<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1996
REGISTRATION NO. 333-12021
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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:
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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
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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 AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
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Common Stock, par value $.01 per
share.............................. 4,427,500 $14.00 $61,985,000 $21,374
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(1) Includes 577,500 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).
(3) The Company previously paid a registration fee of $19,828.
------------------------
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.
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<PAGE> 2
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.
SUBJECT TO COMPLETION, DATED OCTOBER 17, 1996
3,850,000 SHARES
LOGO
COMMON STOCK
All of the 3,850,000 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 $12.00 and $14.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Company's Common Stock has been approved for listing on the Nasdaq National
Market, subject to notice of issuance, under the trading 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 SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED 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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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
577,500 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
Inside the front cover of the document, located in the upper center
appears the Company's logo. Underneath the logo is a caption that reads
CANDLEWOOD Your Studio Hotel. Below the caption is text that reads "The
Candlewood mission is to create and operate a national brand of mid-priced
business extended-stay hotels that deliver exceptional value to customers and
superior profits to franchisees and investors." Also located in the inside front
cover is a map of the United States with certain states containing symbols.
Below the map is a legend with a symbol representing hotel sites under contract
(Alabama, Arizona(2), California(2), Colorado(2), Florida, Kansas, Michigan, New
Jersey, Pennsylvania, Tennessee, Texas(3), Virginia(3), Wisconsin, Utah(2)), a
symbol representing sites under construction (Ohio, Kentucky, Colorado,
Nebraska), a symbol representing franchise applications submitted
(California(2), Illinois, New York, Ohio, South Carolina, Tennessee) a symbol
representing the completed hotel (Kansas), a symbol representing franchise hotel
under construction (Oregon) and a shaded block representing a developer
territory (Northern California, Oregon, Washington).
Below is text which reads as follows:
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT 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 STABILIZATION, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
Opening the cover is a gate-fold with four pictures and one artist's
depiction. Across the bottom of the gate-fold page is an artist's rendition of
the exterior of a Candlewood hotel. Directly above that rendering on the
right-hand gate-fold page is a caption which reads as follows: "Candlewood Hotel
rendering - Denver, Colorado. Expected to open in the first quarter of 1997." In
the upper right-hand corner of the left-hand page of the gate-fold above the
artist's rendering is a photograph of a hotel room showing the bed and kitchen
area with a caption below the photograph which reads "Standard Studio - Wichita,
Kansas." On the upper left-hand side of the right-hand page of the gate-fold
above the artist's rendering is a photograph of the front office of the Wichita
hotel and two people across from each other at a desk with a caption below the
photograph which reads "Check-in made easy." In the upper left of the right-hand
page of the gate-fold above the artist's rendering is a photograph of the
exercise facility of the Wichita hotel with a person on an exercise machine with
a caption below the photograph which reads "The standard Candlewood Hotel will
have an exercise facility." On the right-hand side of the right-hand page of the
gate-field above the artist's rendering is a photograph of a person in front of
food vending machines with a sign which reads "Your Candlewood Cupboard" and
with a caption below the photograph which reads "The 'Candlewood Cupboard' will
provide value priced foods."
<PAGE> 4
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 $13.00 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, franchising and managing 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. The Company's goal is to rapidly
develop and franchise Candlewood hotels to capitalize on what the Company
believes is 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 October 15, 1996, the Company owned and operated one Candlewood hotel
and was constructing four additional hotels, two of which are expected to open
in the first quarter of 1997 and two of which are expected to open in the second
quarter of 1997. In 1997, the Company's objective is to open approximately 14
additional Company-owned hotels and to begin construction of approximately 20
additional Company-owned hotels. In pursuing this objective, as of October 15,
1996 the Company had 18 potential sites under contract and had agreements in
principle or letters of intent with respect to 17 potential sites. In addition,
the Company is developing a nationwide franchising program, and as part of that
program is a party to one multi-hotel development agreement which grants the
developer options to obtain franchises to construct and operate up to 22
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, who founded the Residence Inn
chain and co-founded Summerfield Hotel Corporation, developed and franchised 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 (together with its subsidiaries,
"Doubletree"), which will own 28.7% of the Company's common stock outstanding
after the Offering. 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. As
additional Candlewood hotels commence operations, the Company anticipates that
it will formalize the services to be provided by Doubletree and the cost of
certain of those services. Doubletree is not expected to manage any Candlewood
hotels. Doubletree has agreed to extend a five-year $15 million subordinated
credit facility to the Company, a substantial portion of which will have been
funded at the time of the Offering. Doubletree has also agreed to guarantee a
portion of the construction loans and long-term financing that the Company has
arranged for its qualified franchisees. 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.
3
<PAGE> 5
The standard Candlewood hotel will contain approximately 75 - 135 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
economy 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 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. Candlewood hotels are designed to accommodate what the Company believes
to be an 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 initiated 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 the development agreements,
the Company will grant, in exchange for nominal consideration, options to obtain
franchises to construct and operate Candlewood hotels in exclusive geographic
territories, which exclusive rights may be terminated by the Company if the
developer fails to submit franchise applications in accordance with a
development schedule. As of October 15, 1996, the Company was a party to one
development agreement, which grants the developer options to obtain franchises
to construct and operate up to 22 Candlewood hotels, including five Candlewood
hotels in 1996, seven Candlewood hotels in 1997, seven 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 will 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, remote accessible 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.
4
<PAGE> 6
- Value Priced Features. Candlewood hotels will offer complimentary use of
laundry facilities, free local calls, $0.15-per-minute long distance
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 will make
Candlewood an 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 is
developing 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,
central reservation system and financial support.
- 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. 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"). Doubletree and the Fix Partnership each acquired its membership
interest in Candlewood LLC through a capital contribution and JPD Corporation
acquired its membership interest through the contribution of certain
intangibles, including the development of the Candlewood hotel concept and
rights to the name of the Company, which were valued in the course of
arms-length negotiations among the members of Candlewood LLC. Prior to the
closing of the Offering, the
5
<PAGE> 7
Company's five properties will each be owned by a separate limited liability
company (the "Subsidiary LLCs"), the membership interests of each of which will
be 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 interests 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. As a result, the ownership of the Common
Stock of the Company by Doubletree, the Fix Partnership and the shareholders of
JPD Corporation immediately prior to the Offering will be in the same proportion
as their ownership of membership interests in Candlewood LLC immediately prior
to the reorganization of the Company. Upon consummation of such reorganization,
Doubletree, the Fix Partnership and the shareholders of JPD Corporation,
including Mr. DeBoer, will own 2,587,500, 388,125 and 2,199,375 shares of Common
Stock of the Company, respectively.
In addition, prior to the Offering, the amount of capital in excess of
$200,100 previously contributed to Candlewood LLC by Doubletree, together with a
preferred return on its capital contributions, will be distributed by Candlewood
LLC to Doubletree. In connection with the reorganization of the Company,
Doubletree has agreed to extend to the Company a $15 million subordinated credit
facility. Prior to the Offering, Doubletree will loan to the Company an amount
equal to the amount of the distributed capital and preferred return, which will
be evidenced by a long-term note payable as part of the subordinated credit
facility. As of October 15, 1996, Doubletree had made capital contributions to
Candlewood LLC of approximately $12.3 million. The terms of the distribution to
Doubletree, as well as the subsequent loan by Doubletree to the Company, were
determined by the members of Candlewood LLC in the course of arms-length
negotiations. The reorganization of Candlewood LLC, JPD Corporation and the
Subsidiary LLCs into the Company and the related transactions described above
are referred to herein as the "Reorganization." Following the Reorganization,
each of the Company's five hotel properties will be owned by a separate limited
liability company, the members of which will be the Company, Candlewood LLC and
JPD Corporation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "The Reorganization."
THE OFFERING
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Common Stock offered........................ 3,850,000 shares(1)
Common Stock outstanding after the 9,025,000 shares(1)(2)
Offering..................................
Use of Proceeds............................. To fund the national expansion of Candlewood
hotels and for working capital and other
general corporate purposes.
Nasdaq National Market Symbol............... The Company's Common Stock has been approved
for listing on the Nasdaq National Market,
subject to notice of issuance, under the symbol
"CNDL."
</TABLE>
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(1) Excludes 577,500 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Excludes 900,000 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."
The executive offices of the Company are located at Lakepoint Office Park,
9342 East Central, Wichita, Kansas 67206, and its telephone number is (316)
631-1300.
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 SIX MONTHS
(INCEPTION) TO 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(2).......................... (.04) (.15)
Pro forma weighted average shares outstanding(2)......... 5,175,000 5,175,000
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
COMPANY
--------------------------
CANDLEWOOD PRO FORMA
LLC PRO AS
HISTORICAL FORMA(3) ADJUSTED(4)
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and equivalents.................................. $1,022,492 $1,022,492 $46,968,992
Total assets.......................................... 7,029,069 7,029,069 52,975,569
Accounts payable...................................... 329,828 329,828 329,828
Note payable.......................................... -- 7,334,614 7,334,614
Minority interest..................................... 47,460 -- --
Members' equity....................................... 6,569,318 -- --
Stockholders' equity (deficit)........................ -- (717,836) 45,228,664
</TABLE>
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(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) Pro forma net loss per share is based on (i) the 5,175,000 shares of Common
Stock of the Company issued in conjunction with the Reorganization as if
such shares had been issued and outstanding for all periods presented and
(ii) the amount of pro forma net loss as if the Company had operated as a C
Corporation for all periods presented. See Notes 1g and 1j of Notes to
Consolidated Financial Statements.
(3) Gives effect to the Reorganization as if it had occurred on June 30, 1996,
reflecting (i) the distribution of the amount of capital in excess of
$200,100 previously contributed by Doubletree and related preferred return,
(ii) the contribution of outstanding membership interests of Candlewood LLC
and minority interests of the Subsidiary LLCs held by Doubletree and the Fix
Partnership, and the contribution of the stock of JPD Corporation, to the
Company and (iii) the issuance of a note payable to Doubletree pursuant to
the subordinated credit facility. See Note 10 of Notes to Consolidated
Financial Statements.
(4) Adjusted to reflect the sale of 3,850,000 shares of Common Stock by the
Company in the Offering at an assumed public offering price of $13.00 per
share with assumed net proceeds of $45,946,500 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 and its claims about the proposed construction, operation, features,
rates and demand for Candlewood hotels, among other things. In addition, the
Company operates only one hotel, which hotel has not generated sufficient cash
to cover the Company's operating expenses. 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 sustain net losses for the foreseeable future
and such losses could be larger than those previously reported. 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 October 15, 1996, the Company was
constructing four hotels. In 1997, the Company's objective is to open
approximately 14 additional Company-owned hotels and to begin construction of
approximately 20 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 acquire
properties, complete the development and construction of hotels or that any such
development or construction will be completed on time or within budget.
FUTURE CAPITAL NEEDS AND RISKS OF ADDITIONAL FINANCING
The development of hotels is capital intensive. The Company has arranged
with a third party lender to finance up to 60% of the cost of individual
Company-developed hotels, and the Company may finance a greater portion of such
costs in the future. Funding of the loans for each hotel will be subject to
approval of the third party lender on an individual hotel basis, upon
satisfaction of various conditions. There can be no assurance that any financing
applications submitted by the Company will be approved by the third party lender
on a timely basis, or at all, or that the Company will be able to finance
greater than 60% of the cost of any Company-developed hotel with the third party
lender. If the applications are not approved or if loans are not funded on a
timely basis, the Company may be unable to construct additional Candlewood
hotels, may experience delays in its planned development of hotels, and expects
that it will be required to seek additional financing. In addition, Doubletree
has agreed to loan the Company up to $15 million to fund operating expenses and
development of Candlewood hotels, a substantial portion of which will have been
funded at the time of the Offering. The Company's construction financing and
funds available from Doubletree will bear interest at variable rates, which will
subject the Company to risks associated with debt financing. The Company's
ability to meet its debt service obligations will depend upon the future
performance of the
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Company's operations, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.
The Company believes that the net proceeds from the Offering and cash flow
from operations, together with its subordinated credit facility from Doubletree
and construction financing from NationsBank of Texas, N.A. ("NationsBank") and
the third party lender (if approved on an individual basis), 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, 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. 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. 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."
RISKS ASSOCIATED WITH RAPID GROWTH; RELIANCE ON DOUBLETREE
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 achieve its planned rate of expansion
or 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.
The Company expects to derive substantial benefits from its strategic
alliance with Doubletree. However, Doubletree is under no obligation to provide
any services or to provide any benefits to the Company. If such services or
benefits are provided, there can be no assurance that they will be provided on
terms that are beneficial to the Company or, that if provided, will not be
cancelled at any time.
DEPENDENCE ON SINGLE TYPE OF LODGING FACILITY AND SINGLE BRAND
The Company intends exclusively to develop, manage and franchise 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.
The Company has only recently begun to implement the Candlewood concept,
which includes the design of the standard Candlewood hotel and available
amenities. As of the completion of the Offering, only one Candlewood hotel will
have been constructed. The Company has limited history upon which it can gauge
consumer acceptance of its hotels, and there can be no assurance that the
Company's hotels will be readily accepted by guests who are looking for
extended-stay hotel accommodations. Further, the Company's hotels will compete
against other facilities with substantially greater brand recognition.
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
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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."
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 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 intends to enter into development agreements pursuant to which
the Company will grant, in exchange for nominal consideration, options to obtain
franchises to construct and operate Candlewood hotels within exclusive
territories. Development agreements do not obligate the developer to construct
or operate any Candlewood hotels; however, such agreements allow the Company to
terminate the developer's exclusive territorial rights if the developer fails to
submit franchise applications pursuant to a development schedule. Each
Candlewood hotel constructed under a development agreement 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. By granting exclusive rights in a territory, the
Company must rely on the developer, to the exclusion of the Company or other
franchisees, to franchise hotels at such locations as the developer chooses and
at such times as specified in the development schedule. As a result of
development agreements the Company may become dependent upon a few developers to
construct and operate Candlewood hotels in key geographic areas. The Company is
a party to only one development agreement and there can be no assurance that the
Company will enter into additional development agreements. There can be no
assurance that any franchise agreements will be entered into, 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 and Development
Agreements."
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
rooms 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, the inability of
the Company or its franchisees to secure financing for the development of
Candlewood hotels or an oversupply of hotel rooms coupled with a reduction in
demand could have a material adverse impact on the Company's business and
results of operations.
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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 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 operating
such investments. 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
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addition, property and casualty insurance rates may increase depending on claims
experience, insurance market conditions and the replacement value of the
Company's hotels.
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.
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."
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
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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
5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares, without
any further vote or action by the stockholders. The rights of the holders of
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."
Certificate 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 Restated Certificate of Incorporation (the
"Certificate 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 and does not provide for cumulative voting for the election of
directors or the right of stockholders to call special meetings. The Company's
Certificate of Incorporation also requires that stockholders follow advance
notification procedures for certain stockholder nominations of candidates for
the Board of Directors and for certain other business to be conducted at any
annual meeting of stockholders. 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."
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 24.4% 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 28.7% of the outstanding shares of Common
Stock. In addition, Doubletree will beneficially own approximately 28.7% 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."
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Entities affiliated with Mr. DeBoer, the Chairman, President and Chief
Executive Officer of the Company, own 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. Certain of the
entities affiliated with Mr. DeBoer are selling seven of these Residence Inn
hotels to Innkeepers USA Trust, a lodging real estate investment trust (the
"REIT"), which owns hotels primarily in the upscale extended-stay market. Upon
the closing of the REIT's acquisition, Mr. DeBoer will be the largest
shareholder and is expected to be a member of the Board of Trustees, of the
REIT. 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. The relationships of Mr. DeBoer
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.
Mr. Ueberroth and Mr. Ferris are both directors of the Company and
co-chairmen of Doubletree. Doubletree hotels may now or in the future compete
for guests with Candlewood hotels. The relationships of Messrs. Ueberroth and
Ferris and the transactions between Doubletree and the Company could give rise
to conflicts of interest. See "Certain Transactions."
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'
overallotment option, the Company will have 9,025,000 outstanding shares of
Common Stock (9,602,500 shares if the Underwriters' overallotment option is
exercised in full). Of these shares, the 3,850,000 shares sold in the Offering
(4,427,500 shares if the Underwriters' over-allotment option is exercised in
full) will be available for resale in the public market without restriction
except by affiliates of the Company. The remaining 5,175,000 shares of Common
Stock are "restricted securities" under the Securities Act and may only be sold
pursuant to an effective registration statement under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act,
including Rule 144 thereunder. In addition, the Company intends to register with
the Securities and Exchange Commission a total of 900,000 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 an immediate and substantial
dilution of approximately $8.01 in pro forma net tangible book value per share
of Common Stock from the initial public offering price per share of Common
Stock. See "Dilution."
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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
The Company believes that this Prospectus contains certain forward-looking
statements, including without limitation statements containing the words
"believes," "anticipates," "expects" and words of similar import. 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.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,850,000 shares of
Common Stock being offered hereby, assuming an initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and estimated expenses of the Offering, are estimated to be
approximately $46.0 million (approximately $52.9 million if the Underwriters'
over-allotment option is exercised in full).
The Company intends to use approximately $44.0 million of the net proceeds
from the Offering to fund the national expansion of the Company through the
development and franchising of Candlewood hotels and approximately $2.0 million
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."
16
<PAGE> 18
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
June 30, 1996, (ii) the pro forma capitalization of the Company at June 30, 1996
giving effect to the Reorganization as if it had occurred on that date and (iii)
the pro forma capitalization of the Company as adjusted to reflect the sale of
the 3,850,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $13.00 per share) and 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 PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
-------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable, current portion..................... $ -- $ -- $ --
========== ========== ===========
Notes payable, less current portion................ -- $7,334,614 $ 7,334,614
Minority interest.................................. $ 47,460 -- --
Members' equity.................................... 6,569,318 -- --
Stockholders' equity:
Preferred Stock, par value $.01 per share;
5,000,000 shares authorized; no shares issued
and outstanding............................... -- -- --
Common Stock, par value $.01 per share;
100,000,000 shares authorized; 5,175,000
shares issued and outstanding, pro forma;
9,025,000 shares issued and outstanding, as
adjusted(1)................................... -- 51,750 90,250
Additional paid-in capital....................... -- 348,450 46,256,450
Retained earnings (accumulated deficit).......... -- (1,118,036) (1,118,036)
---------- ---------- -----------
Total stockholders' equity (deficit).......... -- (717,836) 45,228,664
---------- ---------- -----------
Total capitalization..................... $6,616,778 $6,616,778 $52,563,278
========== ========== ===========
</TABLE>
- ---------------
(1) Excludes 900,000 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Equity Plan. See "Management -- Compensation Plans and
Arrangements."
