number of Eligible Securities specified in the Requesting
Holder's Registration Request, net of all underwriting discounts and selling
commissions applicable to the sale of such Eligible Securities and the fees and
expenses of counsel for the Requesting Holder, determined pursuant to the
following procedure:
(i) The Requesting Holder may reach an
agreement with the Company as to the amount of the Net Proceeds.
(ii) If the Requesting Holder and the
Company cannot reach agreement as to the amount of the Net Proceeds
within 30 days after the Company's receipt of the Requesting Holder's
Registration Request, either party may request that the Net Proceeds be
determined according to the procedure set forth below.
(iii) The Requesting Holder and the Company
shall select an appraiser to determine the amount of the Net Proceeds
as soon as practicable. The appraiser shall be an investment banking
firm of national reputation having expertise and experience in public
offerings of securities of companies engaging in businesses similar to
that of the Company. The appraiser shall not be an affiliate of any
Party. If the Requesting Holder and the Company are unable to agree on
such selection, each of them shall select one appraiser meeting the
criteria set forth in the two immediately preceding sentences, and such
appraisers shall select a third appraiser meeting such criteria who
shall determine the amount of the Net Proceeds as soon as practicable.
The fees and expenses of all appraisers shall be paid by the Company.
All other expenses of such appraisal shall be paid by the Requesting
Holder.
(iv) The Company shall pay the amount of the
Net Proceeds to the Requesting Holder within 30 days after such amount
has been determined by agreement or-by appraisal as the case may be.
3. Piggyback Registration.
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<PAGE> 6
(a) If the Company at any time proposes to register Common
Stock under the Securities Act for sale to the public, whether for its own
account or for the account of other security holders or both (except
registration statements on Form S-8, S-4 or another form not available for
registering the Eligible Securities for sale to the public), each such time it
will give written notice to all Holders of its intention to do so. Upon the
written request of any Holder (a "Piggyback Request"), given within 20 days
after receipt of any such notice, to register any of its Eligible Securities,
the Company will use its best efforts to cause the Eligible Securities as to
which registration shall have been so requested to be covered by the
registration statement proposed to be filed by the Company.
(b) In the event that any registration statement described in
this Section 3 shall relate, in whole or in part, to an underwritten public
offering of shares of Common Stock, the Eligible Securities to be registered
must be sold through the same underwriters as have been selected by the Company
or any other person who initiated the filing of the registration statement by
exercising a right to require the Company to do so (a "Requesting Non-Party
Stockholder"). Otherwise, the method of distribution of the Eligible Securities
to be sold by any Holder making a Piggyback Request shall be as specified
therein. The number of shares of Common Stock to be included in such
registration statement on account of any person (other than the Company and any
Requesting Non-Party Stockholder) may be reduced if and to the extent that the
underwriter or underwriters shall be of the opinion that such inclusion would
adversely affect the marketing of the total number of shares of Common Stock
proposed to be sold, and the number of shares to be registered and sold by each
person (other than the Company and any Requesting Non-Party Stockholder) shall
be reduced pro rata according to the number of shares requested to be registered
by such person. Notwithstanding the foregoing provisions of this Section 3, the
Company may withdraw any registration statement referred to in this Section 3
without thereby incurring any liability to any requesting Holder.