17
<PAGE> 19
DILUTION
The pro forma net tangible book value (deficit) of the Company at June 30,
1996 was $(948,274) or $(.18) per share of Common Stock. Net tangible book value
(deficit) per share represents the amount of tangible assets of the Company,
less total liabilities, divided by the number of shares of Common Stock
outstanding. Pro forma net tangible book value at June 30, 1996 assumes
completion of the Reorganization. After giving effect to the sale of the shares
of Common Stock offered hereby (based on an assumed initial public offering
price of $13.00 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 $44,998,226 or $4.99 per share. This represents an immediate increase in
net tangible book value per share of $5.17 to existing stockholders and an
immediate dilution in net tangible book value per share of $8.01 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.............................. $13.00
Pro forma net tangible book value (deficit) per share at June 30, 1996..... $ (.18)
Increase per share attributable to new investors........................... 5.17
-------
Pro forma net tangible book value per share after the Offering............... 4.99
Dilution per share to new investors.......................................... $ 8.01
</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 $13.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 5,175,000 57.3% $ 400,200 0.8% $ 0.08
New investors....................... 3,850,000 42.7 50,050,000 99.2 13.00
--------- ----- ----------- ----- -------
Total..................... 9,025,000 100.0% $50,450,200 100.0% $ 5.59
========= ===== =========== ===== =======
</TABLE>
The foregoing tables exclude 900,000 shares of Common Stock reserved for
issuance pursuant to the 1996 Equity Plan and 577,500 shares of Common Stock
issuable upon the exercise of the Underwriters' over-allotment option. See
"Management -- Compensation Plan and Arrangements" and "Underwriting."
18
<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 SIX MONTHS
(INCEPTION) TO 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(2).......................... (.04) (.15)
Pro forma weighted average shares outstanding(2)......... 5,175,000 5,175,000
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
COMPANY
--------------------------
CANDLEWOOD PRO FORMA
LLC PRO AS
HISTORICAL FORMA(3) ADJUSTED(4)
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.................................. $1,022,492 $1,022,492 $46,968,992
Total assets.......................................... 7,029,069 7,029,069 52,975,569
Accounts payable...................................... 329,828 329,828 329,828
Note payable.......................................... -- 7,334,614 7,334,614
Minority interest..................................... 47,460 -- --
Members' equity....................................... 6,569,318 -- --
Stockholders' equity (deficit)........................ -- (717,836) 45,228,664
</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) Pro forma net loss per share is based on (i) the 5,175,000 shares of Common
Stock of the Company issued in conjunction with the Reorganization as if
such shares had been issued and outstanding for all periods presented and
(ii) the amount of pro forma net loss as if the Company had operated as a C
Corporation for all periods presented. See Notes 1g and 1j of Notes to
Consolidated Financial Statements.
(3) Gives effect to the Reorganization as if it had occurred on June 30, 1996,
reflecting (i) the distribution of the amount of capital in excess of
$200,100 previously contributed by Doubletree and a related preferred
return, (ii) the contribution of outstanding membership interests of
Candlewood LLC and minority interests of the Subsidiary LLCs held by
Doubletree and the Fix partnership, and the contribution of the stock of JPD
Corporaton, to the Company and (iii) the issuance of a note payable to
Doubletree pursuant to the subordinated credit facility. See Note 10 of
Notes to Consolidated Financial Statements.
(4) Adjusted to reflect the sale of 3,850,000 shares of Common Stock by the
Company in the Offering at an assumed public offering price of $13.00 per
share with assumed net proceeds of $45,946,500 and the application of such
net proceeds as if the transactions contemplated hereby occurred on June 30,
1996. See "Use of Proceeds" and "Capitalization."
19
<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 September 1996, the Company began construction of two additional hotels in
the Cincinnati, Ohio and Louisville, Kentucky areas, each of which is scheduled
to open in the second quarter of 1997. In 1997, the Company's objective is to
open approximately 14 additional Company-owned hotels and to begin construction
of approximately 20 additional hotels. In pursuing this objective, as of October
15, 1996, the Company had 18 potential Candlewood sites under contract and had
agreements in principle or letters of intent with respect to 17 potential 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."
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 and
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
and the 77 room Candlewood hotels under construction in the Cincinnati and
Louisville areas will be approximately $4.9 million, $5.1 million, $3.8 million
and $4.0 million, respectively (or approximately $37,000, $39,000, $49,000 and
$52,000, respectively, per room), excluding land. The Company's hotel in Wichita
does not, and its hotels under construction in the Denver and Omaha areas will
not, contain king suites; however, the Company's hotels in the Cincinnati and
Louisville 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,
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 Cincinnati,
Denver, Louisville, Omaha and Wichita areas was approximately $269,000,
$625,000, $670,000, $435,000 and $284,000, respectively.
In addition to the construction of Company-owned Candlewood hotels, the
Company intends to expand through its national franchising program. The Company
entered into a development agreement dated as of June 11, 1996 with Studio West
Hotel Development Company, LLC ("SWHDC") which, in exchange for nominal
consideration, grants SWHDC the option to obtain franchises to construct and
operate 22 Candlewood hotels in Northern California, Oregon and Washington. This
development agreement grants SWHDC options to obtain franchises to construct and
operate five Candlewood hotels in 1996, seven Candlewood hotels in 1997, seven
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 SWHDC relating to the
establishment of a Candlewood hotel in Hillsboro, Oregon. SWHDC 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; however, such agreements allow the
Company to terminate the developer's exclusive territorial rights if the
developer fails to submit franchise applications pursuant to a development
schedule. 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."
20
<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.
The Company earned approximately $11,000 of interest income during the
period which related principally to short-term investment of funds.
21
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1996 was approximately $789,000, an increase of
approximately $754,000 over December 31, 1995. During the six months ended June
30, 1996, cash used in operating activities totaled approximately $596,000. The
net loss during the period was approximately $774,000, resulting primarily from
the need to employ corporate staff in anticipation of, and preparation for, the
addition of future hotel facilities. Increases in accounts receivable, prepaid
expenses, capitalized pre-opening costs and other assets also resulted in the
use of cash during the period. These uses were offset by increases in accounts
payable and accrued expenses and by expenses not requiring the use of cash.
Cash used by investing activities for the six months ended June 30, 1996
totaled approximately $4.7 million. The Company's expenditures for property and
equipment in connection with the construction of new hotels totaled
approximately $4.3 million. Pre-acquisition costs and certificates of deposits
in connection with contracts for the purchase of land for future hotels also
resulted in the use of cash.
During the six months ending June 30, 1996, the primary source of cash was
members' capital contributions to Candlewood LLC, which totaled approximately
$6.2 million.
Working capital at December 31, 1995 was approximately $35,000. The net
loss for the period ending December 31, 1995, of $209,000 resulted from
development stage activities. Increases in accounts payable and accrued expenses
provided cash flow from operating activities during the period.
Expenditures for property and equipment for the period ending December 31,
1995 of approximately $881,000 related to construction activities for the
Company's first hotel located in Wichita, Kansas. Other investing activities
related to capitalized organizational costs and certificates of deposit.
Net cash provided by financing activities during the period ending December
31, 1995, resulted from members' capital contributions in the amount of
approximately $1.2 million.
To date, the Company's material commitments for capital expenditures have
consisted exclusively of amounts committed in connection with the development
and construction of Candlewood hotels. At September 30, 1996, the Company had
material commitments for capital expenditures of approximately $18.9 million
related to the construction of the Denver, Omaha, Louisville and Cincinnati area
hotels.
The Company has financed its operations to date primarily through capital
provided by Doubletree. As of October 15, 1996, Doubletree had contributed
approximately $12.3 million to Candlewood LLC. Pursuant to the terms of the
Candlewood LLC operating agreement, Doubletree is entitled to a preferred return
on its capital contributions, including priority payments to Doubletree of any
capital distributions by Candlewood LLC and a return on all outstanding
contributions at rates of 7% and 10% for the first and second 12 month periods
following contribution, respectively, and 15% per annum thereafter. Prior to the
Offering, the amount of capital in excess of $200,100 previously contributed to
Candlewood LLC by Doubletree, together with a preferred return on the
contributed amount, will be distributed by Candlewood LLC to Doubletree. In
connection with the Reorganization, Doubletree has agreed to extend to the
Company a five-year, $15 million subordinated credit facility. Prior to the
Offering, Doubletree will loan to the Company an amount equal to the amount of
the distributed capital and preferred return, which will be evidenced by a
long-term note as part of the 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 7% and 10% per annum for the
first and second 12 month periods following funding, respectively, and 15% per
annum thereafter. The determination of the applicable interest rate for the
initial amounts loaned under the credit facility will be based on the date
equivalent amounts were originally contributed to Candlewood LLC. See "The
Reorganization."
The Company has arranged with 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. Interest on each loan will be payable monthly at a
variable rate equal to the prime rate plus 1%. Principal amortization payments,
based on a 20 year amortization schedule with an assumed fixed interest rate of
10%, will begin on or after the first day of the first month after the
22
<PAGE> 24
property's hotel has achieved at least 65% occupancy for two consecutive months,
and will continue until three years from the funding of the loan. Such payments
may be extended for one year or refinanced upon the satisfaction of certain
conditions. Unless refinanced, all outstanding amounts, including principal and
interest, will be due upon maturity of the loan.
The Company estimates that construction loans with the third party lender
will be in amounts of approximately 60% of the total cost of a Candlewood hotel
which the Company estimates will generally vary between $3.5 million and $7.5
million, determined primarily by land costs and the number of rooms in the
hotel. The Company intends to apply for construction loans from the third party
lender for its hotels under construction in the Louisville, Kentucky and
Cincinnati, Ohio areas.
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 installments 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's sources of liquidity on a long-term basis include anticipated
cash flow from completed Candlewood hotels, secured and unsecured borrowings and
the issuance of debt or equity securities. It is expected that these sources of
liquidity will be used to repay borrowings under the subordinated credit
facility from Doubletree.
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 third
party lender (if approved on an individual basis) 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."
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which is effective for the Company beginning January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. There is no impact on the
consolidated financial statements as of June 30, 1996 as a result of adoption of
the standard.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The provisions of Statement No. 123 will not have a material
effect on the consolidated financial condition or operating results of the
Company as the Company does not intend to adopt the fair value based measurement
concept.
23
<PAGE> 25
BUSINESS
OVERVIEW
The Company is in the business of developing, owning, operating,
franchising and managing 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. The Company's goal is to rapidly develop
and franchise Candlewood hotels to capitalize on what the Company believes is 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 October 15, 1996, the Company owned and operated one Candlewood hotel
and was constructing four additional hotels, two of which are expected to open
in the first quarter of 1997 and two of which are expected to open in the second
quarter of 1997. In 1997, the Company's objective is to open approximately 14
additional Company-owned hotels and to begin construction of approximately 20
additional Company-owned hotels. In pursuing this objective, as of October 15,
1996 the Company had 18 potential sites under contract and had agreements in
principle or letters of intent with respect to 17 potential sites. In addition,
the Company is developing a nationwide franchising program, and as part of that
program is currently a party to one multi-hotel development agreement which
grants the developer options to obtain franchises to construct and operate up to
22 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, developed by Mr. DeBoer is based on his
extensive background and experience in the extended-stay market, together with
his perception of a 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. The Company believes it will benefit from Doubletree's
central reservation system, in-room video and service arrangement and bulk
purchasing power, including 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. As
additional Candlewood hotels commence operations, the Company anticipates that
it will formalize the services to be provided by Doubletree and the cost of
certain of those services. Doubletree has agreed to extend a five-year $15
million subordinated credit facility to the Company, a substantial portion of
which will have been funded at the time of the Offering. Doubletree has also
agreed to guarantee a portion of the construction loans and long-term financing
that the Company has arranged for its franchisees. 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. Doubletree is not
expected to manage any of the Candlewood hotels. See "Risk Factors -- Risks
Associated with Rapid Growth; Reliance on Doubletree."
The standard Candlewood hotel will contain approximately 75-135 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 accommo-
24
<PAGE> 26
date office equipment needs, an executive chair, a bulletin board, personalized,
remote accessible phone mail, a 25-inch television set, a video cassette player,
a compact disc player, movies on demand and the standard Candlewood hotel will
contain an exercise facility.
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
economy 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. Candlewood hotels are designed to accommodate what the Company believes
to be an 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 will 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, remote accessible 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
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 will make
Candlewood an 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.
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<PAGE> 27
- 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 25 years at
The Irvine Company, most recently as the Chief Financial Officer. Every
Candlewood general manager and director of sales will be 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,
central 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, according to industry sources which the Company
believes to be reliable. The industry is estimated to have generated its third
consecutive year of pre-tax profits in 1995 at a record of $7.6 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 1.7%, 2.2%, 2.6% and
1.1% in 1992,
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<PAGE> 28
1993, 1994 and 1995, respectively, as estimated by Smith Travel Research. The
Company believes 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. According to Smith Travel
Research, RevPAR for the industry as a whole grew 3.2%, 5.6%, 6.5%, 6.0% and
7.7% in 1992, 1993, 1994, 1995, and the first seven months of 1996,
respectively, over each of the previous years.
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 Company believes
the extended-stay segment has benefited from a strong and growing demand for
extended-stay rooms relative to a supply of such rooms. The Company believes
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.
According to industry sources which the Company believes to be reliable, of
the approximately 3.3 million guest rooms available in the United States as of
August 31, 1996, there were only approximately 51,000 or 1.5% dedicated
extended-stay rooms concentrated at approximately 450 properties. D.K. Shifflet
has estimated that in 1995 approximately 195 million business 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>
YEAR ENDED DECEMBER 31, JANUARY 1 TO
-------------------------------------------------- JULY 31,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
OCCUPANCY
U.S. hotels....................... 60.7% 61.7% 63.0% 64.6% 65.3% 66.6%
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 81.3 80.8 81.1
ADR
U.S. hotels....................... $59.02 $59.90 $61.97 $64.35 $67.45 $71.44
Limited-service, all-suite
hotels.......................... 69.15 69.57 71.65 73.70 77.76 82.44
Extended-stay hotels(1)........... 73.12 73.61 73.09 74.28 77.54 79.69
REVPAR
U.S. hotels....................... $35.83 $36.96 $39.04 $41.57 $44.04 $47.58
Limited-service, all-suite
hotels.......................... 49.72 51.90 55.46 57.56 60.50 65.05
Extended-stay hotels(1)........... 54.04 56.61 58.40 60.39 62.65 64.63
</TABLE>
- ---------------
Source: Smith Travel Research
(1) Sample contains AmeriSuites, Hawthorn Suites, Homewood Suites, Lexington
Suites, Residence Inn by Marriott, Studio Plus, Summerfield Suites and
Woodfin Suites.
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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 450 extended-stay properties, the Company believes that
approximately 300, or approximately 67%, operate in the upscale segment,
approximately 105, or approximately 23%, operate in the economy segment, and
only approximately 45 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. Smith Travel
Research, Coopers & Lybrand and D.K. Shifflet are the sources of the industry
information set forth herein; however, none provided any formal consultation,
advice or counsel regarding any aspect of, or were in any way associated with,
the Offering.
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 begin to build national brand
recognition among travelers and businesses. As of October 15, 1996, the Company
owned and operated one Candlewood hotel, was constructing four additional
hotels, two of which are expected to open in the first quarter of 1997 and two
of which are expected to open in the second quarter of 1997, had 18 potential
sites under contract and had agreements in principle or letters of intent with
respect to 17 potential sites. The Company is also pursuing a nationwide
franchise program and has entered into a development agreement which grants the
developer options to obtain franchises to construct and operate up to 22
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 begun to assemble an experienced management team, hire the
personnel and develop the infrastructure necessary to pursue its growth and
development strategies. Through its real estate division, the Company will
coordinate and select sites for the development of new Candlewood hotels. The
Company's construction division will coordinate and oversee the construction of
both Company-owned and franchised hotels in an attempt to ensure 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 attempt to ensure high occupancy and longer stays. The Company's
franchising division will actively identify and pursue potential franchisees and
monitor and regulate 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
As of October 15, 1996, the Company owned and operated one Candlewood hotel
and was constructing four additional hotels. In 1997, the Company's objective is
to open approximately 14 additional Company-owned hotels and to begin
construction of approximately 20 additional Company-owned hotels. These hotels
will be constructed on sites the Company has under contract, on sites for which
the
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<PAGE> 30
Company has signed letters of intent or agreements in principle, on which it 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. No area
of the country has been excluded from the Company's expansion plans; however,
the Company has generally targeted areas in which it believes the entitlement
process is relatively short.
As of October 15, 1996, the Company had acquired or contracted to acquire
sites for the construction of Candlewood hotels in the following areas:
<TABLE>
<CAPTION>
AREA SITE STATUS
------------------------------------------------------- ---------------------
<S> <C>
Wichita, Kansas........................................ Completed
Denver, Colorado....................................... Under construction*
Louisville, Kentucky................................... Under construction**
Omaha, Nebraska........................................ Under construction*
Cincinnati, Ohio....................................... Under construction**
Birmingham, Alabama.................................... Under contract
Phoenix, Arizona(2).................................... Under contract
Irvine, California..................................... Under contract
Los Angeles, California................................ Under contract
Colorado Springs, Colorado............................. Under contract
Denver, Colorado....................................... Under contract
Jacksonville, Florida.................................. Under contract
Kansas City, Kansas.................................... Under contract
Southfield (Detroit), Michigan......................... Under contract
Ramsey, New Jersey..................................... Under contract
Philadelphia, Pennsylvania............................. Under contract
Knoxville, Tennessee................................... Under contract
Fort Worth, Texas...................................... Under contract
Houston, Texas(2)...................................... Under contract
Arlington, Virginia (Washington, D.C.)(2).............. Under contract
Norfolk, Virginia...................................... Under contract
Madison, Wisconsin..................................... Under contract
Salt Lake City, Utah (2)............................... Under contract
</TABLE>
- ---------------
* Anticipated opening in the first quarter of 1997.
** Anticipated opening in the second quarter of 1997.
In addition, as of October 15, 1996 the Company had executed letters of
intent or had agreements in principle with respect to the purchase of an
additional 17 sites in 12 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
29
<PAGE> 31
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 75 - 135 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.
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
and the 77 room Candlewood hotels under construction in the Cincinnati and
Louisville areas will be approximately $4.9 million, $5.1 million, $3.8 million
and $4.0 million, respectively (or approximately $37,000, $39,000, $49,000 and
$52,000, 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; however, the Company's hotels in the Cincinnati and
Louisville 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
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 Cincinnati,
Denver, Louisville, Omaha and Wichita areas was approximately $269,000,
$625,000, $670,000, $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 and construction financing from NationsBank and a third
party lender (if approved on an individual property basis), 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 initiated 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, in exchange for
nominal consideration, the right to obtain franchises to construct and
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<PAGE> 32
operate Candlewood hotels in an exclusive geographic territory, which exclusive
rights may be rescinded by the Company if the developer fails to submit
franchise applications pursuant to a development schedule. As of September 30,
1996, the Company was a party to one development agreement which currently
grants the developer options to obtain franchises to construct and operate five
Candlewood hotels in 1996, seven Candlewood hotels in 1997, seven 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 International, Inc. 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 Mr. DeBoer
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 potential 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 quality control program and 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.
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. Doubletree has agreed to guarantee the amount of such loans in
excess of approximately 56% of the hotel cost. The amount of such loans will not
exceed 75% of the hotel cost, unless Candlewood manages the hotel, in which case
such loans will not exceed 80% of the hotel cost. It is anticipated that the
guarantee will remain in effect until the loan has been repaid. Upon an event of
default, Doubletree will have the option to meet any shortfalls or pay down the
loan principal. In exchange for the guarantee, Doubletree will receive a 5%
interest in the profits and residual value of the hotel and a 0.25-0.50% fee on
the total loan amount outstanding.
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 a
development agreement with SWHDC which grants SWHDC options to obtain franchises
to construct and operate up to 22 hotels in Northern California, Oregon and
Washington. This development agreement grants options to the developer to submit
site approvals and applications and to execute franchise agreements for five
Candlewood hotels in 1996, seven hotels in 1997, seven hotels in 1998 and three
hotels in 1999.
In June 1996 the Company entered into a development agreement with Studio
Ventures, L.L.C. ("Studio Ventures") which granted Studio Ventures the option to
obtain franchises to construct and operate up to 24 Candlewood hotels in
specific communities in Kentucky, North Carolina, Ohio, South Carolina and
Tennessee. Studio Ventures did not submit applications for franchises within the
time frames set forth in the development schedule and the Company subsequently
terminated Studio Ventures' exclusive territorial rights under this development
agreement in October 1996. The Company intends to continue to work with
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<PAGE> 33
Studio Ventures as a potential franchisee of Candlewood hotels on a site by site
basis and Studio Ventures has currently submitted three franchise applications
to construct and operate Candlewood hotels in Columbus, Ohio, Columbia, South
Carolina and Nashville, Tennessee. The Company has not received franchise
application fees for many of these franchise applications. The Company is
exploring opportunities to sign franchise and development agreements with
several other entities; however, while it has received additional applications,
the Company is not a party to any additional agreements. See "-- Franchise and
Development 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 SWHDC, the Company has entered into a franchise agreement for the
establishment of a Candlewood hotel in Hillsboro, Oregon. SWHDC commenced
construction of this hotel in August 1996 and expects to commence operations in
the second quarter of 1997. SWHDC is entitled to terminate its franchise
agreement after two years, with a termination fee being required in certain
circumstances. SWHDC 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. Development agreements establish schedules for the submission
of franchise applications, which must be signed before construction of a
Candlewood hotel is commenced. If a developer fails to franchise any hotels
according to the 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 pursuant to 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," "-- Competition
for and Dependence on Franchise Agreements" and "-- Dependence on Development
Agreements."
Management of Franchised Hotels
The Company intends to make its hotel management services available to its
franchisees and anticipates that many franchisees may 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 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 and
Development Agreements."
OPERATING STRATEGIES
The Company's primary operating objectives 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
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<PAGE> 34
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 or more often 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 will be required to 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 has begun to target 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
a 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.
FRANCHISE AND DEVELOPMENT 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 and also give
the Company the right to approve the plans and specifications for the hotel.
Each franchisee is required, however, to bear the cost of the development and
construction of the franchised hotels. 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 is non-refundable if the application
is not approved by the Company. The Company reserves the right to waive the
payment of franchise application fees. 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. Each franchisee may also
be required to contribute 2.5% of its fiscal period room revenues to the
Company's marketing, advertising and direct sales fund which may be established
by the Company, in its sole discretion. If such a fund is established, it will
be 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
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<PAGE> 35
operating manual and training programs for the franchisee's employees. The
Company expects to offer a central reservation system in cooperation with
Doubletree, 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. At the
Company's request, but not more often than once every five years, each
franchisee must also upgrade the hotel at the expense of the franchisee to
conform to certain standards set by the Company. 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 statement 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 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, in exchange for a nominal fee, 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. Although by granting exclusive rights in a
territory the Company must rely on the developer to franchise hotels at such
locations as the developer chooses and at such times specified in the
development schedule, by doing so the Company believes it can stimulate rapid
expansion of franchised Candlewood hotels in specific geographic regions while
focusing its development and ownership efforts in other regions. To exercise a
development option, the developer must submit a franchise application, together
with the franchise application 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.
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<PAGE> 36
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
Cincinnati, Ohio, Denver, Colorado, Louisville, Kentucky, and the Omaha,
Nebraska areas and has commenced construction of Candlewood hotels at those
sites. The hotels in the Denver and Omaha areas, when completed, are each
expected to contain 131 studios and approximately 57,000 square feet. The hotels
in the Cincinnati and Louisville areas, when completed, are each expected to
contain 65 studios, 12 king suites and approximately 39,000 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.
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
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<PAGE> 37
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 October 15, 1996, the Company and its subsidiaries employed 31
persons, eight of whom were employed at the Company's hotel in Wichita and 23 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
non-employee or independent directors within the meaning of Rule 16b-3 of the
Exchange Act (the "Independent Directors").
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- --- ------------------------------------------
<S> <C> <C>
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
</TABLE>
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. Mr. DeBoer has consented to become a member of the
Board of Trustees of Innkeepers USA Trust, a publicly-held lodging real estate
investment trust, following the consummation of its purchase of seven hotels
which are owned by entities affiliated with Mr. DeBoer.
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
Procter 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, a business management company.
From March 1984 to March 1989, Mr. Ueberroth served as the sixth Commissioner of
Major League Baseball. Mr. Ueberroth serves as a director of 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.
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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
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 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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<PAGE> 40
DIRECTOR COMPENSATION
The Company's Independent Directors will receive directors' fees of $4,000
for each Board of Directors meeting attended. In addition, each Independent
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 following table summarizes the compensation paid to the Company's Chief
Executive Officer during fiscal 1995. No executive officer of the Company
received total compensation greater than $100,000 during fiscal 1995.
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
- ---------------------------------------------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Jack P. DeBoer,
President and Chief Executive Officer $24,000(1) -- -- --
</TABLE>
- ---------------
(1) Represents a base salary of $96,000 on an annualized basis.
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. James D. 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.
Options to purchase an aggregate of 365,700 shares of Common Stock will be
granted to directors, officers and other employees of the Company. Of these
options, Mr. DeBoer is expected to receive
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<PAGE> 41
no options, Mr. Fix is expected to receive options to purchase approximately
50,000 shares of Common Stock and Mr. Korroch is expected to receive options to
purchase approximately 100,000 shares of Common Stock.
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 for the previous three years. The contract provides that,
during the term of the contract, 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 hotel
companies or chains. For two years after Mr. DeBoer's contract ends, subject to
the aforementioned exceptions, Mr. DeBoer will not engage in the acquisition,
founding, development, operation, or management of any new hotel companies or
chains. See "Risk Factors -- Control of Company by Management and Principal
Stockholders; Potential Conflicts of Interest."
COMPENSATION PLANS AND ARRANGEMENTS
1996 Equity Participation Plan
The Company has established the 1996 Equity Participation Plan (the "1996
Equity Plan") to provide an additional incentive for executive officers, other
key employees, Independent Directors and consultants of the Company by
personally benefitting them through the ownership of Company stock. 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.
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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.
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.
Effective upon 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 365,700
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 900,000 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.
41
<PAGE> 43
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, 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.
42
<PAGE> 44
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 reservation system and to benefit from
Doubletree's established insurance and benefit programs. As additional
Candlewood hotels commence operations, the Company anticipates that it will
formalize the services to be provided by Doubletree and the cost of certain of
those services. 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. Doubletree has agreed to
guarantee the amount of such loans in excess of approximately 56% of the hotel
cost. The amount of such loans will not exceed 75% of the hotel cost, unless
Candlewood manages the hotel, in which case such loans will not exceed 80% of
the hotel cost. It is anticipated that the guarantee will remain in effect until
the loan has been repaid. Upon an event of default, Doubletree will have the
option to meet any shortfalls or pay down the loan principal. In exchange for
the guarantee, Doubletree will receive a 5% interest in the profits and residual
value of the hotel and a 0.25-0.50% fee on the total loan amount outstanding.
The Company has financed its operations to date primarily through capital
provided by Doubletree. As of October 15, 1996, Doubletree had contributed
approximately $12.3 million to Candlewood LLC. Pursuant to the terms of the
Candlewood LLC operating agreement, Doubletree was entitled to a preferred
return on its capital contributions, including priority payments to Doubletree
of any capital distributions by Candlewood LLC and a return on all outstanding
contributions at rates of 7% and 10% for the first and second 12 month periods
following contribution, respectively, and 15% thereafter. In connection with the
Reorganization, a substantial portion of the funds advanced to Candlewood LLC by
Doubletree will be distributed to Doubletree by Candlewood LLC and Doubletree
has agreed to extend to the Company 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 7% per annum for the first 12 months following contribution, 10% per
annum for the second 12 months following contribution and 15% per annum
thereafter. In connection with the Reorganization, Doubletree will loan a
substantial portion of the amount which it had previously contributed to
Candlewood LLC to the Company together with the preferred return, which will be
evidenced by a long-term note payable under the credit facility and which will
bear interest at a rate calculated based on the date equivalent amounts were
originally contributed to Candlewood LLC. See "The Reorganization."
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<PAGE> 45
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. Doubletree and the Fix
Partnership each acquired its membership interest in Candlewood LLC through
capital contributions and JPD Corporation acquired its membership interest
through the contribution of certain intangibles, including the development of
the Candlewood hotel concept and rights to the name of the Company, which were
valued in the course of arms length negotiations among the members. At the time
of the offering each of the Company's five properties will be owned by a
separate limited liability company, the membership interests of each of which
will be 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. As a result, the ownership
of the Common Stock of the Company by Doubletree, the Fix Partnership and the
shareholders of JPD Corporation immediately prior to the Offering will be in the
same proportion as their ownership of Candlewood LLC immediately prior to the
Reorganization. Upon consummation of the Reorganization, Doubletree, the Fix
Partnership and the shareholders of JPD Corporation, including Mr. DeBoer will
own 2,587,500, 388,125 and 2,199,375 shares of Common Stock of the Company,
respectively.
In addition, prior to the Offering the amount of capital in excess of
$200,100 previously contributed to Candlewood LLC by Doubletree, together with a
preferred return on its capital contribution, will be distributed to Doubletree,
pursuant to the terms of the operating agreement of Candlewood LLC. In
connection with the Reorganization of the Company, Doubletree has agreed to
extend to the Company 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. Prior to the Offering, Doubletree
will loan to the Company the amount of the distribution of capital together with
the preferred return, which will be evidenced by a long-term note payable as
part of the subordinated credit facility. The terms of the distribution to
Doubletree, as well as the subsequent loan by Doubletree to the Company were
determined by members of Candlewood LLC in the course of arms-length
negotiations. 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
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, Candlewood LLC and JPD Corporation.
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
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<PAGE> 46
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 appointed by unanimous agreement 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 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
Reorganization, certain organizational matters related to the formation of the
Company and other transactions contemplated 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 or at such time as the Initial Stockholders hold less than 50%
of the outstanding Common Stock of the Company.
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<PAGE> 47
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of October 15, 1996, and as adjusted to reflect
the Reorganization and the Offering (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(1) SHARES PERCENTAGE SHARES PERCENTAGE
- --------------------------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Doubletree Corporation............................. 2,587,500 50.0% 2,587,500 28.7%
410 N. 44th Street
Phoenix, Arizona 85008
JPD Corporation.................................... 2,199,375 42.5 -- --
Warren D. Fix Family Partnership................... 388,125 7.5 388,125 4.3
Jack P. DeBoer(2).................................. 2,199,375 42.5 2,199,375 24.4
Richard J. Ferris.................................. -- -- -- --
Peter V. Ueberroth................................. -- -- -- --
Warren D. Fix(3)................................... 388,125 7.5 388,125 4.3
James E. Korroch................................... -- -- -- --
All directors and executive officers as a
group (9 persons)(2)(3).......................... 2,587,500 50.0 2,587,500 28.7
</TABLE>
- ---------------
* Less than one percent
(1) The address of each of the persons listed in the table (other than
Doubletree Corporation) is Lakepoint Office Park, 9342 East Central,
Wichita, Kansas 67206.
(2) Shares owned prior to the Offering includes 2,199,375 shares held by JPD
Corporation. Shares owned after the Offering will include certain shares
held by children of Mr. DeBoer each of whom is of the age of majority and
certain grandchildren of Mr. DeBoer; in each case, Mr. DeBoer disclaims
beneficial ownership of such shares. None of these individuals will hold in
excess of five percent of the Common Stock.
(3) Includes 388,125 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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<PAGE> 48
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 100,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 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 9,025,000 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 one vote per share on all matters
to be voted upon by the stockholders, including the election of directors. The
Company's Certificate of Incorporation does not provide for cumulative voting in
the election of directors.
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's Board of
Directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of 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
47
<PAGE> 49
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 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 American
Stock Transfer & Trust Company.
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 9,025,000
shares of Common Stock. Of these shares, the 3,850,000 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 5,175,000 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.
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 90,250 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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<PAGE> 50
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.
In the event of a default by an Underwriter, the Underwriting Agreement provides
that, in certain circumstances, the purchase commitments of the nondefaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
--------------------------------------------------------------------- ----------------
<S> <C>
Montgomery Securities................................................
Schroder Wertheim & Co. Incorporated.................................
---------
Total...................................................... 3,850,000
=========
</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 577,500 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 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 the Offering.
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
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.
49
<PAGE> 51
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
The validity of 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.
50
<PAGE> 52
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
F-1
<PAGE> 53
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> 54
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
1996
1995 1996 (NOTE 10)
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 123,384 $1,022,492 $ 1,022,492
Accounts receivable..................................... 2,975 55,107 55,107
Pre-opening costs, net of accumulated amortization of
$24,260............................................... -- 88,163 88,163
Prepaid expenses........................................ 945 35,771 35,771
---------- ---------- -----------
Total current assets.......................... 127,304 1,201,533 1,201,533
---------- ---------- -----------
Construction in progress -- hotel property.............. 842,656 1,266,268 1,266,268
Property and equipment, net of accumulated depreciation
of $301 and $37,531, respectively..................... 37,639 3,873,070 3,873,070
Intangible assets, net of accumulated amortization of
$4,324 and $13,593, respectively...................... 239,345 230,438 230,438
Pre-acquisition costs................................... 6,397 294,715 294,715
Other assets............................................ 30,000 163,045 163,045
---------- ---------- -----------
$1,283,341 $7,029,069 $ 7,029,069
========== ========== ===========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable........................................ $ 64,695 $ 329,828 $ 329,828
Accrued expenses........................................ 27,532 82,463 82,463
---------- ---------- -----------
Total current liabilities..................... 92,227 412,291 412,291
---------- ---------- -----------
Note payable............................................ -- -- 7,334,614
Minority interests...................................... 8,427 47,460 --
Members' equity......................................... 1,182,687 6,569,318 --
Stockholders' equity (deficit):
Preferred Stock, par value $.01 per share; 5,000,000
shares authorized; no shares issued and
outstanding........................................ -- -- --
Common Stock, par value $.01 per share; 100,000,000
shares authorized; no shares issued and
outstanding, actual;
5,175,000 shares issued and outstanding, pro
forma.............................................. -- -- 51,750
Additional paid-in capital............................ -- -- 348,450
Retained earnings (accumulated deficit)............... -- -- (1,118,036)
---------- ---------- -----------
Total stockholders' equity (deficit).......... -- -- (717,836)
---------- ---------- -----------
Commitments.............................................
---------- ---------- -----------
$1,283,341 $7,029,069 $ 7,029,069
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 55
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)
========= =========
Pro forma net loss per share......................................... $ (.04) $ (.15)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 56
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> 57
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> 58
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ("JPD") and 7.5%
by Warren D. Fix Family Partnership, L.P. ("Fix"), 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 and .15% by Fix. 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 contributed the ownership
rights, title and interest in the Candlewood Hotel name and logo and certain
other intangibles 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> 59
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
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, commencing upon the date a property
is opened, 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.
Subsequent to the proposed public offering (see note 9), the Company will
no longer operate as a limited liability company and, accordingly, the Company
will become a taxable entity. Because the Company has incurred losses since
inception, there is no pro forma income tax expense or benefit for the period
from October 1, 1995 (date of inception) to December 31, 1995 and for the
six-months ended June 30, 1996 as the income tax benefit attributable to the pro
forma net operating loss carryforward would be offset by a valuation allowance.
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.
j. Pro Forma Net Loss Per Share
Subsequent to the proposed public offering (see note 9), the Company will
no longer operate as a limited liability company and, accordingly, the Company
will become a taxable entity. Pro forma net loss per share information is
presented as if (i) the Company had operated as a taxable entity (C Corporation)
for the period from October 1, 1995 (date of inception) to December 31, 1995 and
for the six-months ended June 30, 1996 and (ii) the reorganization described in
note 9 had been effective as of October 1, 1995 and the shares of common stock
issued in conjunction with the reorganization had been issued and outstanding
for all periods presented (see note 1g).
k. Revenue Recognition
Room revenue and other revenue are recognized when earned.
F-8
<PAGE> 60
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 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>
3. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 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, JUNE 30,
1995 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.
F-9
<PAGE> 61
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Such payments for rent of corporate office space
and equipment totaled $9,984 for the period ended December 31, 1995.
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 Company, 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 ("Offering"). Immediately prior to the Offering, each of
Doubletree and Fix will contribute its outstanding membership interest in the
Company and the minority interests in the Subsidiaries, and the stockholders of
JPD will contribute 100% of the common stock of JPD (the assets of which are
F-10
<PAGE> 62
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
substantially comprised of its membership interests in the Company) 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.
In addition, prior to the Offering, capital in excess of $200,100
previously contributed by Doubletree, together with the preferred return on such
amounts, will be distributed to Doubletree. In connection with the
reorganization, Doubletree has agreed to extend to the Company a $15 million
subordinated credit facility. Prior to the Offering, Doubletree will loan the
amount of the distribution of capital and preferred return to the Company, which
will be evidenced by a long-term note payable as part of the subordinated credit
facility. Amounts due under the facility 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.
10. PRO FORMA BALANCE SHEET (UNAUDITED)
The unaudited pro forma balance sheet at June 30, 1996 gives effect to
the reorganization as if the reorganization had occurred on that date. Pro
forma adjustments are as follows:
<TABLE>
<S> <C>
Cash
------------------------------------------------------------------------
Proceeds from note payable issued to Doubletree pursuant to $15
million subordinated credit facility............................... $ 7,334,614
Distribution to Doubletree............................................ (7,334,614)
-----------
Net pro forma adjustment.............................................. $ --
===========
Note Payable
------------------------------------------------------------------------
Proceeds from note payable issued to Doubletree pursuant to $15
million subordinated credit facility............................... $ 7,334,614
===========
Minority Interests
------------------------------------------------------------------------
Contribution of minority interests of subsidiaries in conjunction with
the reorganization................................................. $ (47,460)
===========
Members' Equity
------------------------------------------------------------------------
Distribution to Doubletree of its cumulative capital contributions to
Candlewood Hotel Company, L.L.C. in excess of $200,100............. $(7,151,872)
Reclassification of contributed capital to common stock ($51,750) and
additional paid-in capital ($348,450).............................. (400,200)
Reclassification of cumulative losses to accumulated deficit.......... 982,754
-----------
Net pro forma adjustment........................................... $(6,569,318)
===========
</TABLE>
F-11
<PAGE> 63
CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Stockholders' Equity (Deficit)
------------------------------------------------------------------------
Reclassification of Members' Equity:
Common stock....................................................... $ 51,750
-----------
Additional paid-in capital......................................... 348,450
-----------
Retained earnings (accumulated deficit):
Reclassification of cumulative losses.............................. (982,754)
Distribution to Doubletree of preferred return on capital
contribution...................................................... (135,282)
-----------
Total pro forma adjustment to retained earnings (accumulated
deficit)..................................................... (1,118,036)
-----------
Net pro forma adjustment to stockholders' equity (deficit).... $ (717,836)
===========
</TABLE>
F-12
<PAGE> 64
Inside the back cover of the document, located in the upper half of the
page appears an artist's rendition of a king suite which shows a living area
and kitchen separated from a bedroom. With a caption below the rendering which
reads "King Suite rendering." In the lower right hand corner of the back inside
cover is a photograph of the front of the Company's hotel in Wichita, Kansas
with a caption below the photograph which reads "Candlewood Hotel - Wichita,
Kansas."