4. Registration Procedures. If and whenever the Company is
required by the provisions of Section 2 to effect the registration of any
Eligible Securities under the Securities Act, the Company shall:
(a) prepare and file with the Commission a registration
statement with respect to such securities which will permit the public sale
thereof in accordance with the method of distribution specified in the
applicable Registration Request, and the Company shall use its best efforts (i)
to cause such registration statement to be filed within 60 days of receipt of
the Registration Request, (ii) to cause such registration statement to be
declared effective as promptly as practicable and (iii) to maintain the
effectiveness of such registration statement for a period of not less than 90
days;
(b) promptly prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to effect and maintain the
effectiveness of such registration statement for the period specified in Section
4(a) and as to comply with the provisions of the Securities Act with respect to
the disposition of all Eligible Securities covered by such registration
statement in accordance with the intended method of disposition set forth in
such registration statement for
6
<PAGE> 7
such period, including such amendments or supplements as are necessary to cure
any untrue statement or omission referred to in Section 4(e)(vi);
(c) provide to the managing underwriter or underwriters and
not more than one counsel for all underwriters and to the Holders of Eligible
Securities to be included in such registration statement and not more than one
counsel for all such Holders (such counsel to be reasonably acceptable to the
Company) the opportunity to participate in the preparation of (i) such
registration statement, (ii) each prospectus relating thereto and included
therein or filed with the Commission and each amendment or supplement thereto;
(d) make available for inspection by the parties referred to
in Section 4(c) such financial and other information and books and records of
the Company, and cause the officers, directors and employees of the Company, and
counsel and independent certified public accountants of the Company, to respond
to such inquiries, as shall be reasonably necessary, in the judgment of
respective counsel to such Holders and such underwriter or underwriters, to
conduct a reasonable investigation within the meaning of the Securities Act;
provided, however, that each such person shall be required to retain in
confidence and not to disclose to any other person any information or records
reasonably designated by the Company in writing as being confidential until such
time as such information becomes a matter of public record (whether by virtue of
its inclusion in such registration statement or otherwise), (ii) such person
shall be required to disclose such information pursuant to the subpoena or order
of any court or other governmental agency or body having jurisdiction over the
matter or (iii) such information is required to be set forth in such
registration statement or the prospectus included therein or in an amendment to
such registration statement or an amendment or supplement to such prospectus in
order that such registration statement, prospectus, amendment or supplement, as
the case may be, shall not contain an untrue statement of a material fact or
omit to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, and such information has not been
so set forth after the request by a Holder to such effect; and provided,
further, that the Company need not make such information available, nor need it
cause any officer, director or employee to respond to such inquiry, unless each
such Holder and such counsel, upon the Company's request, execute and deliver to
the Company an undertaking to substantially the same effect contained in the
immediately preceding proviso;
(e) immediately notify the persons referred to in Section 4(c)
and (if requested by any such person) confirm such advice in writing, (i) when
such registration statement or any prospectus included therein or any amendment
or supplement thereto has been filed and, with respect to such registration
statement or any such amendment, when the same has become effective, (ii) of any
material comments by the Commission with respect thereto or any request by the
Commission for amendments or supplements to such registration statement or
prospectus or for additional information, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of such registration
statement or the initiation of any proceedings for that purpose, (iv) if at any
time the representations and warranties of the Company contemplated by Section
4(l)(i) cease to be true and correct in all material respects, (v) of the
receipt by the Company of any notification with respect to the suspension of the
qualification of any Eligible Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose or (vi) at any time
when a prospectus is required to be delivered under the Securities Act,
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<PAGE> 8
of the occurrence or failure to occur of any event, or any other change in law,
fact or circumstance, as a result of which such registration statement,
prospectus or any amendment or supplement thereto, or any document incorporated
by reference in any of the foregoing, contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing;
(f) take reasonable efforts to obtain the withdrawal at the
earliest practicable date of any order suspending the effectiveness of such
registration statement or any post-effective amendment thereto;
(g) if requested by the managing underwriter or underwriters
or the Holders of at least a majority of the Eligible Securities being sold in
connection with an underwritten public offering, promptly incorporate in a
prospectus supplement or post-effective amendment such information as such
managing underwriter or underwriters or such Holders reasonably specify should
be included therein relating to the terms of the sale of such Eligible
Securities, including, without limitation, information with respect to the
number of Eligible Securities being sold to such underwriters, the names and
descriptions of such Holders, the purchase price being paid therefor by such
underwriters and any other terms of the underwritten (or best efforts
underwritten) offering of the Eligible Securities to be sold in such offering,
and make all required filings of such prospectus supplement or post-effective
amendment promptly after notification of the matters to be incorporated in such
prospectus supplement or post-effective amendment;
(h) furnish to each Holder of Eligible Securities included in
such registration and each underwriter, if any, thereof an executed copy of such
registration statement, each such amendment and supplement thereto (in each case
including all exhibits thereto, whether or not such exhibits are incorporated by
reference therein) and such number of copies of the prospectus included in such
registration statement (including each preliminary prospectus and any summary
prospectus) and each amendment or supplement thereto, in conformity with the
requirements of the Securities Act, as such Holder and Managing underwriter, if
any, may reasonably request in order to facilitate the disposition of such
Eligible Securities by such Holder or by the participating underwriters;
(i) use its best efforts to (i) register or qualify the
Eligible Securities to be included in such registration statement under such
other securities laws or blue sky laws of such jurisdictions as any Holder of
such Eligible Securities and each Managing underwriter, if any, thereof shall
reasonably request, (ii) keep such registrations or qualifications in effect for
so long as is necessary to effect the disposition of such Eligible Securities in
the manner contemplated by the registration statement, the prospectus included
therein and any amendment or supplement thereto and (iii) take any and all such
actions as may be reasonably necessary or advisable to enable such Holder and
any participating underwriter or underwriters to consummate the disposition in
such jurisdictions of such Eligible Securities; provided, however, that the
Company shall not be required for any such purpose to (A) qualify generally to
do business as a foreign corporation or a broker-dealer in any jurisdiction
wherein it would not otherwise be required to qualify but for the requirements
of this Section VD, (B) subject itself to taxation in any such jurisdiction or
(C) consent to general service of process in any such jurisdiction;
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<PAGE> 9
(j) cooperate with the Holders of the Eligible Securities
included in such registration and the managing underwriters, if any, to
facilitate the timely preparation and delivery of certificates representing
Eligible Securities to be sold, which certificates shall be printed,
lithographed or engraved, or produced by any combination of such methods, on
steel engraved borders and which shall not bear any restrictive legends; and, in
the case of an underwritten public offering, enable such Eligible Securities to
be registered in such names as the underwriter or underwriters may request at
least two business days prior to any sale of such Eligible Securities;
(k) provide not later than the effective date of the
registration statement a CUSIP number for all Eligible Securities;
(l) enter into an underwriting agreement, engagement letter,
agency agreement, "best efforts" underwriting agreement or similar agreement, as
appropriate, and take such other actions in connection therewith as the Holders
of at least a majority of the Eligible Securities to be included in such
registration shall reasonably request in order to expedite or facilitate the
disposition of such Eligible Securities, and in connection therewith, whether or
not an underwriting agreement is entered into and whether or not the
registration is an underwritten public offering, (i) make such representations
and warranties to the Holders of such Eligible Securities included in such
registration and the underwriters, if any, in form, substance and scope as are
customarily made in an underwritten public offering, (ii) obtain an opinion of
counsel to the Company in customary form and covering such matters as are
customarily covered by such an opinion as the Holders of at least a majority of
such Eligible Securities and the underwriters, if any, may reasonably request,
addressed to each participating Holder and the underwriters, if any, and dated
the effective date of such registration statement (or, if such registration
includes an underwritten public offering, dated the date of the closing under
the underwriting agreement); (iii) obtain a "cold comfort" letter from the
independent certified public accountants of the Company addressed to the Holders
of the Eligible Securities included in such registration and the underwriters,
if any, dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, also dated the date of
the closing under the underwriting agreement), such letter to be in customary
form and covering such matters as are customarily covered by such letters; (iv)
deliver such documents and certificates as may be reasonably requested by the
Holders of at least a majority of the Eligible Securities included in such
registration and the managing underwriter or underwriters, if any, to evidence
compliance with clause (i) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company, and
(v) undertake such obligations relating to expense reimbursement,
indemnification and contribution as are provided in Sections 5, 6 and 7 hereof;
(m) make available to its security holders, as soon as
reasonably practicable after the sale of Eligible Securities, an earning
statement covering a period of at least twelve months which shall satisfy the
provisions of Section 11(a) of the Securities Act (including, at the option of
the Company, pursuant to Rule 158 thereunder); and
(n) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission.
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<PAGE> 10
The provisions of subsections (b) through (n) of this Section
4 shall also apply to registrations pursuant to Section 3; provided however,
that, for the purposes of this paragraph, the time period set forth in Section
4(b) during which the Company must file amendments or supplements to the
registration statement and prospectus to keep such registration effective shall
also be deemed to be 90 days.