<PAGE> 65
- -------------------------------------------------------
- -------------------------------------------------------
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 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
Special Note Regarding Forward-Looking
Statements............................ 15
Use of Proceeds......................... 16
Dividend Policy......................... 16
Capitalization.......................... 17
Dilution................................ 18
Selected Historical and Pro Forma
Consolidated Financial Information.... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 20
Business................................ 24
Management.............................. 37
Certain Transactions.................... 43
The Reorganization...................... 44
Principal Stockholders.................. 46
Description of Capital Stock............ 47
Shares Eligible For Future Sale......... 48
Underwriting............................ 49
Experts................................. 50
Legal Matters........................... 50
Additional Information.................. 50
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.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
3,850,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
SCHRODER WERTHEIM & CO.
, 1996
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE> 66
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...................................................... $ 21,374
NASDAQ application fee.................................................... 45,000
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............................................................. 37,376
--------
Total........................................................... $600,000
========
</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 October 1996, an aggregate of 5,175,000 shares of common stock will be
issued to Doubletree Corporation and the Fix Partnership in exchange for the
Membership Interests in Candlewood LLC and the Subsidiary LLCs and to the
shareholders of JPD Corporation in exchange for 100% of the stock of JPD
Corporation. 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> 67
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.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated 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 30, 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 Development Agreement between the Registrant and Studio West Hotel Development
Company, L.L.C. dated as of June 11, 1996.***
10.5 Franchise Agreement between the Registrant and Studio West Hotel Development Company,
L.L.C. dated July 25, 1996.
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.**
27.1 Financial Data Schedule.**
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
*** Replaces form of agreement previously filed.
II-2
<PAGE> 68
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 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> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Wichita, State of Kansas, on October 17, 1996.
CANDLEWOOD HOTEL COMPANY, INC.
a Delaware corporation
By: /s/ JACK P. DEBOER
-------------------------------
Jack P. DeBoer
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------- ----------------------------------
<C> <S> <C>
/s/ JACK P. DEBOER President, Chief Executive Officer October 16, 1996
- ------------------------------------- and Chairman of the Board
Jack P. DeBoer (Principal Executive Officer)
/s/ WARREN D. FIX Director, Executive Vice President, October 16, 1996
- ------------------------------------- Chief Financial Officer and
Warren D. Fix Director (Principal Financial and
Principal Accounting Officer)
RICHARD J. FERRIS* Director October 16, 1996
- -------------------------------------
Richard J. Ferris
PETER V. UEBERROTH* Director October 16, 1996
- -------------------------------------
Peter V. Ueberroth
*By: /s/ WARREN D. FIX
- -------------------------------------
Warren D. Fix
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 70
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1 Form of Underwriting Agreement.*
3.1 Restated 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 30, 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 Development Agreement between the Registrant and Studio West Hotel
Development Company, L.L.C. dated as of June 11, 1996 and
developers.***
10.5 Franchise Agreement between the Registrant and Studio West Hotel
Development Company, L.L.C. dated July 25, 1996 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.**
27.1 Financial Data Schedule.**
- -----------
* To be filed by amendment.
** Previously filed.
*** Replaced form of Agreement previously filed.
<PAGE> 1
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
CANDLEWOOD HOTEL COMPANY, INC.
Candlewood Hotel Company, Inc., a corporation organized and existing
under the laws of the State of Delaware (hereinafter referred to as the
"Corporation") hereby certifies as follows:
1. The undersigned is the duly elected, qualified and acting
Executive Vice President, Chief Financial Officer and Secretary of the
Corporation.
2. The name of the Corporation is Candlewood Hotel Company, Inc. The
Corporation's original Certificate of Incorporation was filed with the Secretary
of State of Delaware on August 16, 1996 under the same name.
3. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, and having been adopted in accordance therewith, this
Restated Certificate of Incorporation restates and integrates and amends the
provisions of the Certificate of Incorporation of this Corporation.
4. The text of the Certificate of Incorporation of the Corporation,
as it may have heretofore been amended or supplemented, is hereby further
amended and restated to read in its entirety as follows:
FIRST: The name of the Corporation (hereinafter the "Corporation")
is
Candlewood Hotel Company, Inc.
SECOND: The address, including street, number, city and county, of
the registered office of the Corporation in the State of Delaware is:
THE CORPORATION TRUST COMPANY
Corporation Trust Center
1209 Orange Street
Wilmington, New Castle County, Delaware 19801
THIRD: The nature of the business and of the purposes to be
conducted and promoted by the Corporation shall be to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is One Hundred and Five Million (105,000,000), to
be divided into two classes designated "Common Stock" and "Preferred Stock". The
Corporation shall be authorized to issue (a) One Hundred Million (100,000,000)
shares of Common Stock, par value $.01 per share, and (b) Five Million
(5,000,000) shares of Preferred Stock, par value $.01 per share.
<PAGE> 2
The Board of Directors is hereby empowered to cause the Preferred
Stock to be issued from time to time for such consideration as it may from time
to time fix, to cause such Preferred Stock to be issued in series with such
voting powers and such designations, preferences, privileges and relative,
participating, optional or other special rights as designated by the Board of
Directors in the resolution providing for the issuance of such series and,
within the limits and restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the number of shares constituting any
series, to increase or decrease (but not below the number of shares of such
series then outstanding), the number of shares of any such series subsequent to
the issue of shares of that series. Shares of Preferred Stock of any one series
shall be identical in all respects.
All shares of any series of Preferred Stock which shall have been
redeemed, converted, exchanged or otherwise surrendered to or acquired by the
Corporation pursuant to its terms, shall be cancelled and have the status of
authorized but unissued shares of Preferred Stock of the Corporation.
FIFTH: Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, if any, to elect additional directors under
specified circumstances, the number of the directors of the Corporation shall be
fixed from time to time by or pursuant to the Bylaws of the Corporation. At each
annual meeting of the stockholders of the Corporation, the directors shall be
elected to hold office until such person's successor is elected and qualified or
until such person's death, retirement, resignation or removal. The directors
need not be stockholders.
SIXTH: Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, if any, any or all of the directors of the
Corporation may be removed from office by the stockholders only for cause and
only by the affirmative vote of at least 66- 2/3% of the outstanding shares of
Common Stock of the Corporation at any annual or special meeting of stockholders
of the Corporation, the notice of which shall state that the removal of a
director or directors is among the purposes of the meeting.
SEVENTH: Newly created directorships resulting from any increase in
the authorized number of directors or any vacancy on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or any other cause shall be filled solely by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum, or by a sole remaining director. The directors so chosen shall hold
office until the next annual election of directors and until their successors
are duly elected and qualified, unless sooner displaced. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office. No decrease
in
2
<PAGE> 3
the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
EIGHTH: Effective upon the closing of the Corporation's initial sale
of its Common Stock in a firm commitment underwriting involving a public
offering pursuant to a Registration Statement on Form S-1 under the Securities
Act of 1933, as amended, any action required or permitted to be taken at any
annual or special meeting of stockholders may be taken only upon the vote of the
stockholders at an annual or special meeting duly called and may not be taken by
written consent of the stockholders.
NINTH: Special meetings of the stockholders of the Corporation, for
any purpose, or purposes, unless otherwise prescribed by statute, may be called
by the President and shall be called by the President or the Secretary at the
request in writing of a majority of the Board of Directors, the Chairman or any
Co-Chairman of the Board of Directors and shall be held at such place, on such
date, and at such time as shall be fixed by the person or persons calling the
meeting, but such special meetings may not be called by any other person or
persons. Such request shall state the purpose or purposes of the proposed
meeting. Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
TENTH: At an annual meeting of stockholders, only such business
shall be conducted, and only such proposals shall be acted upon, as shall have
been brought before the annual meeting (a) by, or at the direction of, a
majority of the directors, or (b) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Article TENTH. For a
proposal to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to, or
mailed and received at, the principal executive offices of the Corporation not
less than 60 days prior to the scheduled annual meeting, regardless of any
postponements, deferrals or adjournments of that meeting to a later date;
provided, however, that if less than 70 days' notice or prior public disclosure
of the date of the scheduled annual meeting is given or made, notice by the
stockholder, to be timely, must be so delivered or received not later than the
close of business on the tenth day following the earlier of the day on which
such notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (a) a brief description of the proposal desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (b) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business and any other stockholders
known by such stockholder to be supporting such proposal, (c) the class and
number of shares of the Corporation's stock which are beneficially owned by the
stockholder on the date of such stockholder notice and by any other stockholders
known by such stockholder to be supporting such proposal on the date of such
stockholder notice, and (d) any financial interest of the stockholder in such
proposal.
The presiding officer of the annual meeting shall determine and
declare at the annual meeting whether the stockholder proposal was made in
accordance with the terms of this
3
<PAGE> 4
Article TENTH. If the presiding officer determines that a stockholder proposal
was not made in accordance with the terms of this Article TENTH, he shall so
declare at the annual meeting and any such proposal shall not be acted upon at
the annual meeting.
This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated, filed and
received as herein provided.
ELEVENTH: Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, if any, only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors, by any nominating committee or person appointed by the
Board, or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Article ELEVENTH. Such nominations, other than those made by or at
the direction of the Board or by any nominating committee or person appointed by
the Board, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice must be delivered to,
or mailed and received at, the principal executive offices of the Corporation
not less than 60 days prior to the scheduled annual meeting, regardless of any
postponement, deferrals or adjournments of that meeting to a later date;
provided, however, that if less than 70 days' notice or prior public disclosure
of the date of the scheduled annual meeting is given or made, notice by the
stockholder, to be timely, must be so delivered or received not later than the
close of business on the tenth day following the earlier of the day on which
such notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. A stockholder's notice to the Secretary
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election or reelection as a director, (i) the name, age, business address
and residence address of the person, (ii) the principal number of shares of
capital stock of the Corporation which are beneficially owned by the person and
(iii) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
Rule 14a under the Securities Exchange Act of 1934, as amended; and (b) as to
the stockholder giving the notice (i) the name and address, as they appear on
the Corporation's books, of the stockholder and (ii) the class and number of
shares of the Corporation's stock which are beneficially owned by the
stockholder on the date of such stockholder notice. The Corporation may require
any proposed nominee to furnish such other information as may reasonably be
required by the Corporation to determine the eligibility of such proposed
nominee to serve as director of the Corporation.
The presiding officer of the annual meeting shall determine and
declare at the annual meeting whether the nomination was made in accordance with
the terms of this Article ELEVENTH. If the presiding officer determines that a
nomination was not made in accordance with the terms of this Article ELEVENTH,
he shall so declare at the annual meeting and any such defective nomination
shall be disregarded.
4
<PAGE> 5
TWELFTH: Notwithstanding anything contained in this Restated
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 66- 2/3% of the outstanding shares of Common Stock of the
Corporation shall be required to amend or repeal Articles FIFTH, SIXTH, SEVENTH,
EIGHTH, NINTH, TENTH, ELEVENTH, TWELFTH, THIRTEENTH or FOURTEENTH of this
Restated Certificate of Incorporation or to adopt any provision inconsistent
therewith.
The Board of Directors is expressly empowered to adopt, amend or
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at the time any
resolution providing for adoption, amendment or repeal is presented to the
Board). The stockholders shall also have power to adopt, amend or repeal the
Bylaws of the Corporation. In addition to any vote of the holders of any class
or series of stock of this Corporation required by law, the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
outstanding shares of Common Stock of the Corporation shall be required to
adopt, amend or repeal any provision of the Bylaws of the Corporation.
THIRTEENTH: (a) Each person who was or is made a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another Corporation or of a partnership,
joint venture, limited liability company, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) actually and
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in subparagraph (b)
hereof, indemnification in connection with a proceeding (or part thereof)
initiated by such person shall be permitted hereunder only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Article THIRTEENTH shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation Law
requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director of officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to
5
<PAGE> 6
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Article
THIRTEENTH or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
(b) If a claim under subparagraph (a) of this Article THIRTEENTH is
not paid in full by the Corporation within thirty days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim or
otherwise to enforce his or her rights to indemnification and payment of
expenses and, if successful, in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(c) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Article THIRTEENTH shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
certificate of incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law.
FOURTEENTH: The personal liability of the directors of the
Corporation is hereby eliminated to the fullest extent permitted by paragraph
(7) of subsection (b) of Section 102 of the General Corporation Law of the State
of Delaware, as the same may be amended and supplemented.
FIFTEENTH: The Corporation is to have perpetual existence.
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SIXTEENTH: From time to time any of the provisions of this Restated
Certificate of Incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the time prescribed by said laws,
and all rights at any time conferred upon the stockholders of the Corporation by
this Restated Certificate of Incorporation are granted subject to the provisions
of this Article SIXTEENTH.
IN WITNESS WHEREOF, this Corporation has caused this Restated
Certificate of Incorporation to be signed by Warren D. Fix, its Executive Vice
President, Chief Financial Officer and Secretary, this 14th day of October,
1996.
CANDLEWOOD HOTEL COMPANY, INC.,
A DELAWARE CORPORATION
By: /s/ Warren D. Fix
-----------------------------------
Warren D. Fix
Executive Vice President, Chief
Financial Officer and Secretary
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Exhibit 3.2
BYLAWS
OF
CANDLEWOOD HOTEL COMPANY, INC.,
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I - OFFICES........................................................ 1
Section 1.1 Registered Office.................................. 1
Section 1.2 Other Offices...................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1
Section 2.1 Place of Meetings.................................. 1
Section 2.2 Annual Meeting of Stockholders..................... 1
Section 2.3 Quorum; Adjourned Meetings and Notice Thereof...... 1
Section 2.4 Voting............................................. 2
Section 2.5 Proxies............................................ 2
Section 2.6 Special Meetings................................... 2
Section 2.7 Notice of Stockholder's Meetings................... 2
Section 2.8 Stockholder Proposals.............................. 2
Section 2.9 Maintenance and Inspection of Stockholder List..... 3
Section 2.10 No Stockholder Action by Written Consent Without a
Meeting............................................ 3
ARTICLE III - DIRECTORS.................................................... 4
Section 3.1 Number, Election and Tenure........................ 4
Section 3.2 Vacancies.......................................... 4
Section 3.3 Notification of Nomination......................... 4
Section 3.4 Powers............................................. 5
Section 3.5 Directors' Meetings................................ 5
Section 3.6 Regular Meetings................................... 6
Section 3.7 Special Meetings................................... 6
Section 3.8 Quorum............................................. 6
Section 3.9 Action Without Meeting............................. 6
Section 3.10 Telephonic Meetings................................ 6
Section 3.11 Committees of Directors............................ 6
Section 3.12 Minutes of Committee Meetings...................... 7
Section 3.13 Compensation of Directors.......................... 7
Section 3.14 Indemnification.................................... 7
ARTICLE IV - OFFICERS...................................................... 9
Section 4.1 Officers........................................... 9
Section 4.2 Election of Officers............................... 10
Section 4.3 Subordinate Officers............................... 10
Section 4.4 Compensation of Officers........................... 10
Section 4.5 Term of Office; Removal and Vacancies.............. 10
Section 4.6 Chairman of the Board.............................. 10
Section 4.7 President.......................................... 10
Section 4.8 Vice President..................................... 10
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TABLE OF CONTENTS (Cont'd)
Page
Section 4.9 Secretary.......................................... 10
Section 4.10 Assistant Secretaries.............................. 11
Section 4.11 Chief Financial Officer............................ 11
Section 4.12 Assistant Treasurer................................ 11
ARTICLE V - CERTIFICATES OF STOCK.......................................... 11
Section 5.1 Certificates....................................... 11
Section 5.2 Signatures on Certificates......................... 12
Section 5.3 Statement of Stock Rights, Preferences, Privileges. 12
Section 5.4 Lost Certificates.................................. 12
Section 5.5 Transfers of Stock................................. 12
Section 5.6 Fixing Record Date................................. 12
Section 5.7 Registered Stockholders............................ 13
ARTICLE VI - GENERAL PROVISIONS............................................ 13
Section 6.1 Dividends.......................................... 13
Section 6.2 Payment of Dividends............................... 13
Section 6.3 Checks............................................. 13
Section 6.4 Fiscal Year........................................ 13
Section 6.5 Corporate Seal..................................... 13
Section 6.6 Manner of Giving Notice............................ 14
Section 6.7 Waiver of Notice................................... 14
Section 6.8 Annual Statement................................... 14
ARTICLE VII - AMENDMENTS................................................... 14
Section 7.1 Amendment by Directors or Stockholders............. 14
ii
<PAGE> 4
BYLAWS
OF
CANDLEWOOD HOTEL COMPANY, INC.,
A DELAWARE CORPORATION
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 1.2 Other Offices. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 Place of Meetings. Meetings of stockholders shall be
held at any place within or without the State of Delaware designated by the
Board of Directors. In the absence of any such designation, stockholders'
meetings shall be held at the principal executive office of the corporation.
Section 2.2 Annual Meeting of Stockholders. The annual meeting of
stockholders shall be held each year on a date and a time designated by the
Board of Directors. At each annual meeting directors shall be elected and any
other proper business may be transacted.
Section 2.3 Quorum; Adjourned Meetings and Notice Thereof. A
majority of the stock issued and outstanding and entitled to vote at any meeting
of stockholders, the holders of which are present in person or represented by
proxy, shall constitute a quorum for the transaction of business except as
otherwise provided by law, by the Certificate of Incorporation, or by these
Bylaws. A quorum, once established, shall not be broken by the withdrawal of
enough votes to leave less than a quorum and the votes present may continue to
transact business until adjournment. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, a majority of the
voting stock represented in person or by proxy may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been
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transacted at the meeting as originally notified. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote thereat.
Section 2.4 Voting. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes, or the Certificate of Incorporation, or these Bylaws, a different vote
is required in which case such express provision shall govern and control the
decision of such question.
Section 2.5 Proxies. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him by proxy appointed by an instrument in writing
subscribed by such stockholder and bearing a date not more than three years
prior to said meeting, unless said instrument provides for a longer period. All
proxies must be filed with the Secretary of the corporation at the beginning of
each meeting in order to be counted in any vote at the meeting. Each stockholder
shall have one vote for each share of stock having voting power, registered in
his name on the books of the corporation on the record date set by the Board of
Directors as provided in Article V, Section 5.6 hereof. All elections shall be
had and all questions decided by a plurality vote.
Section 2.6 Special Meetings. Special meetings of the stockholders,
for any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or the Secretary at the request in writing of a majority of the
Board of Directors, the Chairman or any Co-Chairman of the Board of Directors
and shall be held at such place, on such date, and at such time as shall be
fixed by the person or persons calling the meeting, but such special meetings
may not be called by any other person or persons. Such request shall state the
purpose or purposes of the proposed meeting. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
Section 2.7 Notice of Stockholder's Meetings. Whenever stockholders
are required or permitted to take any action at a meeting, a written notice of
the meeting shall be given which notice shall state the place, date and hour of
the meeting, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called. The written notice of any meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting. If mailed, notice is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
Section 2.8 Stockholder Proposals. At an annual meeting of
stockholders, only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been brought before the annual meeting (a)
by, or at the direction of, a majority of the directors, or (b) by any
stockholder of the corporation who complies with the notice procedures set forth
in this Section 2.8. For a proposal to be properly brought before an annual
meeting by a
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stockholder, the stockholder must be given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
corporation not less than 60 days prior to the scheduled annual meeting,
regardless of any postponements, deferrals or adjournments of that meeting to a
later date; provided, however, that if less than 70 days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made, notice
by the stockholder, to be timely, must be so delivered or received not later
than the close of business on the tenth day following the earlier of the day on
which such notice of the date of the scheduled annual meeting was mailed or the
day on which such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (a) a brief description of the proposal desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (b) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such proposal, (c) the
class and number of shares of the corporation's stock which are beneficially
owned by the stockholder on the date of such stockholder notice and by any other
stockholders known by such stockholder to be supporting such proposal on the
date of such stockholder notice, and (d) any financial interest of the
stockholder in such proposal.
The presiding officer of the annual meeting shall determine and
declare at the annual meeting whether the stockholder proposal was made in
accordance with the terms of this Section 2.8. If the presiding officer
determines that a stockholder proposal was not made in accordance with the terms
of this Section 2.8, he shall so declare at the annual meeting and any such
proposal shall not be acted upon at the annual meeting.
This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated, filed and
received as herein provided.
Section 2.9 Maintenance and Inspection of Stockholder List. The
officer who has charge of the stock ledger of the corporation shall prepare and
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 2.10 No Stockholder Action by Written Consent Without a
Meeting. Effective upon the closing of the corporation's initial sale of its
Common Stock in a firm commitment underwriting involving a public offering
pursuant to a Registration Statement on
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Form S-1 under the Securities Act of 1933, as amended, any action required or
permitted to be taken at any annual or special meeting of stockholders may be
taken only upon the vote of the stockholders at an annual or special meeting
duly called and may not be taken by written consent of the stockholders.
ARTICLE III
DIRECTORS
Section 3.1 Number, Election and Tenure. The authorized number of
directors which shall constitute the Board shall not be less than four (4) nor
more than seven (7). The exact number shall be determined from time to time by
resolution of the Board. Until otherwise determined by such resolution, the
Board shall consist of four (4) persons. Directors shall be elected at the
annual meeting of stockholders and each director shall serve until such person's
successor is elected and qualified or until such person's death, retirement,
resignation or removal. The directors need not be stockholders. Subject to the
rights, if any, of the holders of shares of Preferred Stock then outstanding, if
any, any and all directors of the corporation may be removed from office by the
stockholders only for cause and only by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the outstanding shares of Common
Stock of the corporation at any annual or special meeting of stockholders of the
corporation, the notice of which shall state that the removal of a director or
directors is among the purposes of the meeting.
Section 3.2 Vacancies. Vacancies on the Board of Directors by reason
of death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors shall be filled solely by the affirmative vote of
a majority of the remaining directors then in office, even though less than a
quorum, or by a sole remaining director. The directors so chosen shall hold
office until the next annual election of directors and until their successors
are duly elected and qualified, unless sooner displaced. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office. No decrease
in the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director.
Section 3.3 Notification of Nomination. Subject to the rights, if
any, of the holders of shares of Preferred Stock then outstanding, if any, only
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the corporation may be made
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at a meeting of stockholders by or at the direction of the Board of Directors,
by any nominating committee or person appointed by the Board, or by any
stockholder of the corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
3.3. Such nominations, other than those made by or at the direction of the Board
or by any nominating committee or person appointed by the Board, shall be made
pursuant to timely notice in writing to the Secretary of the corporation. To be
timely, a stockholder's notice must be delivered to, or mailed and received at,
the principal executive offices of the corporation not less than 60 days prior
to the scheduled annual meeting, regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, that if less
than 70 days' notice or prior public disclosure of the date of the scheduled
annual meeting is given or made, notice by the stockholder, to be timely, must
be so delivered or received not later than the close of business on the tenth
day following the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such public disclosure
was made. A stockholder's notice to the Secretary shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director, (i) the name, age, business address and residence address of the
person, (ii) the principal number of shares of capital stock of the corporation
which are beneficially owned by the person and (iii) any other information
relating to the person that is required to be disclosed in solicitations for
proxies for election of directors pursuant to Rule 14a under the Securities
Exchange Act of 1934, as amended; and (b) as to the stockholder giving the
notice (i) the name and address, as they appear on the corporation's books, of
the stockholder and (ii) the class and number of shares of the corporation's
stock which are beneficially owned by the stockholder on the date of such
stockholder notice. The corporation may require any proposed nominee to furnish
such other information as may reasonably be required by the corporation to
determine the eligibility of such proposed nominee to serve as director of the
corporation.
The presiding officer of the annual meeting shall determine and
declare at the annual meeting whether the nomination was made in accordance with
the terms of this Section 3.3. If the presiding officer determines that a
nomination was not made in accordance with the terms of this Section 3.3, he
shall so declare at the annual meeting and any such defective nomination shall
be disregarded.
Section 3.4 Powers. The property and business of the corporation
shall be managed by or under the direction of its Board of Directors. In
addition to the powers and authorities by these Bylaws expressly conferred upon
them, the Board may exercise all such powers of the corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders.
Section 3.5 Directors' Meetings. The directors may hold their
meetings and have one or more offices, and keep the books of the corporation
outside of the State of Delaware.
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Section 3.6 Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board.
Section 3.7 Special Meetings. Special meetings of the Board of
Directors may be called by the President on forty-eight hours' notice to each
director, either personally or by mail or by telegram; special meetings shall be
called by the President or the Secretary in like manner and on like notice on
the written request of two directors unless the Board consists of only one
director; in which case special meetings shall be called by the President or
Secretary in like manner or on like notice on the written request of the sole
director.
Section 3.8 Quorum. At all meetings of the Board of Directors a
majority of the authorized number of directors shall be necessary and sufficient
to constitute a quorum for the transaction of business, and the vote of a
majority of the directors present at any meeting at which there is a quorum,
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of Incorporation or by
these Bylaws. If a quorum shall not be present at any meeting of the Board of
Directors the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. If only one director is authorized, such sole director shall
constitute a quorum.
Section 3.9 Action Without Meeting. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 3.10 Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
Section 3.11 Committees of Directors. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
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may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the Bylaws of the corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 3.12 Minutes of Committee Meetings. Each committee shall
keep regular minutes of its meetings and report the same to the Board of
Directors when required.
Section 3.13 Compensation of Directors. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, the Board of Directors
shall have the authority to fix the compensation of directors. The directors may
be paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
Section 3.14 Indemnification.
(a) The corporation shall indemnify any person who was
or is made a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he or she is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other
enterprise, against all expense, liability and loss (including attorneys' fees),
judgments, fines, ERISA excise taxes and amounts paid or to be paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person 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
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving
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at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, limited liability company,
trust or other enterprise against expenses, liability and loss (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation and except that no such indemnification shall be made in respect
of any claim, issue or matter as to which such person shall have been adjudged
to be liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of Delaware
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or
agent of the corporation shall be successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in paragraphs (a) and (b),
or in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
(d) Any indemnification under paragraphs (a) and (b)
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
of Directors in the manner provided in paragraph (d) upon receipt of an
undertaking by or on behalf of the director, officer, employee or agent to repay
such amount unless it shall ultimately be determined that he is entitled to be
indemnified by the corporation as authorized in this Section 3.14.
(f) The indemnification provided by this Section 3.14
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
(g) The Board of Directors may authorize, by a vote of a
majority of a quorum of the Board of Directors, the corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the
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corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Section 3.14.
(h) For the purposes of this Section 3.14, references to
"the corporation" shall include, in addition to the resulting 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, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, 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, limited liability company,
trust or other enterprise, shall stand in the same position under the provisions
of this Section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this section, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include 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 a person who 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 shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.
ARTICLE IV
OFFICERS
Section 4.1 Officers. The officers of this corporation shall be
chosen by the Board of Directors and shall include a Chairman of the Board, a
President, a Secretary, and a Chief Financial Officer. The corporation may also
have at the discretion of the Board of Directors such other officers as are
desired, including one or more Vice Presidents, one or more Assistant
Secretaries and Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 4.3 hereof. In the event
there are two or more Vice Presidents, then one or more may be designated as
Executive Vice President, Senior Vice President, or other similar or dissimilar
title. At the time of the election of officers, the directors may by resolution
determine the order of their rank. Any number of offices may be held by the same
person, unless the Certificate of Incorporation or these Bylaws otherwise
provide.
9
<PAGE> 13
Section 4.2 Election of Officers. The Board of Directors, at its
first meeting after each annual meeting of stockholders, shall choose the
officers of the corporation.
Section 4.3 Subordinate Officers. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
Section 4.4 Compensation of Officers. The salaries of all officers
and agents of the corporation shall be fixed by the Board of Directors.
Section 4.5 Term of Office; Removal and Vacancies. The officers of
the corporation shall hold office until their successors are chosen and qualify
in their stead. Any officer elected or appointed by the Board of Directors may
be removed at any time by the affirmative vote of a majority of the Board of
Directors. If the office of any officer or officers becomes vacant for any
reason, the vacancy shall be filled by the Board of Directors.
Section 4.6 Chairman of the Board. The Chairman of the Board, if
such an officer be elected, shall, if present, preside at all meetings of the
Board of Directors and exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors or prescribed by
these Bylaws. If there is no President, the Chairman of the Board shall in
addition be the Chief Executive Officer of the corporation and shall have the
powers and duties prescribed in Section 4.7 of this Article IV.
Section 4.7 President. Subject to such supervisory powers, if any,
as may be given by the Board of Directors to the Chairman of the Board, if there
be such an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these Bylaws.
Section 4.8 Vice President. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to time
may be prescribed for them, respectively, by the Board of Directors.
Section 4.9 Secretary. The Secretary shall attend all sessions of
the Board of Directors and all meetings of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose; and
shall perform like duties for the standing
10
<PAGE> 14
committees when required by the Board of Directors. He shall give, or cause to
be given, notice of all meetings of the stockholders and of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or these Bylaws. He shall keep in safe custody the seal of the
corporation, and when authorized by the Board, affix the same to any instrument
requiring it, and when so affixed it shall be attested by his signature or by
the signature of an Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by his signature.
Section 4.10 Assistant Secretaries. The Assistant Secretary, or if
there be more than one, the Assistant Secretaries in the order determined by the
Board of Directors, or if there be no such determination, the Assistant
Secretary designated by the Board of Directors, shall, in the absence or
disability of the Secretary, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 4.11 Chief Financial Officer. The Chief Financial Officer
shall have the custody of the corporate funds and securities and shall keep full
and accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys, and other valuable effects in the name
and to the credit of the corporation, in such depositories as may be designated
by the Board of Directors. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as Chief Financial Officer and of the financial condition of the
corporation. If required by the Board of Directors, he shall give the
corporation a bond, in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors, for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
Section 4.12 Assistant Treasurer. The Assistant Treasurer, or if
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Chief Financial Officer, perform the duties and exercise the
powers of the Chief Financial Officer and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
ARTICLE V
CERTIFICATES OF STOCK
Section 5.1 Certificates. Every holder of stock of the corporation
shall be entitled to have a certificate signed by, or in the name of the
corporation by, the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President, and by the
11
<PAGE> 15
Secretary or an Assistant Secretary, or the Chief Financial Officer or an
Assistant Treasurer of the corporation, certifying the number of shares
represented by the certificate owned by such stockholder in the corporation.
Section 5.2 Signatures on Certificates. Any or all of the signatures
on the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Section 5.3 Statement of Stock Rights, Preferences, Privileges. If
the corporation shall be authorized to issue more than one class of stock or
more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the corporation shall issue to represent such class or series of stock, a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Section 5.4 Lost Certificates. The Board of Directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5.5 Transfers of Stock. Upon surrender to the corporation,
or the transfer agent of the corporation, of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 5.6 Fixing Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or
12
<PAGE> 16
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date which shall not be more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 5.7 Registered Stockholders. The corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact thereof and accordingly shall not be bound to recognize any
equitable or other claim or interest in such share on the part of any other
person, whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1 Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 6.2 Payment of Dividends. Before payment of any dividend
there may be set aside out of any funds of the corporation available for
dividends such sum or sums as the directors from time to time, in their absolute
discretion, think proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the directors shall think conducive to
the interests of the corporation, and the directors may abolish any such
reserve.
Section 6.3 Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 6.4 Fiscal Year. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
Section 6.5 Corporate Seal. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
13
<PAGE> 17
Section 6.6 Manner of Giving Notice. Whenever, under the provisions
of the statutes or of the Certificate of Incorporation or of these Bylaws,
notice is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears on
the records of the corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to directors may also be given by telegram.
Section 6.7 Waiver of Notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed to be equivalent.
Section 6.8 Annual Statement. The Board of Directors shall present
at each annual meeting, and at any special meeting of the stockholders when
called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
ARTICLE VII
AMENDMENTS
Section 7.1 Amendment by Directors or Stockholders. The Board of
Directors is expressly empowered to adopt, amend or repeal bylaws of the
corporation, without the approval of the stockholders. Any adoption, amendment
or repeal of bylaws of the corporation by the Board of Directors shall require
the approval of a majority of the total number of authorized directors (whether
or not there exist any vacancies in previously authorized directorships at the
time any resolution providing for adoption, amendment or repeal is presented to
the Board). The stockholders shall also have power to adopt, amend or repeal the
bylaws of the corporation. In addition to any vote of the holders of any class
or series of stock of this corporation required by law or by the Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the outstanding shares of Common Stock of the
corporation shall be required to adopt, amend or repeal any provisions of the
bylaws of the corporation.
///
///
///
///
///
14
<PAGE> 18
CERTIFICATE OF SECRETARY
OF
CANDLEWOOD HOTEL COMPANY, INC.,
A DELAWARE CORPORATION
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of Candlewood
Hotel Company, Inc., a Delaware corporation; and
(2) That the foregoing bylaws, comprising fourteen (14) pages,
constitute the bylaws of said corporation as duly adopted by Unanimous Written
Consent of the Board of Directors of said corporation as of September 30, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 14th day
of October, 1996.
/s/ Warren D. Fix
---------------------------------
Warren D. Fix
Secretary
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER [LOGO] SHARES
CANDLEWOOD
Your Studio Hotel CUSIP 13741M 10 8
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
THE PAR VALUE OF $.01 PER SHARE OF
CANDLEWOOD HOTEL COMPANY, INC.
(hereinafter called the "Corporation") transferable on the books of the
Corporation by said owner in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed. This certificate is not valid
unless countersigned by the Transfer Agent and Registrar.
Witness, the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
[CANDLEWOOD SEAL]
/s/ /s/
EXECUTIVE VICE PRESIDENT, PRESIDENT AND CHIEF EXECUTIVE
CHIEF FINANCIAL OFFICER AND SECRETARY OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NEW YORK) TRANSFER AGENT
AND REGISTRAR,
BY: AUTHORIZED SIGNATURE
<PAGE> 2
CANDLEWOOD HOTEL COMPANY, INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof authorized to be issued and the qualifications, limitations or
restrictions of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as through they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT. _________________ Custodian ________________
TEN ENT- as tenants by the entireties (Cust.) (Minor)
JT TEN- as joint tenants with under Uniform Gifts to Minors
right of survivorship and Act _________________________
not as tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value received, hereby sell, assign and transfer unto
--------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
/ /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
---------------------------------------------
- ----------------------------------------------------------------------, Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-----------------------------------------
(SIGNATURES)
------------------------------------------------
------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN ON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE,
WHATEVER.
SIGNATURES GUARANTEED:
- -------------------------------------------------
THE SIGNATURES MUST BE GUARANTEED BY A FIRM WHICH
IS A MEMBER OF A MEDALLION GUARANTEE PROGRAM.
<PAGE> 1
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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<PAGE> 4
(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
- 2 -
<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
- 3 -
<PAGE> 6
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
- 4 -
<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.
- 5 -
<PAGE> 8
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.
- 6 -
<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
- 7 -
<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,
- 8 -
<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
- 9 -
<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
- 10 -
<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.
- 11 -
<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
- 12 -
<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.
- 13 -
<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"
- 14 -
<PAGE> 17
GUARANTY
As an inducement to CANDLEWOOD HOTEL COMPANY, L.L.C. to enter into the
foregoing Development Agreement, which it is unwilling to do but for this
Guaranty, the undersigned individually and, if more than one Guarantor, jointly
and severally, guarantee the punctual payment and performance of all obligations
of the Developer under the Agreement. This shall be an unconditional,
irrevocable, and continuing guaranty for the entire term of this Agreement,
including any renewal terms.
The undersigned agree that they are willing to remain fully bound by
this Guaranty notwithstanding any action or inaction of the CHC and Developer in
connection with the Agreement, and that their obligation shall not be modified,
waived, or released by any modification, amendment, or departure from the terms
of the Agreement, or by any forbearance, extension of time, waiver, or release
granted by CHC to Developer or any Guarantor or with respect to any security
held by CHC. The undersigned expressly waive any notice of all such matters
(including, without limitation, notice of amendment or modification of the
Agreement, notice of demand for payment or performance by Developer, notice of
default or termination, and any other notices required by the Agreement) and
agree to pay and perform the obligations of Developer without notice or demand
from the CHC and without any requirement that CHC first proceed against
Developer or any other Guarantor.
IN WITNESS WHEREOF, each of the undersigned has executed this Guaranty
as of the date of the Development Agreement.
ATTEST:
- -------------------------------- --------------------------------
ATTEST:
- -------------------------------- --------------------------------
"Guarantor"
- 15 -
<PAGE> 18
Attachment A
CANDLEWOOD HOTEL COMPANY, L.L.C.
DEVELOPMENT AGREEMENT
ASSIGNED AREA
Assigned Area:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
A-1
<PAGE> 19
Attachment B
CANDLEWOOD HOTEL COMPANY, L.L.C.
DEVELOPMENT AGREEMENT
DEVELOPMENT SCHEDULE
Date of Submission
Hotel No. of Franchise Application City, State
B-1
<PAGE> 20
Attachment C
CANDLEWOOD HOTEL COMPANY, L.L.C.
FRANCHISE APPLICATION
This Franchise Application is furnished to Candlewood Hotel Company,
L.L.C. ("CHC") in order to induce CHC to process the application of the
undersigned (collectively, "Applicant") for a Franchise Agreement for the
construction and operation of a franchised Candlewood Hotel containing ______
rooms at the following site:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Applicant understands that CHC is relying upon the information provided in this
Franchise Application and all documents submitted by Applicant in connection
herewith (collectively, the "Application").
Applicant represents and warrants to CHC as follows:
1. All information contained in the Application is true, correct,
complete, and not misleading through omission of material
information, as of the date hereof. Applicant agrees to inform
CHC promptly of any material change in any information in the
Application. Applicant also agrees to supply such additional
information, statements, or data as may be requested by CHC.
2. Applicant has the authority to submit the Application and to
enter into the Franchise Agreement. Neither the Application
nor the execution of the Franchise Agreement will conflict
with any obligations of Applicant to other parties. Applicant
has not been induced by CHC to terminate or breach any
agreement with respect to the site specified above.
3. Applicant has favorable prospects for obtaining the site,
evidence of which accompanies the Application.
4. Applicant is familiar with the Candlewood System and its
requirements. All relevant agreements and exhibits and a
Franchise Offering Circular have been provided by CHC to the
undersigned.
C-1
<PAGE> 21
Applicant understands and acknowledges that:
1. CHC does not enter into oral agreements or understandings with
respect to franchises or matter pertaining to the grant of a
franchise.
2. As of this date, there are no oral agreements or
understandings whatsoever between Applicant and CHC with
respect to any commitment or franchise.