Notwithstanding the provisions of Section 4(a), the Company's
obligation to file a registration statement, or cause such registration
statement to become effective, shall be suspended, without incurring any
liability to any Holder, for a period not to exceed 90 days if there exists at
the time material non-public information relating to the Company that, in the
reasonable opinion of the Company, should not be disclosed. In such an event,
the Company shall promptly inform all Holders of the Company's decision to defer
filing of a registration statement and shall notify all Holders promptly (but in
any event not later than upon the expiration of the 90-day period specified in
the immediately preceding sentence) of the recommencement of the Company's
efforts to file the registration statement and to cause the registration
statement to become effective.
In connection with each registration of Eligible Securities
hereunder, the Holders thereof will furnish to the Company in writing such
information with respect to themselves and the proposed distribution by them as
shall be reasonably necessary in order to assure compliance with applicable
federal and state securities laws. Each such Holder also agrees to notify the
Company as promptly as practicable of any inaccuracy or change in information
previously furnished by such Holder to the Company or of the occurrence of any
other event, in either case as a result of which any prospectus relating to such
registration contains an untrue statement of a material fact regarding such
Holder or the distribution of such Eligible Securities or omits to state any
material fact regarding such Holder or the distribution of such Eligible
Securities required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, and promptly
to furnish to the Company any additional information required to correct and
update such previously furnished information or required so that such prospectus
shall not contain, with respect to such Holder or the distribution of such
Eligible Securities, an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in light of the circumstances then existing. Each such
Holder further agrees that upon giving any notice referred to in the immediately
preceding sentence, or upon receipt of any notice from the Company pursuant to
Section 4(e)(vi) hereof, such Holder shall forthwith discontinue the disposition
of Eligible Securities pursuant to the registration statement applicable to such
Eligible Securities until such Holder shall have received copies of an amended
or supplemented registration statement or prospectus, and if so directed by the
Company, such Holder shall deliver to the Company (at the Company's expense) all
copies, other than permanent file copies, then in such Holder's possession of
the prospectus covering such Eligible Securities at the time of receipt of such
notice.
Except as otherwise provided in the Stockholders Agreement, in
connection with the organization of the Company and the initial registration of
Common Stock under the Securities Act, the Company and the Members will take any
and all appropriate action
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<PAGE> 11
recommended by a Managing underwriter (including, without limitation, effecting
a stock split) to facilitate the marketing of the Common Stock proposed to be
sold pursuant to such registration.
5. Expenses. The Company shall pay all expenses incurred in
complying with Sections 2 and 3, including without limitation all registration
and filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws (other than those which by law must be paid by the selling
security holders), fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars and stock exchange
listing fees, but excluding all underwriting discounts and selling commissions
applicable to the sale of Eligible Securities and fees and expenses of counsel
for the selling Holders. All expenses of participating sellers other than those
assumed by the Company in this Agreement shall be borne by such sellers in
proportion to the number of shares sold by each seller or as they may otherwise
agree.
6. Indemnification.
(a) In the event of a registration of Eligible Securities
under the Securities Act pursuant to Section 2 or 3, the Company shall indemnify
and hold harmless each selling Holder, each underwriter of such Eligible
Securities thereunder and each other person, if any, who controls such selling
Holder or underwriter within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such selling
Holder, underwriter or controlling person may become subject under the
Securities Act or otherwise, and will reimburse each such selling Holder,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action, as such expenses are incurred, insofar as
such losses, claims, ties or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such Eligible
Securities were registered under the Securities Act pursuant to Section 2 or 3,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
however, that the Company shall not be liable to any such selling Holder,
underwriter or controlling person in any such case if and to the extent that any
such loss, claim damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
conformity with information furnished by such selling Holder, underwriter or
controlling person in writing specifically for use in such registration
statement or prospectus.