3. Payment by certified check of the following fee to CHC is made
with this Application: $_______________, which is the greater
of $40,000 or $400 times the number of rooms of the Hotel as
specified above. The fee may be invested, commingled with
other funds of CHC, or otherwise used by CHC as it deems
appropriate in its discretion. CHC shall not process the
Application unless full payment accompanies the Application.
4. CHC may approve or disapprove the Application for any reason.
If the Application is approved, the fee will not be refunded
and Applicant will be offered for execution the Franchise
Agreement to which the fee is applicable. In the event that
CHC disapproves the Application, it shall have no liability to
Applicant other than to return the application fee, less
expenses incurred by CHC in processing the Application, which
expenses are conclusively agreed by the Applicant and CHC to
be $5,000.
5. Applicant shall not acquire any rights or be entitled to be
issued any Franchise Agreement by virtue of the submission of
this Application.
Applicant jointly and severally hereby indemnifies and agrees to defend
CHC and its members and affiliates and each of their respective employees,
agents, representatives, and assignees and hold them harmless from all losses,
consequently, directly or indirectly incurred (including legal and accounting
fees and expenses) or arising from, as a result of or in connection with the
breach of any representation or warranty contained in the Application or arising
from, as a result of, or in connection with CHC's reliance on such
representations or warranties. CHC shall have the right to take any action it
may deem necessary in its sole discretion to protect and defend itself against
any threatened action covered by this indemnification. CHC may, in its sole
discretion, have sole an exclusive control over the defense of any such action
(including the right to be represented by counsel of its choosing) and over the
settlement, compromise, or other disposition thereof.
C-2
<PAGE> 22
This Application may be executed in several counterparts, each of which
shall be deemed an original but which together shall constitute one and the same
instrument.
Dated: _____________________, 19____.
--------------------------------------------
Applicant - Corporate, Limited Liability
Company, or Partnership Name if applicable
By:
--------------------------------------------
(Name & Title)
Signature of each individual Applicant
or each general partner if Applicant is
a partnership or each shareholder of an
Applicant which is a corporation, or
each member and manager if Applicant is
a limited liability company:
- -------------------------------------- -------------------------------------
- -------------------------------------- -------------------------------------
- -------------------------------------- -------------------------------------
APPROVAL:
Candlewood Hotel Company, L.L.C. hereby approves the Application and the site
referenced therein.
CANDLEWOOD HOTEL COMPANY, L.L.C.
By
-------------------------------
Date: _________ Its
C-3
<PAGE> 23
Attachment D
CANDLEWOOD HOTEL COMPANY, L.L.C.
FRANCHISE AGREEMENT
FRANCHISE AGREEMENT
The form of Franchise Agreement currently offered by CHC is attached.
(Refer to Article 3 of Development Agreement.)
D-1
<PAGE> 1
Exhibit 10.5
CANDLEWOOD HOTEL COMPANY, L.L.C.
FRANCHISE AGREEMENT
CANDLEWOOD HOTEL COMPANY, L.L.C.
<PAGE> 2
FRANCHISE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Recitals ...................................................................................................... 1
Article 1 Acknowledgments and Representations............................................................ 2
Article 2 Grant of Franchise............................................................................. 3
Article 3 Term and Renewal............................................................................... 4
Article 4 Fees and Royalties............................................................................. 5
Article 5 Hotel Construction and Opening................................................................. 7
Article 6 Duties of CHC.................................................................................. 10
Article 7 General Duties of Franchisee................................................................... 12
Article 8 Quality Control and Supervision................................................................ 16
Article 9 Advertising.................................................................................... 18
Article 10 Financial Reporting............................................................................ 20
Article 11 Proprietary Marks and Trade Secrets; Competition............................................... 22
Article 12 Insurance and Indemnity........................................................................ 26
Article 13 Transfer of Interest or Management............................................................. 28
Article 14 Default and Termination........................................................................ 33
Article 15 Obligations upon Termination................................................................... 35
Article 16 Additional Covenants........................................................................... 37
Article 17 Approvals and Waivers.......................................................................... 38
Article 18 Notices........................................................................................ 39
Article 19 Alternative Dispute Resolution................................................................. 39
Article 20 Entire Agreement............................................................................... 41
Article 21 Construction and Modification.................................................................. 42
Article 22 Execution of Agreement......................................................................... 43
Guaranty....................................................................................................... 45
Exhibit A Approved Location ............................................................................. A-1
Exhibit B Owners of Franchisee .......................................................................... B-1
Exhibit C Covenant Agreement ............................................................................ C-1
</TABLE>
<PAGE> 3
CANDLEWOOD HOTEL COMPANY, L.L.C.
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT (the or this "Agreement") made and entered
into at Wichita, Kansas this 25th day of July, 1996, by and between CANDLEWOOD
HOTEL COMPANY, L.L.C., a Delaware limited liability company (hereinafter
referred to as "CHC"), and Studio West Hotel Development Company, L.L.C.
(hereinafter referred to as "Franchisee"), whose principal business address is
101 Larkspur Land, Suite 318, Larkspur, California 94939.
RECITALS
A. CHC has developed and owns a concept and distinctive system for the
design, decor, establishment, operation, and image 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 such system are
hereinafter referred to as the "Proprietary Marks") utilizing certain Trade
Secrets (as defined in Section 11. 4 below) in connection with providing economy
extended-stay lodging accommodations (such system, as it may be modified or
supplemented by CHC from time to time, is hereinafter referred to as the
"System").
B. Franchisee desires to establish and operate a Candlewood Hotel under
the System and wishes to obtain a franchise from CHC for that purpose.
C. Franchisee recognizes the benefits to be derived from being
identified with and licensed to use the System and Franchisee understands and
acknowledges the importance of operating the hotel franchised hereunder in
strict conformity with CHC's standards and specifications in order to enhance
public acceptance of, and demand for, all Candlewood Hotels (hereinafter, the
"System Hotels").
D. CHC is relying upon the business skill, financial capacity, and
character of Franchisee and its principals, and the guarantee by the principals
of Franchisee'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:
- 1 -
<PAGE> 4
ARTICLE 1. ACKNOWLEDGMENTS AND REPRESENTATIONS.
Franchisee acknowledges and represents to CHC, in order to induce CHC
to enter this Agreement, as follows:
A. Franchisee has read this Agreement and CHC's franchise
disclosure document and understands and accepts the terms, conditions,
and covenants contained in this Agreement as being reasonably necessary
to maintain CHC's standards of quality and service and the uniformity
of those standards at each System Hotel in order to protect and
preserve the goodwill of the Proprietary Marks.
B. Franchisee has conducted an independent investigation of
the business contemplated by this Agreement. Franchisee recognizes that
the nature of the business conducted by CHC may evolve and change over
time; that an investment in a Candlewood Hotel involves business risks
which have been considered by Franchisee; and that the success of the
venture depends primarily upon Franchisee's business ability and
efforts.
C. Franchisee has not received or relied upon any guarantee,
expressed or implied, about the revenues, profits, or success of the
business venture contemplated by this Agreement.
D. No representations have been made by CHC, or by its
members, managers, officers, employees, directors, and/or agents, and
Franchisee has not relied on any representations, that are contrary to
or not contained in the statements made in the franchise disclosure
document heretofore received by Franchisee or the terms contained in
this Agreement.
E. CHC has made no representations or warranties and has
further disclaimed any warranties with regard to whether any of the
Proprietary Marks are protectable or registerable and with regard to
whether any of the Proprietary Marks infringe upon the rights of
others.
F. In all of their dealings with Franchisee, the members,
managers, officers, employees, directors, and/or agents of CHC act only
in a representative capacity, not in an individual capacity, and that
this Agreement and all business dealings between Franchisee and such
individuals as a result of this Agreement are solely between Franchisee
and CHC.
G. The application made by Franchisee to CHC is true and
correct. Franchisee has made no incorrect statement in the application
or failed to make any
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statement that would be necessary to make the statements in the
application not misleading.
ARTICLE 2. GRANT OF FRANCHISE.
2.1. Subject to the terms and conditions of this Agreement, and to the
continuous compliance by Franchisee with the terms and conditions of this
Agreement, CHC hereby grants to Franchisee the nonexclusive right, and
Franchisee undertakes the obligation, to operate a Candlewood Hotel in
accordance with CHC's standards and specifications, including the operational
standards procedures and techniques as prescribed in the System standards manual
of CHC (as it may be modified, amended, and supplemented by CHC from time to
time in its sole discretion, hereinafter, the "Manual"), and to use the System
(as it may be changed, improved, and further developed by CHC from time to time)
and the Proprietary Marks in connection therewith. Such franchised Candlewood
Hotel shall be referred to in this Agreement as the "Hotel" or "franchised
business."
2.2. Franchisee shall operate the Hotel at, and only at, the street
address set forth on Exhibit A hereto (hereinafter, the "Approved Location"),
and the Hotel shall have the number of guest rooms specified on Exhibit A.
Franchisee agrees that CHC and 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") are not restricted from using the
System or engaging in or licensing any business activity including System Hotels
or other hotels at any other location.
2.3. Franchisee agrees that (a) this franchise relates solely to the
Approved Location, and (b) this Agreement does not entitle Franchisee to any
protected territory, territorial rights, or exclusivity. Franchisee shall not
expand or change the number of guest rooms in the Hotel without the prior
written consent of CHC.
2.4. Franchisee further agrees that CHC and the Affiliated Companies
have and retain the right to develop, acquire, participate in, and/or operate
and license others to develop, acquire, participate in, and/or operate hotels,
lodging facilities, or other business operations of any type whatsoever,
including, without limitation, hotels using any of the Proprietary Marks or any
other trade names 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, at any location, and that such
business operations may compete with and adversely affect the operation of the
franchised business. Franchisee agrees that the Affiliated Companies may
exercise such rights from time to time without notice to Franchisee. Franchisee
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
any of the Affiliated Companies.
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2.5. The license granted hereby to use the Proprietary Marks is
nonexclusive, and Franchisee agrees that such Proprietary Marks are and shall
remain the property of CHC and shall not be contested as to ownership or
validity by Franchisee. Franchisee understands and agrees that the grant of the
license to use the marks is conditioned upon Franchisee's agreement that: (a)
the Proprietary Marks shall be used only in connection with the franchised
business and only in the manner authorized by CHC; (b) Franchisee will not use
the Proprietary Marks as part of its corporate or other legal name, will
identify itself as a franchisee, and will comply with all fictitious name and
other statutes in connection with its use of the Proprietary Marks; (c)
Franchisee will cooperate with CHC in protecting and defending the Proprietary
Marks; and (d) Franchisee will comply with CHC's designations of additions,
deletions, and changes in the Proprietary Marks.
ARTICLE 3. TERM AND RENEWAL.
3.1. Unless sooner terminated or modified as hereinafter provided, the
term of this Franchise shall be 20 years from the date of this Agreement.
3.2. Franchisee is granted the option to renew this Agreement for two
additional consecutive terms of ten years, provided Franchisee complies with all
of the following conditions prior to each such renewal:
A. Franchisee shall not then be in default of any provision of
this Agreement, any amendment hereof, or successor hereto, or any other
agreement between Franchisee and CHC or any of the Affiliated
Companies, and shall have substantially complied with all of the terms
and conditions of such agreements during the initial and/or any prior
renewal terms thereof.
B. Franchisee shall have satisfied all monetary obligations
owed by Franchisee to CHC and any of the Affiliated Companies, and
shall have timely met those obligations throughout the term of this
Agreement.
C. Franchisee shall submit a renewal application to CHC not
less than 24 months nor more than 36 months prior to the end of the
initial term and shall pay with its renewal application a renewal fee
of one-half of the then-current franchise application fee being charged
by CHC for new development, computed on a per room basis.
D. Not less than 12 months prior to the end of the initial
term, Franchisee shall execute CHC's then-current form of commitment
agreement for renewal franchise agreement, which may require, among
other things, that Franchisee's general manager and other employees
comply with CHC's then-current training requirements and that
Franchisee upgrade, at Franchisee's expense, the Hotel to conform to
the then-current
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standards and specifications of CHC, including, without limitation,
such structural changes, remodeling, and redecoration and such
modifications to existing improvements as may be necessary to do so.
E. Franchisee shall execute a general release, in a form
prescribed by CHC, of any and all claims against CHC and all of the
Affiliated Companies, and each of their members, owners, shareholders,
managers, directors, officers, agents, and/or employees; provided,
however, that all rights enjoyed by the Franchisee and any causes of
action arising in its favor from the provisions of any applicable
franchise laws and regulations shall remain in force; it being the
intent of this proviso that any non-waiver provisions of such laws be
satisfied.
Upon expiration of the initial term of this Agreement and provided Franchisee
has met the foregoing conditions and has complied with the upgrading and other
requirements specified in the commitment agreement, CHC shall issue to
Franchisee, CHC's then-current franchise agreement for a ten-year renewal term.
The then-current franchise agreement shall supersede in all respects this
Agreement, and the terms may differ from the terms of this Agreement including,
without limitation, higher royalty and marketing fees; provided, however, that
the renewal fee paid pursuant to Section 3.2.C above shall be in lieu of any
initial franchise fee provided for in the then-current franchise agreement of
CHC.
ARTICLE 4. FEES AND ROYALTIES.
4.1. In consideration of the rights and franchise granted herein,
Franchisee shall pay to CHC each of the following:
A. At the earlier of the execution and delivery of a franchise
application or the execution and delivery of this Agreement by
Franchisee, an initial franchise fee equal to the greater of (i)
$40,000 or (ii) $400 times the number of rooms of the Hotel as
specified on Exhibit A hereto. Franchisee acknowledges and agrees that
such fee has been fully earned and is nonrefundable in consideration of
expenses incurred, rights granted, services rendered, and other
valuable consideration, the receipt and sufficiency of which is
acknowledged by Franchisee.
B. Beginning during the Fiscal Period (as defined in Section
10.1 below) immediately following the opening of the tenth System
Hotel, a continuing Fiscal Period royalty fee of 4% of Franchisee's
Room Revenues (as defined in Section 4.3 below) at the Hotel for the
next 26 Fiscal Periods thereafter, and following such 26 Fiscal
Periods, the continuing Fiscal Period royalty fee shall be 5% of
Franchisee's Room Revenues during the remaining term of this Agreement.
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<PAGE> 8
C. A contribution to the Marketing Fund (as defined in Section
9.3 below), administered by the IACHO Marketing Committee (as defined
in Section 9.3 below) for the System as provided in Section 9.3 below,
on a Fiscal Period basis of 2.5% of Franchisee's Room Revenues at the
Hotel, subject to adjustment from time to time upon a majority vote by
members of The International Association of Candlewood Hotel Owners
("IACHO"). Association members in good standing under the rules
governing the association shall be provided at least 30 days advance
notice of, and an opportunity to vote on, any proposed adjustment. A
majority vote, as required to approve any adjustment in the
contribution to the Marketing Fund, shall mean a number of votes equal
to or greater than the majority of all open and operating System
Hotels. CHC shall provide to Franchisee at least 60 days notice prior
to the effective date of any adjustment so approved. CHC further agrees
that it will not exercise the rights granted herein to require
Franchisee to contribute to a Marketing Fund as described in this
section and in section 9.3 of this Agreement, without first seeking
approval of the assessment of Marketing Fund Fees from the members of
the International Association of Candlewood Hotel Owners voting in the
manner provided in Article 9.4 of this Agreement.
4.2. All Fiscal Period payments required by Sections 4.1.B and 4.1.C
shall be due to CHC and Marketing Fund, respectively, by the 15th day after the
end of the fiscal Period in which such Room Revenues were received by
Franchisee, and shall be submitted to CHC together with any report required
under Article 10 hereof. Any payment or report not actually received by CHC on
or before such date shall be deemed overdue unless postmarked at least five days
prior to the date it was due. If any payment is overdue, Franchisee shall pay to
CHC immediately upon demand the overdue amount together with interest on such
amount from the date it was due until paid, at the lesser of 1.5% per month or
the maximum rate permitted by law. Franchisee acknowledges that nothing
contained in this Section shall constitute an agreement by CHC to accept such
payments after the same are due or a commitment by CHC to extend credit to, or
otherwise finance Franchisee's operation of, the Hotel. Franchisee acknowledges
that Franchisee's failure to pay all such amounts when due shall constitute
grounds for termination of this Agreement, as provided in Section 14.1.E of this
Agreement, notwithstanding the provisions of this Section . The entitlement to
such late charge shall be in addition to any other remedies CHC may have.
4.3. As used in this Agreement, "Room Revenues" shall mean all revenues
attributable to or payable for the use, occupancy, or rental of rooms at the
Hotel, including barter and credit transactions (before commissions and
discounts for credit cards), whether or not collected, proceeds from any
business interruption insurance or other loss of income insurance applicable to
loss of revenues due to the non-availability of guest rooms, and proceeds for
guaranteed no- show revenue which is collected, but excluding sales taxes, room
taxes, or other taxes collected by Franchisee from customers for transmittal to
appropriate taxing authorities. "Room Revenues" shall be accounted for in
accordance with the Uniform System of Accounts for Hotels, Eighth Revised
Edition, 1986, as published by the Hotel Association of New York City,
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Inc., except as otherwise provided in the accounting procedures set forth in the
Manual; subject, however, to the right of CHC to designate any subsequent
edition or to designate a reasonable alternative accounting system if, in CHC's
judgment, the 1986 edition is no longer authoritative or its use otherwise is
not advisable under then current hotel accounting practice. In no event shall
any charges to guests attributable to items and services which are required by
the System to be included within the rates for lodging accommodations be
excluded or deducted in determining Room Revenues. Franchisee shall not
sacrifice Room Revenues to further any other business activity.
ARTICLE 5. HOTEL CONSTRUCTION AND OPENING.
5.1. Prior to commencing construction of the Hotel under this
Agreement, Franchisee shall have completed or satisfied all of the following:
A. If Franchisee is obtaining the site for the Hotel by lease
or installment land contract, Franchisee shall submit to CHC with a
request for approval, prior to execution by Franchisee, the lease or
installment land contract for the proposed site, which must not contain
any provision that is inconsistent with or interferes with the
performance of any provision of this Agreement (which lease or
installment land contract must include provisions (i) authorizing CHC
to enter the premises and make any modifications necessary to protect
the Proprietary Marks, (ii) granting to CHC the right (but not the
duty) to assume the lease or installment land contract if Franchisee is
in default under its terms and provisions and/or if this Agreement
expires or is terminated, (iii) requiring concurrent notice from lessor
or vendor to CHC of any default or termination, and (iv) in the case of
a lease, providing for a term of at least 20 years including option
periods in favor of Franchisee), which lease or installment land
contract, when approved by CHC, shall not thereafter be materially
modified without the prior written consent of CHC. Under no
circumstances shall CHC have any obligation or liability under such
lease or installment land contract.
B. Submit to CHC with a request for approval, prior to
preparation of design development documents for the building, a site
layout showing (i) the dimensions of the site at the Approved Location;
(ii) the location of the site in relation to streets and other
thoroughfares and adjoining properties; (iii) placement of the Hotel on
the site; (iv) proposed drives, parking, and service areas; and (v)
such other information as may be reasonably required by CHC, which site
layout, when approved by CHC, shall not thereafter be materially
modified without the prior written consent of CHC.
C. Submit to CHC with a request for approval, after the site
layout for the Hotel has been approved by CHC, complete design
development documents for the building prepared by a registered
architect or engineer in compliance with all applicable
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laws, regulations, and ordinances which design development documents,
when approved by CHC, shall not thereafter be materially modified
without the prior written consent of CHC.