(b) In the event of a registration of any of the Eligible
Securities under the Securities Act pursuant to Section 2 or 3, each selling
Holder of such Eligible Securities, severally and not jointly, will indemnify
and hold harmless the Company, each underwriter and each person, if any, who
controls the Company or any underwriter within the meaning of the Securities
Act, each officer of the Company who signs the registration statement, each
director of the Company, each other seller of securities registered by the
registration statement covering such Eligible Securities and each person, if
any, who controls such seller, against all losses, claims, damages or
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<PAGE> 12
liabilities, joint or several, to which the Company or any such officer,
director, underwriter, other seller or controlling person may become subject
under the Securities Act or otherwise, and shall reimburse the Company and each
such officer, director, underwriter, other seller and controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
but only to the extent that any such loss, claim, damage or liability (or action
in respect thereof) arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such Holder furnished in
writing to the Company by such Holder specifically for use in the registration
statement or prospectus relating to such Eligible Securities. Notwithstanding
the immediately preceding sentence, the liability of each such Holder hereunder
shall, not in any event exceed the net proceeds received by such Holder from the
sale of Eligible Securities covered by such registration statement
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party, if a claim
in respect thereof is to be made against an indemnifying party hereunder, shall
notify such indemnifying party in writing thereof, but the omission so to notify
such indemnifying party shall not relieve such indemnifying party from any
liability that it may have to any indemnified party other than under this
Section 6 and, unless the failure to so provide notice materially adversely
affects or prejudices such indemnifying party's defense against any action,
shall not relieve such indemnifying party from any liability that it may have to
any indemnified party under this Section 6. In case any such action shall be
brought against any indemnified party and it shall notify an indemnifying party
of the commencement thereof, such indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the
defense thereof with counsel reasonably satisfactory to such indemnified party,
and, after notice from such indemnifying party to such indemnified party of its
election so to assume and undertake the defense thereof, such indemnifying party
shall not be liable to such indemnified party under this Section 6 for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected; provided, however, that, if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it that are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume and undertake the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such defense to be
reimbursed by the indemnifying party as incurred.
(d) No indemnifying party shall be liable for any amounts paid
in a settlement effected without the consent of such indemnifying party, which
consent shall not be withheld unreasonably. No indemnifying party shall consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the chairman or plaintiff to the
indemnified party of a release from all liability in respect of such claim or
litigation.
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<PAGE> 13
(e) The reimbursements required by this Section 6 shall be
made by periodic payments during the course of the investigation or defense, as
and when bills are received and expenses incurred.
7. Contribution. If for any reason the indemnity set forth in
Section 6 is unavailable or is insufficient to hold harmless an indemnified
party, then the indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the aggregate losses, claim,
damages, liabilities and expenses of the nature contemplated by said indemnity
(i) in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and such indemnified party on the other
(determined by reference to, among other things, whether the untrue statement of
a material fact or omission to state a material fact relates to information
supplied by the indemnifying party or such indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission), or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law or provides a lesser sum
to such indemnified party than the amount hereinafter calculated, in such
proportion as is appropriate to reflect not only the relative fault of the
indemnifying party and such indemnified party but also the relative benefits
received by the indemnifying party on the one hand and such indemnified party on
the other, as well as any other relevant equitable considerations.
The Company and the Parties agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses referred to in such paragraph
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section, a Holder shall not be required
to contribute any amount in excess of the amount by which the net proceeds of
the sale of Eligible Securities sold by such Holder and distributed to the
public exceeds the amount of any damages which such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person which is not guilty of such fraudulent
misrepresentation.
In the event that any terms of an indemnification or
contribution provision contained in an underwriting agreement executed by or on
behalf of the Company and a Holder differs from a provision in Section 6 or this
Section 7, the provisions in such underwriting agreement shell determine the
rights and obligations of the Company, such Holder and each underwriter that is
a party thereto.