D. Submit to CHC with a request for approval, after the design
development documents for the buildings have been approved by CHC,
final building plans and specifications prepared by a registered
architect or engineer in compliance with all applicable laws,
regulations, and ordinances which plans and specifications, when
approved by CHC, shall not thereafter be materially modified without
the prior written consent of CHC.
E. Provide to CHC satisfactory evidence that all permits,
licenses, and certifications required for the lawful construction and
operation of the proposed Hotel, including, without limitation, all
applicable building permits, zoning access, sign and fire requirements,
have been obtained.
F. Provide to CHC insurance certificates satisfying the
applicable requirements set forth in Article 12 of this Agreement.
G. Provide to CHC evidence that Franchisee possesses or has
obtained adequate financing for constructing, furnishing, and operating
the Hotel.
H. Such other information as CHC may reasonably request.
5.2. Franchisee shall commence construction of the Hotel before the
date 120 days after the date of this Agreement. Franchisee may, upon payment to
CHC of an extension fee of $1,000 per extension, obtain up to four 30-day
extensions of the date upon which Franchisee was to commence construction of the
Hotel. Any further extensions shall be granted only in CHC's sole discretion and
upon payment of such additional extension fees as CHC deems appropriate in its
sole discretion. Commencement of construction shall be deemed to have occurred
on the date that grading, excavation, or similar site preparation begins at the
Approved Location. Franchisee shall provide written notice to CHC of the date of
commencement of construction within ten days after it occurs.
5.3. Within three months after the commencement of construction,
Franchisee shall submit to CHC with a request for approval a final interior
design plan, including standards and specifications for furnishings, fixtures,
and equipment, prepared by a qualified interior designer, which interior design
plan, when approved by CHC, shall not be materially modified without the prior
written consent of CHC. As used in Sections 5.1.B, 5.1.C, 5.1.D, and this
Section 5.3, the term "materially modified" shall mean any modification which
would (a) change the size or dimensions of any public areas, guest rooms, or
amenities of the Hotel, (b) adversely affect
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the appearance or design of any portion of the Hotel or the quality of the
materials used therein, or (c) constitute a departure from the concept or
standards of the System.
5.4. Franchisee shall diligently and continuously prosecute the
construction, furnishing, and equipping of the Hotel (including its acquisition
and installation of all fixtures, equipment, furnishings, furniture, signs,
supplies, and other items necessary for completion and opening of the Hotel) in
accordance with the plans previously approved by CHC and in accordance with the
Manual, but in any event the construction, furnishing, and equipping of the
Hotel shall be completed within 12 months after the date of commencement of
construction of the Hotel. Franchisee acknowledges and understands that time is
of the essence in the construction and opening of the Hotel, and notwithstanding
the occurrence of any events constituting force majeure, or any other cause, the
construction shall be completed and the Hotel shall be furnished, equipped, and
shall otherwise be made ready to open for business, and all governmental
licenses and permits (including a certificate of occupancy) necessary to operate
the Hotel under the System shall have been obtained by Franchisee, at the end of
such 12-month period. Franchisee may, upon payment to CHC of an extension fee of
$5,000 per extension, obtain up to four 30-day extensions of the date upon which
Franchisee was to complete the construction, furnishing, and equipping of the
Hotel. Any further extensions shall be granted only in CHC's sole discretion and
upon payment of such additional extension fees as CHC deems appropriate in its
sole discretion.
5.5. Franchisee agrees that CHC and its agents shall have the right
(without, however, any duty or obligation to do so) to inspect the construction
of the Hotel at all reasonable times.
5.6. CHC's exercise of its rights to approve the plans and
specifications and to inspect construction of the Hotel shall be solely for the
purpose of assuring compliance with System standards and with the terms and
conditions of this Agreement, and CHC shall have no liability or obligation to
Franchisee or any other person with respect to construction of the Hotel.
5.7. No later than five months prior to the expected opening of the
Hotel, Franchisee shall submit to CHC, for its prior approval, Franchisee's
direct sales and marketing plan.
5.8. No later than 120 days prior to the expected opening of the Hotel,
Franchisee shall employ a qualified general manager for the Hotel. No later than
90 days prior to the expected opening of the Hotel, Franchisee shall employ a
qualified director of sales for the Hotel.
5.9. The Hotel shall be opened for business immediately upon
satisfaction of all of the following requirements:
A. All furnishings, furniture, equipment, signs, supplies, and
other items required for the opening of the Hotel in accordance with
this Agreement and the
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standards of CHC shall have been installed or completed, and Franchisee
shall have submitted to CHC, a certificate of occupancy or equivalent
certificate from appropriate regulatory authorities. Opening with less
than all of the improvements completed may be approved by CHC, such
approval not to be unreasonably withheld by CHC if the foregoing
requirements are satisfied as to all portions of the Hotel premises to
which guests will have access and Franchisee is proceeding diligently
toward completion of the full Hotel facility in accordance with the
terms of this Agreement.
B. Franchisee's general manager and director of sales for the
Hotel shall have completed to CHC's satisfaction a training program
conducted by CHC, and Franchisee shall have employed qualified
personnel sufficient to operate the Hotel.
C. Franchisee shall have paid all sums due CHC and the
Affiliated Companies.
D. Franchisee is not in default under this Agreement, or any
existing franchise agreement or other agreement with CHC or any of the
Affiliated Companies.
E. Franchisee has submitted to CHC a certification executed by
the architect of the Hotel or such other person as is acceptable to CHC
that the Hotel has been constructed, completed, furnished, and equipped
in accordance with the plans previously approved by CHC and in
accordance with the Manual, that all other terms and conditions
relating to the opening of the Hotel have been satisfied and the Hotel
is ready to open for business as a Hotel.
F. CHC shall be satisfied as to Franchisee's compliance with
requirements necessary for opening the Hotel by such on-site inspection
and investigation as CHC deems appropriate, which shall be made and
completed within 15 days of receipt of the certificate of Franchisee
pursuant to Section 5.8.E above. Nothing under this Section 5.09.F
shall in any manner relieve Franchisee of the obligation of complying
with the requirements of the approved plans or the terms of this
Agreement.
5.10. Franchisee acknowledges and understands that Franchisee shall
bear the entire cost of the development and construction of the Hotel,
including, without limitation, all costs applicable to design, engineering, and
other professional services, contractors, financing, licenses, permits,
equipment, furnishings, and supplies.
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ARTICLE 6. DUTIES OF CHC.
In addition to the other obligations and duties set forth in this
Agreement, CHC agrees as follows:
6.1. CHC shall provide to Franchisee a set of then-current prototype
plans and specifications (not for construction) as determined by CHC for a
typical System Hotel.
6.2. Upon reasonable request, CHC shall consult with and advise
Franchisee at CHC's home office concerning the construction and operation of the
Hotel.
6.3. CHC shall provide Franchisee on loan one copy of the Manual
setting forth standards of operation for the System and standards of quality,
cleanliness, and service for the Hotel. CHC shall have the right to add to and
otherwise modify the Manual from time to time to reflect changes in the
business, authorized products or services (or specifications therefor),
equipment requirements, quality standards, and operating procedures of the Hotel
as determined by CHC from time to time.
6.4. CHC shall make available to Franchisee and Franchisee's employees
such required and optional training courses, programs, conferences, seminars,
and materials, as CHC deems appropriate. All training shall be conducted at such
locations and at such times as CHC may designate and shall be subject to the
terms and conditions set forth in Section 7.2 of this Agreement.
6.5. CHC shall endeavor to maintain high standards of quality,
cleanliness, appearance, and service for the System, and to that end shall
conduct inspections of the System Hotels, evaluations of the services rendered
therein, and interviews of employees, agents, and customers of System Hotels,
all as CHC deems advisable and appropriate.
6.6. Franchisee acknowledges and agrees that CHC may (but is not
obligated to) make available to all System Hotels a reservation system subject
to the terms and conditions of Section 9.7 of this Agreement.
6.7. Franchisee acknowledges and agrees that CHC may (but is not
obligated to) make available to all System Hotels a property management system
subject to the terms and conditions of Section 7.12 of this Agreement.
6.8. Franchisee acknowledges and agrees that CHC may (but is not
obligated to) make available to all System Hotels a Candlewood Hotel Directory
subject to the terms and conditions of Section 9.6 of this Agreement.
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6.9. Franchisee acknowledges and agrees that any duty or obligation
imposed on CHC by this Agreement may be performed by a designee, employee, or
agent of CHC, as CHC may direct.
6.10. All of the obligations of CHC under this Agreement are to
Franchisee only, and no other party is entitled to rely on, enforce, or obtain
relief for breach of such obligations either directly or by subrogation.
ARTICLE 7. GENERAL DUTIES OF FRANCHISEE.
In addition to the other obligations and duties set forth in this
Agreement, Franchisee agrees as follows:
7.1. Franchisee covenants and agrees to commence, diligently pursue,
and complete construction of the Hotel and open for business in accordance with
Article 5 of this Agreement.
7.2 Franchisee shall employ or retain qualified management personnel as
prescribed in the Manual. All personnel employed or retained by Franchisee in
the position of general manager shall, within four months of employment, attend
and successfully complete, to CHC's satisfaction, CHC's general manager training
program. The four month period may be extended if space in the training program
is not available to Franchisee's personnel during the specified period. All
sales personnel, in addition to the general manager, shall, within four months
of employment, attend and successfully complete, to CHC's satisfaction, CHC's
sales training course. CHC may periodically make available other required or
optional training courses to Franchisee's personnel, other than those mentioned,
as well as other programs, conferences, seminars, and materials, and Franchisee
shall insure that such personnel as CHC may direct, satisfactorily complete any
required training within the time specified. All training shall be provided at
such locations as CHC may designate and Franchisee shall be responsible for
Franchisee's employees' travel expenses and room, board, and wages during the
training. Franchisee will not be charged tuition for the initial training of
Franchisee's first general manager and first director of sales for the Hotel.
Franchisee will be charged reasonable tuition for all other training of
Franchisee's personnel. CHC reserves the right to require, as a condition of
providing training, that personnel employed or retained by Franchisee execute
confidentiality agreements prepared by CHC. CHC reserves the right to limit the
availability of any optional training programs.
7.3. Franchisee expressly acknowledges that adherence to each and every
provision of the System is reasonable, necessary, and essential to maintain the
uniform image and favorable reputation of each Hotel and the success of CHC's
franchise program. Accordingly, Franchisee expressly agrees to comply with each
and every requirement of the System during the term
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hereof, as the same may be modified or supplemented from time to time by CHC in
its sole discretion.
7.4. Franchisee shall provide efficient, courteous, and high-quality
service to the public and shall operate the Hotel 24 hours a day every day
except as otherwise permitted by CHC in writing. Franchisee shall cause the
Hotel to honor all credit cards specified by CHC and enter into such credit card
arrangements with the issuers of such cards as may be necessary to do so.
7.5. Franchisee shall use the Hotel premises solely for the operation
of the franchised business and shall not use or allow the use of the premises
for any other purpose or activity (including, without limitation, the promotion
of any competing business) at any time without the prior written consent of CHC,
which may be granted or withheld in CHC's sole discretion.
7.6. The Hotel and everything located on the Hotel premises shall be
maintained in a clean, safe, orderly and first-class condition in accordance
with the standards specified in the Manual, and consistent with the image of a
clean, sanitary, attractive, safe, and efficiently operated economy
extended-stay hotel. The Hotel shall be constructed, maintained, and operated in
compliance with all applicable fire, safety, health, and sanitation laws,
ordinances, and regulations, and Franchisee shall maintain the highest health
standards and ratings applicable to the Hotel and otherwise maintain high moral
and ethical standards at the Hotel.
7.7. Franchisee shall perform such maintenance of the Hotel as is
required by CHC from time to time to maintain the condition, appearance, and
efficient operation of the Hotel, including, without limitation, (a) continuous
and thorough cleaning and sanitation of the interior and exterior of the Hotel,
(b) interior and exterior repair of the Hotel, (c) maintenance of equipment at
peak performance, (d) replacement of worn out or obsolete improvements,
fixtures, furnishings, equipment, computer systems, software, and signs with
approved improvements, fixtures, furnishings, equipment, computer systems,
software, and signs, and (e) periodic painting and decorating. At CHC's request,
which shall not be more often than once every five years, Franchisee shall
upgrade the Hotel within the time specified by CHC at Franchisee's expense to
conform to the building decor appearance and presentation of Proprietary Marks,
and trade dress consistent with CHC's then-current public image, including,
without limitation, such structural changes, remodeling, and redecoration and
such modifications to existing improvements as may be deemed necessary by CHC.
Except as described above, Franchisee shall make no additions, alterations, or
replacements to the Hotel or anything located on the Hotel premises without the
prior written consent of CHC.
7.8. Franchisee acknowledges and agrees (a) that this franchise and
Franchisee's right under this Agreement are granted for the number of guest
rooms specified herein on Exhibit A, and (b) that Franchisee shall not expand
the number of guest rooms in the Hotel without the prior written consent of CHC.
Should Franchisee propose to increase the number of such guest rooms, a fee
equal to the then-current initial franchise fee per guest room for each
additional
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guest room shall then be paid to CHC with Franchisee's request for approval of
such expansion. Such fee for the expansion shall become nonrefundable upon CHC's
approval of the proposed expansion.
7.9. Franchisee shall, at Franchisee's expense, comply with all
federal, state, and local laws, rules, ordinances, and regulations, and shall
timely obtain, and keep in force as required throughout the term of this
Agreement, any and all permits, certificates, licenses, and approvals necessary
for the full and proper conduct of the business franchised hereunder.
7.10. Franchisee shall notify CHC in writing within five days of the
commencement of any action, suit, or proceeding, and of the issuance of any
inquiry, subpoena, order, writ, injunction, award, or decree of any court,
agency, or other governmental instrumentality, arising out of, concerning, or
which may affect the operation or financial condition of the franchised
business, including, without limitation, any criminal action or proceeding
brought by Franchisee against employees, customers, or other persons.
7.11. Franchisee shall pay when due all taxes levied or assessed in
connection with the possession, ownership, or operation of the Hotel and all
taxes payable on royalties and other payments made to CHC or to any of the
Affiliated Companies (excluding income taxes payable by CHC or any of the
Affiliated Companies). In the event of any bona fide dispute respecting any tax
assessed against Franchisee, the Hotel, any personal property located therein,
or any payments due to CHC or any of the Affiliated Companies, Franchisee may
contest the validity or amount of the tax in accordance with procedures of the
taxing authority; provided, however, that Franchisee shall act with all due
diligence and shall in no event permit a tax sale or seizure against the Hotel
or any equipment, goods, or property located therein, or any impoundment of
payments due to CHC. Franchisee recognized that Franchisee's failure or repeated
delays in making prompt payment in accordance with the terms of any agreements,
leases, invoices or statements for purchase or lease of furniture, fixtures,
equipment, inventories, supplies, travel agent services, or other goods and
services will be detrimental to the reputation of Franchisee, CHC, and other
System franchisees. Franchisee shall timely pay when due all amounts owed by
Franchisee in connection with the operation of the Hotel.
7.12. If and when CHC makes available an automated property management
system for System Hotels, Franchisee shall install, maintain, and use the
automated property management system as developed and promulgated (in the Manual
or otherwise in writing) by CHC. Franchisee shall reimburse CHC for Franchisee's
equitable pro rata share of CHC's cost of developing and maintaining such
software, including, without limitation, enhancements, additions, substitutions,
or other modifications provided to the System by CHC.
7.13. If the Franchisee is at any time a corporation, limited liability
company, or partnership, Franchisee agrees and represents that:
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A. Franchisee has the authority to execute and deliver this
Agreement and to perform its obligations thereunder and is duly
organized or formed and validly existing in good standing under the
laws of the state of its formation or organization.
B. Franchisee's organizational documents or partnership
agreement will recite that the issuance and transfer of the ownership
interests of Franchisee are restricted by the terms and conditions of
this Agreement, and all certificates and other documents representing
an ownership interest in Franchisee will bear a legend referring to the
restrictions of this Agreement.
C. Exhibit B to this Agreement will completely and accurately
describe all of the owners of Franchisee and their beneficial ownership
interests in Franchisee.
D. Each of the owners of Franchisee at any time during the
term of this Agreement will sign an agreement in the form that CHC
prescribes undertaking to be bound jointly and severally by all
provisions of this Agreement and any ancillary agreements between CHC
or any of the Affiliated Companies and Franchisee, and that a material
breach of such agreement shall be deemed a material breach of this
Agreement. Franchisee and its owners agree to sign and deliver to CHC
such revised Exhibits B as may be necessary to reflect any changes in
the information contained therein within five days following the
occurrence thereof and to furnish such other information about
Franchisee's organization or formation as CHC may request.
E. Franchisee shall furnish CHC with its articles or
certificate of incorporation, bylaws, and partnership or limited
liability documentation or similar organization documents, and any
other documents CHC may reasonably request, and any amendments thereto
or restatements thereof.
7.14. If the Hotel (or any of the premises on which the Hotel is
located) is condemned or damaged by casualty, Franchisee agrees as follows:
A. Franchisee shall, at the earliest possible time, give CHC
full notice of any proposed taking of the Hotel or surrounding premises
by eminent domain or condemnation. If the Hotel is condemned or so
taken or such a substantial portion of the Hotel is condemned or so
taken as to render impractical the continued operation of the Hotel in
accordance with System standards, then in such event, this Agreement
shall terminate upon notice by CHC to Franchisee, and CHC shall share
in the condemnation or eminent domain award to the extent of the then
net present value of its lost royalty income (using a discount rate
equal to the prime rate for corporate loans at major U.S. money center
commercial banks as published in the "Money Rates" table of The Wall
Street Journal on the date of the award, or if such rate is no longer
published another similar index selected by CHC). If a non-substantial
condemnation shall occur, then in
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such event, Franchisee shall promptly make whatever repairs and
restoration may be necessary to make the Hotel conform substantially to
its former, character, and appearance according to plans and
specifications approved by CHC, and the resumption of normal operation
of the Hotel shall not be unreasonably delayed by Franchisee.
B. If the Hotel is damaged or destroyed by fire or other
casualty, Franchisee shall repair the damage without delay. If the
casualty requires closing the Hotel, Franchisee shall (i) immediately
notify CHC, (ii) commence reconstruction and repair as soon as
practicable, but in any event within 120 days after the closing of the
Hotel, (iii) repair or rebuild the Hotel in accordance with the
then-current System standards and specifications, and (iv) reopen the
Hotel for continuous operations under the System as soon as
practicable, but in any event within 12 months after closing the Hotel.
Franchisee shall give CHC at least 90 days advance written notice of
the date of such reopening.
C. The closing of the Hotel due to condemnation or casualty
shall not extend the term of this Agreement.
ARTICLE 8. QUALITY CONTROL AND SUPERVISION.
8.1. Franchisee agrees that substantial uniformity of quality at all
System Hotels is necessary and desirable for purposes of establishing and
protecting the shared identity, reputation, and goodwill associated with the
System and the Proprietary Marks. In order to better accomplish these
objectives, Franchisee agrees that:
A. The Hotel shall be operated in strict conformity with such
standards, specifications, methods, and techniques as CHC may, from
time to time, prescribe in the Manual, and Franchisee shall refrain
from deviating therefrom and from otherwise operating in any manner
which adversely reflects on the System, the Proprietary Marks, the
goodwill associated therewith, or CHC's rights therein.