8. Underwriting Agreement. If Eligible Securities are to be
sold pursuant to a registration statement in an underwritten offering pursuant
to Section 2 or 3, the Company and each selling Holder of Eligible Securities
agrees to enter into a written agreement with the managing underwriter or
underwriters selected in the manner herein provided in such form and containing
such provisions as are reasonably satisfactory to the Company and each such
selling
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<PAGE> 14
Holder and as are customary in the securities business for such an arrangement
among such underwriter or underwriters, each such selling Holder and companies
of the Company's size and investment stature. No Holder of Eligible Securities
may participate in any underwritten sale of Eligible Securities pursuant to
Section 2 or 3 hereof unless such Holder agrees to sell such Holder's securities
in accordance with any underwriting arrangements approved by the persons
entitled hereunder to specify the method of distribution of the securities being
registered and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
9. Limitations on Subsequent Registration Rights. If,
subsequent to the date hereof, the Company grants to any holders or prospective
holders of the Company's securities the right to require that the Company
register any securities of the Company under the Securities Act, such
registration rights shall be granted subject to the rights of the Holders to
include all or part of their Eligible Securities in any such registration on the
terms and conditions set forth in Section 3.
10. Rule 144. Upon the Reorganization, the Company shall be
deemed to covenant with the Holders of Eligible Securities that from and after
the effective date of the initial registration statement of the Company filed
under the Securities Act, if and to the extent it shall be required to do so
under the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder, as the same may be amended and in effect at the time
(the "Exchange Act), the Company shall timely file the reports required to be
filed by it under the Exchange Act or the Securities Act (including, but not
limited to, the reports under Sections 13 and 15(d) of the Exchange Act referred
to in subparagraph (c)(1) of Rule 144 adopted by the Commission under the
Securities Act) and shall take such further action as any Holder of Eligible
Securities may reasonably request, all to the extent required from time to time
to enable such Holder to sell Eligible Securities without registration under the
Securities Act within the limitations of the exemption provided by Rule 144
under the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission. Upon the request
of any Holder of Eligible Securities, the Company shall deliver to such Holder a
written statement as to whether it has complied with such requirements.
11. Miscellaneous.
(a) All covenants and agreements contained in this Agreement
by or on behalf of any of the signatories shall bind and inure to the benefit of
the respective successors and permitted assigns of the signatories, whether so
expressed or not. If any permitted transferee of any Holder of Eligible
Securities shall acquire Eligible Securities in any manner (other than by way of
a registered public offering), whether by operation of law or otherwise, such
Eligible Securities shall be held subject to all of the terms of this Agreement,
and by taking and holding such Eligible Securities such transferee shall be
entitled to receive the benefits of and be conclusively deemed to have agreed to
be bound by and to perform all of the terms and provisions of this Agreement.
The benefits to which any such permitted transferee shall be entitled shall
include, without limitation, the rights to register Eligible Securities under
Sections 2 and 3 hereof; provided,
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<PAGE> 15
however, that any such permitted transferee shall not be entitled to deliver to
the Company a Registration Request pursuant to Section 2 hereof unless such
permitted transferee acquired from its transferor at least a majority of the
Eligible Securities owned by such transferor at the time of the transfer. If the
Company shall so request, any such successor or permitted assign shall agree in
writing to acquire and hold the Eligible Securities subject to all of the terms
hereof. This Section 11(a) shall not be deemed to create any right on the part
of any Holder to transfer Eligible Securities in contravention of any
restriction thereon contained in any other agreement to which such Holder is a
party.
(b) All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand, (b) sent by telecopier (with receipt confirmed), provided
that a copy is mailed by registered mail, return receipt requested, or (c) when
received by the addressee, if sent by Express Mail, Federal Express or other
express delivery service (receipt requested), in each case to the appropriate
addresses and telecopier numbers set forth below (or to such other addresses and
telecopier numbers as a party may designate as to itself by notice to the other
parties):
(i) If to Doubletree: 410 North 44th Street,
Suite 700, Phoenix, AZ 85008, Attention: General Counsel (telecopier
no. (602) 220-6666.
(ii) If to the Company or Candlewood LLC:
Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206,
telecopier number (316) 631-1333, Attention: President.
(iii) If to DeBoer or JPD Corporation:
Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206,
telecopier number (316) 631-1333, Attention: Jack DeBoer.
(iv) If to the Fix Partnership: Lakepoint
Office Park, 9342 East Central, Wichita, Kansas 67206, telecopier
number (316) 631-1333, Attention: Warren Fix.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
(d) This Agreement may not be amended or modified, and no
provision hereof may be waived, except in writing, and any such writing shall
only be effective with respect to a Party who has executed such writing. The
failure of any of the Parties to insist upon strict adherence to any term of
this Agreement on any occasion shall not be considered a waiver of that term or
deprive such Party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement.
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed in original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 16
(f) The Parties acknowledge that there may be no adequate
remedy at law if any Party fails to perform any of its obligations hereunder and
that each Party may be irreparably harmed by any such failure, and accordingly
agree that each Party, in addition to any other remedy to which it may be
entitled in law or in equity, shall be entitled to compel specific performance
of the obligations of any other Party under this Agreement in accordance with
the terms and conditions of this Agreement in any court of the United States or
any state thereof having jurisdiction.
(g) The headings in this Agreement are for convenience of
reference only and shall not Emit or otherwise affect the meaning hereof.
(h) In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the Holders
shall be enforceable to the fullest extent permitted by law.
(i) This Agreement, together with the Stockholders Agreement
(including the exhibits and schedules thereto), is intended by the parties as a
final expression of their agreement and a complete and exclusive statement of
the agreement and understanding of the parties hereto in respect of the subject
matter contained herein and therein. There are no restrictions, promises,
warranties or undertakings other than those set forth or referred to herein or
therein. This Agreement and the Stockholders Agreement (including the exhibits
and schedules thereto) supersede all prior agreements and understandings between
the Parties with respect to such subject matter.
(j) EXCEPT AS OTHERWISE PROVIDED IN SECTION 11(f) HEREOF, EACH
PARTY IRREVOCABLY AGREES THAT ALL DISPUTES IN ANY WAY, MANNER OR RESPECT ARISING
OUT OF OR FROM OR RELATED TO THIS AGREEMENT 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 Parties 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 Party. If such Parties are unable
to agree on such selection, each such Party select one arbitrator meeting the
criteria set forth in the immediately preceding sentence and such arbitrators
shall select an arbitrator meeting such criteria to resolve such dispute as soon
as practicable. The fees and expenses of any arbitrator selected by a Party
shall be paid by such Party, the fees and expenses of any other arbitrators
shall be shared equally by the Parties who are involved in the dispute. All
other expenses of such arbitration shall be paid by the Party incurring the
same, subject to the rights of such Party (or an affiliate, of such Party) to
indemnification, if any.
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<PAGE> 17
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first written above.
DOUBLETREE CORPORATION
By: /s/ DAVID L. STIVERS
----------------------------------
Name: David L. Stivers
Title: Senior Vice President,
General Counsel and Secretary
JPD CORPORATION
By: /s/ JACK P. DeBOER
- -------------------------------------
Jack P. DeBoer
President
/s/ JACK P. DeBOER
- -------------------------------------
Jack P. DeBoer, as sole shareholder
of JPD Corporation
THE WARREN D. FIX FAMILY PARTNERSHIP
By: /s/ WARREN D. FIX
- -------------------------------------
Warren D. Fix
General Partner
CANDLEWOOD HOTEL COMPANY, INC.
By: /s/ JACK P. DeBOER
- -------------------------------------
Jack P. DeBoer
President and Chief Executive Officer
17
<PAGE> 1
Exhibit 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
Candlewood Hotel Company, L.L.C.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Wichita, Kansas
September 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS
OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR THE PERIOD FROM OCTOBER 1, 1995
(DATE OF INCEPTION) TO DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> OCT-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 123,384 1,022,492
<SECURITIES> 0 0
<RECEIVABLES> 2,975 55,107
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 127,304 1,201,533
<PP&E> 879,994 5,101,807
<DEPRECIATION> 301 37,531
<TOTAL-ASSETS> 1,283,341 7,029,069
<CURRENT-LIABILITIES> 92,227 412,291
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 1,182,687 6,569,318
<TOTAL-LIABILITY-AND-EQUITY> 1,283,341 7,029,069
<SALES> 0 0
<TOTAL-REVENUES> 0 120,038
<CGS> 0 0
<TOTAL-COSTS> 0 86,195
<OTHER-EXPENSES> 208,986 819,107
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (208,986) (773,768)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (208,986) (773,768)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (208,986) (773,768)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