B. Franchisee shall, at Franchisee's expense, purchase or
lease and install at the Hotel all fixtures, equipment, furnishings,
furniture, a telephone system, facsimile machine, computer systems,
reservation system, signs, supplies, and all other items ("FF&E")
specified by CHC. Franchisee shall refrain from installing in, on, or
about the Hotel, or permitting to be installed, without CHC's prior
written consent, any FF&E, electronic or video games, vending machines
or any other items not previously approved by CHC. The size, form,
color scheme, content (except for prices to be charged), and location
of all signs, advertisements, and graphic materials displayed in any
public area or guest rooms at the Hotel shall be as prescribed in the
Manual or otherwise approved in writing by CHC.
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8.2. The franchised business shall be conducted in accordance with the
Manual, as updated, supplemented, and modified from time to time, receipt of one
current copy on loan from CHC is hereby acknowledged by Franchisee. Franchisee
further acknowledges that establishing, maintaining, and protecting the good
will, reputation, and uniformity of the System requires strict adherence to this
Agreement and the Manual in all respects, it being agreed that every detail is
significant and material. Franchisee shall at all times insure that Franchisee's
copy of the Manual is kept current and up-to-date, and in the event of any
dispute as to the contents of the Manual, the terms of the master copy of the
Manual maintained by CHC at CHC's home office shall be controlling. Franchisee
shall maintain the Manual in a safe and secure location and shall report the
theft or loss of the Manual, or any portion thereof, immediately to CHC.
8.3. Franchisee hereby grants to CHC and its agents the right to enter
upon the premises of the Hotel at any reasonable time for the purpose of
conducting inspections. Franchisee shall (a) provide lodging, if available,
without charge to CHC's agent during such time as may reasonably be necessary to
complete such inspections; (b) cooperate fully with CHC's agents during the
inspections; and (c) take such steps as may be reasonably necessary to correct
any deficiencies detected during such an inspection, upon the written request of
CHC or its agents, within such reasonable time as may be specified therein.
Franchisee shall provide all information requested by CHC for the purpose of
CHC's conducting guest satisfaction audits and surveys.
8.4. If Franchisee develops any products, services, procedures, or
inventions deemed by CHC to be appropriate for use in other System Hotels, it is
understood and agreed that CHC (and other System franchisees) may use such
products, services, procedures, or inventions in other System Hotels without
obligation to compensate Franchisee, it being understood and agreed that the
benefit to the Franchisee from the overall enhancement of the System is
sufficient consideration for granting this right to CHC.
8.5. All marketing and promotion by Franchisee shall be factual,
ethical, and in good taste in the judgment of CHC and shall be subject to CHC's
approval as provided in Section 9.1 of this Agreement. Franchisee shall in all
dealings with its customers, suppliers, CHC, and the public adhere to the
highest standards of honesty, integrity, fair dealing, and ethical conduct.
Franchisee agrees to refrain from any business or advertising practice which, in
the subjective opinion of CHC, may be injurious to the business of CHC and the
goodwill associated with the Proprietary Marks and other System Hotels.
8.6. Within seven days of the receipt by Franchisee of any report from
any health department or other comparable agency, Franchisee shall mail a
complete copy of such report to CHC. Franchisee shall notify CHC in writing
within five days of the commencement of any action, suit, or proceeding, and of
the issuance of any order, writ, injunction, award or decree of any court,
agency, or other governmental instrumentality, which may adversely affect the
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operation or financial condition of Franchisee or the Hotel or of any notice of
violation of any law, ordinance, or regulation relating to health or sanitation.
8.7. CHC may from time to time suggest rates for lodging accommodations
and prices for the goods and other services offered by Franchisee. CHC and
Franchisee agree that the rates and prices suggested by CHC are recommendations
only and are not mandatory. Nothing contained in this Agreement shall be deemed
a representation or warranty by CHC that the use of CHC's suggested prices shall
produce, increase, or optimize profits.
ARTICLE 9. ADVERTISING.
Franchisee and CHC recognize the value of advertising and the
importance of the standardization of advertising programs to the furtherance of
the goodwill and public image of the System. In order to better accomplish these
objectives, the parties agree as follows:
9.1. All advertising, marketing, and sales materials used by Franchisee
in any medium shall be conducted in such manner, and shall conform to such
standards and requirements, as CHC may specify. By written notice to Franchisee,
CHC may request that franchisee submit to CHC for its prior written approval
(except with respect to prices to be charged), samples of all advertising,
marketing, and sales plans and materials and all other materials displaying the
Proprietary Marks that Franchisee desires to use which have not been prepared or
previously approved by CHC; provided, however, that no such deemed approval
shall relieve Franchisee from complying with the requirements of Section 8.5 of
this Agreement.
9.2. Franchisee shall obtain listings at Franchisee's expense in the
yellow and white pages of local telephone directories. Franchisee shall also pay
its share of the cost of any multiple-hotel local telephone book advertising.
9.3. CHC may, in its sole discretion, establish a Marketing,
Advertising and Direct Sales Fund (hereinafter, the "Marketing Fund"). The
Marketing Fund will be administered by a committee of not less than three
persons nor more than seven selected by a majority vote of the members of the
International Association of Candlewood Hotel Owners (IACHO) (hereinafter, the
"Marketing Committee"). Franchisee and all franchisees of the System shall be
members of IACHO and each member shall be entitled to the same number of votes
as the number of hotels for which such member then has open and operating. The
members of the Marketing Committee shall be elected at each annual meeting of
the IACHO. Any vacancies in the Marketing Committee shall be filled by a person
designated by the board of directors of the IACHO. The Marketing Fund will be
used by the Marketing Committee to meet any and all costs of developing and
preparing national, regional, point of sale, and local direct sales advertising
materials for use within the System, including, without limitation, costs
associated with developing, preparing, directing, administering, maintaining,
and disseminating advertising,
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marketing, promotional, and public relations materials; conducting marketing
research; maintaining a national sales and marketing staff and related expenses;
and preparing, producing, broadcasting, and disseminating advertising and
promotions, including, without limitation, radio, television, newspaper, and
magazine advertising, market surveys, public relations activities, and
employment of advertising agencies. The Marketing Committee shall choose and
determine the nature, theme, and timing of advertising and the kind and quality
of advertising materials to be provided to franchisees through the Marketing
Fund. All payments, plus income earned therefrom, shall be used exclusively for
the above-stated purposes, shall be maintained in an account separate from CHC
funds, and shall not be used to defray any of CHC's expenses. CHC shall, for
each of its company-owned System Hotels, make contributions to the Marketing
Fund at the same percentage of Room Revenues required of franchisees within the
System. The Marketing Committee or its designee shall direct all advertising,
marketing, and direct sales promotional programs and activities, with sole
discretion over the concepts, materials, and media used in such programs and
activities and the placement and allocation thereof. Franchisee acknowledges
that the intent of the Marketing Fund shall be to maximize general public
recognition, direct sales programs, and acceptance of the Proprietary Marks for
the benefit of the System, and the Marketing Committee or its designee shall
have no obligation, in administering the Marketing Fund, to make expenditures
for Franchisee which are equivalent or proportionate to any payments by
Franchisee or to ensure that any particular franchisee or any particular
franchised location benefits directly or pro rata from advertising or promotion
conducted under the Marketing Fund.
9.4. As long as this Agreement remains effective, Franchisee shall be a
member of The International Association of Candlewood Hotel Owners (hereinafter
"IACHO") or such successor association as may be sanctioned by CHC to serve as
an advisory council to CHC with respect to advertising, marketing, reservations,
and other matters relating to System Hotels. All franchisees of the System and
CHC shall be members of IACHO. As a member of IACHO, Franchisee shall have the
following rights and obligations:
A. Franchisee shall pay to IACHO all dues and assessments
authorized by IACHO and shall otherwise maintain its membership in
IACHO in good standing ("good standing" means IACHO dues and
assessments are current and Franchisee has not been given a notice of
its default under this Agreement). Such fees shall be consistently
applied to all franchisees in the System and CHC-owned Hotels.
B. On all matters on which members of IACHO in good standing
are authorized to vote under this Agreement and Bylaws of IACHO, each
franchisee member shall be entitled to one vote for each System Hotel
it has in operation and CHC shall be entitled to one vote for each
System Hotel operated by CHC for itself or for parties who are not
franchisees.
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C. CHC will, as it deems advisable, seek the advice and
counsel of IACHO, its board of directors, and committees. IACHO's
committees and their functions and membership will be subject to
approval in writing by CHC, which approval will not be unreasonably
withheld. Recognizing that IACHO must function in a manner consistent
with all franchises of the System, the parties will cause the governing
rules of IACHO to be consistent with this Agreement.
9.5. If CHC determines, in its sole discretion, to publish a Candlewood
Hotels Directory, Franchisee agrees to list the Hotel in the Candlewood Hotels
Directory and to furnish to CHC such information as CHC may request for that
purpose. Franchisee understands and acknowledges that the success and utility of
the Candlewood Hotels Directory may require that it contain information
concerning rates for lodging accommodations; that Franchisee shall have sole
discretion in determining any rates for the Hotel which appears in each
Candlewood Hotels Directory; and that CHC assumes no liability for, nor shall
CHC be deemed liable by reason of, any failure by Franchisee or CHC's other
franchisees to honor any Candlewood Hotels Directory rates for the period during
which each Candlewood Hotels Directory is in effect. If rates are required to be
included in the Candlewood Hotels Directory listing for the Hotel, seasonal and
other rate changes or differentials shall be specified, upon Franchisee's
request. Franchisee agrees not to charge higher rates than those that Franchisee
causes to be published in the Candlewood Hotels Directory and to comply with
such other requirements with respect to the Candlewood Hotels Directory as may
be specified from time to time in the Manual.
9.6. If CHC determines, in its sole discretion, to create and maintain
a reservation system for System Hotels, Franchisee shall participate in the
reservation system, and shall observe all terms and conditions of participation
specified by CHC. Franchisee shall purchase, install, and maintain at the Hotel
all equipment necessary for participation in the reservation system provided by
CHC, including a reservation terminal and related equipment and software and any
future enhancements, additions, substitutions, or other modifications specified
by CHC in the Manual or otherwise in writing. Franchisee shall also be
responsible for telephone line charges for connecting Franchisee's reservation
equipment to the reservation system and for the cost of supplies used in the
operation of the equipment and for all other related expenses.
ARTICLE 10. FINANCIAL REPORTING.
10.1. Franchisee shall, in the manner and form specified by CHC in the
Manual or otherwise in writing, prepare on a current basis (and preserve for at
least 5 years from the date of preparation) complete and accurate books and
records in accordance with generally accepted accounting principles concerning
Room Revenues and all financial, operating, marketing, and other aspects of the
Hotel and the franchised business, and maintain an accounting system which fully
and accurately reflects all financial aspects of the Hotel, the franchised
business, and Franchisee. Such books and records shall include, but not be
limited to, books of account, tax
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returns, governmental reports, register tapes, daily and other periodic reports,
and complete quarterly and annual financial statements (profit and loss
statements, balance sheets, and cash flow statements). Franchisee's obligation
to preserve such books and records shall survive the termination or expiration
of this Agreement. Unless otherwise directed by CHC in the Manual, Franchisee
shall maintain a fiscal year consisting of the 52-53 week period ending on the
Friday nearest December 31 of each calendar year (hereinafter, the "Fiscal
Year"), and the Fiscal Year shall have 13 fiscal periods (hereinafter, the
"Fiscal Periods") which are the four-week periods ending on the 4th, 8th, 12th,
16th, 20th, 24th, 28th, 32th, 36th, 40th, 44th, 48th, and the last Friday of the
Fiscal Year (or five-week period with respect to the 13th Fiscal Period of
certain Fiscal Years). The fiscal quarters of the Fiscal Year shall consist of
accounting periods of 12, 12, 12, and 16 or 17 weeks, respectively (hereinafter,
the "Fiscal Quarters").
10.2. On or before the 15th day of each Fiscal Period, Franchisee shall
submit to CHC a statement (in such form and detail as CHC may require from time
to time) reflecting the computation of all amounts then due under Section 4.1 of
this Agreement. The statement shall include information for the preceding month
as to Room Revenues, other revenues, expenses, occupancy and room rates data,
reservation data, and such other information as CHC may require.
10.3. Franchisee shall submit to CHC as soon as available but not later
than 90 days after the end of Franchisee's Fiscal Year, at Franchisee's expense,
a full and complete audited statement in writing setting forth the Room Revenues
and the computation of all amounts paid by Franchisee under Section 4.1 of this
Agreement for such Fiscal Year. Such statement shall be prepared in accordance
with generally accepted accounting principles, consistently applied, and shall
be accompanied by a report from an independent certified public accountant
reasonably satisfactory to CHC that the statement has been examined in
accordance with generally accepted auditing standards. In addition, at CHC's
request, Franchisee shall submit to CHC true copies of all state sales tax
returns relating to sales made at the Hotel at the same time the returns are
filed with state authorities, and such other records as CHC may reasonably
request from time to time, including, without limitation, state and federal
income tax returns of Franchisee.
10.4. CHC or its representatives, at CHC's expense, shall at all
reasonable times have the right to inspect or audit the books, accounts,
records, returns, and statements of Franchisee. The foregoing records may
include, but are not limited to, state and federal income tax returns, credit
card or any other third party charge account statements, and any bank, savings
and loan, brokerage, or other financial checking, money market, or savings
account used for the franchised business. Franchisee shall fully cooperate with
CHC and its representatives or agents conducting such inspections or audits and,
upon request, Franchisee shall submit a written response to any issues raised in
connection with said audits. In the event a discrepancy between reported Room
Revenues and actual Room Revenues is uncovered in any audit conducted pursuant
to this Section for any reporting period (monthly, quarterly, or annually),
Franchisee shall promptly pay the amount determined to be owing and, if the
discrepancy exceeds 2% of
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reported Room Revenues, Franchisee shall reimburse CHC for all costs of the
audit, including travel, lodging, and wages of personnel of CHC or third parties
required to conduct such audit. Franchisee shall also promptly reimburse CHC for
the cost of any audit (including salaries, travel, and living expenses)
necessitated by Franchisee's failure to file any financial report due hereunder
and any deficiency in royalties or Marketing Fund contributions disclosed by
such audit. At CHC's option, Franchisee shall also immediately pay to CHC
interest on the understated amount due from the date such amount was due until
paid at the lesser of 1.5% per month or the maximum rate permitted by applicable
law. The foregoing remedies shall be in addition to any other remedies CHC may
have. Submission by Franchisee of more than two written statements of Room
Revenues which under-report Room Revenues for any reporting period by 2% or more
(regardless of any subsequent cure) shall constitute a material breach of this
Agreement entitling CHC, at its option, the right to terminate this Agreement
pursuant to Section 14.1.C of this Agreement.
10.5. Franchisee hereby authorizes all banks and/or other financial
institutions with which Franchisee does business to disclose to CHC any
requested financial information in their possession relating to the Hotel.
Franchisee further authorizes CHC to disclose such information to prospective
Franchisees and state regulatory agencies, provided that such information is not
identified as relating to the Hotel unless required by law or regulation and
then only if CHC requests that such identification be held in confidence.
ARTICLE 11. PROPRIETARY MARKS AND TRADE SECRETS; COMPETITION.
11.1. Franchisee acknowledges that ownership of all right, title, and
interest in the System and all parts thereof, including, without limitation, the
Proprietary Marks and the design, decor, and image of all System Hotels, is and
shall remain vested solely in CHC. Franchisee expressly disclaims any right,
title, or interest therein or in any goodwill derived therefrom. Franchisee's
license to use the System, and any part thereof, is personal to Franchisee, and
Franchisee shall not license, sublicense, or allow the System, or any part
thereof, to be used by any other person, firm, or business association without
CHC's prior written approval. All uses of the System by Franchisee inure to the
benefit of CHC.
11.2. Franchisee shall not, directly or indirectly, at any time during
the term of this Agreement or thereafter, do, cause or suffer to be done any act
or thing disputing, attacking, or in any way impairing or tending to impair the
right, title, or interest of CHC in the Proprietary Marks or the System.
Franchisee shall immediately notify CHC in writing of all infringements or
imitations of the Proprietary Marks, and CHC shall exercise absolute discretion
in deciding what action, if any, should be taken. Franchisee shall fully
cooperate with CHC in the prosecution of any action to prevent the infringement,
imitation, or illegal use of the Proprietary Marks and agrees to be named as a
party in any such action at CHC's request. CHC shall bear any and all legal
expenses incident to Franchisee's participation, at CHC's
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request, in any action to prevent the infringement or illegal use of the
Proprietary Marks, except for the cost of any legal counsel separately retained
by Franchisee. Except as expressly provided in this Section , CHC shall not be
liable to Franchisee for any damages, costs, expenses, loss of profits or
business opportunities, or incidental or consequential damages of any kind or
nature whatsoever relating to any action involving the Proprietary Marks.
11.3. Franchisee shall use the Proprietary Marks as the sole
identification of the Hotel; provided, however, that in all public records and
in its relationship with other persons, on stationery, business forms, checks,
or as otherwise required by CHC, Franchisee shall indicate Franchisee's
independent ownership of the Hotel. Franchisee shall file so-called assumed name
or doing business certificates with local or state authorities, as required by
applicable law, showing its independent ownership of the Hotel. In no event
shall Franchisee use the Proprietary Marks in connection with the sale of any
product or service not authorized for sale at the Hotel. The Franchisee shall
not license, sublicense, or allow the Proprietary Marks to be used by any other
person or business entity without CHC's prior written approval. In adopting any
corporate, proprietorship, or partnership name, Franchisee shall not use the
Proprietary Marks or any variation or abbreviation thereof, or any words
confusingly similar thereto. Franchisee has no right to register any of the
Proprietary Marks. If it becomes advisable at any time in CHC's sole discretion
for CHC and/or Franchisee to modify or discontinue use of the Proprietary Marks,
and/or use one or more additional or substitute trade or service Proprietary
Marks, Franchisee agrees to comply therewith within a reasonable time after
written notice thereof by CHC.
11.4. Franchisee further acknowledges and agrees as follows:
A. CHC possesses certain confidential information, including,
without limitation, (i) the design for Systems Hotels, (ii) methods of
service and operations at System Hotels, (iii) knowledge of sales and
profit performance at any one or more System Hotels, (iv) knowledge of
test programs, concepts or results relating to new advertising and
promotional programs, (v) sources of suppliers of equipment, (vi)
advertising, promotion, and marketing techniques, (vii) methods and
information regarding the selection and training of managers and other
employees for System Hotels, and in general, methods, techniques,
formats, specifications, procedures, information systems, and
knowledge, in the operation and franchising of hotels. All of the
foregoing are hereinafter referred to as the "Trade Secrets".
B. CHC will disclose the Trade Secrets to Franchisee in
furnishing Franchisee with standard plans for the Hotel, in the Manual
and any temporary operating manuals, by providing training to
Franchisee hereunder, and in the performance of CHC's other obligations
and the exercise of its other rights under this Agreement. Franchisee
hereby agrees that all materials lent or otherwise made available to
Franchisee by CHC and all disclosures made to Franchisee hereunder
including, without limitation, the Manual and
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other confidential commercial information identified as such by CHC are
trade secrets of CHC and shall be kept confidential and used by Franchisee
only in the operation of the Hotel. Franchisee will not, nor permit anyone
else to, reproduce, copy, or exhibit any portion of the Manual or any
other confidential or proprietary information received from CHC.
Franchisee shall not divulge any such Trade Secrets to any person other
than Franchisee's employees and then only to the extent necessary for the
operation of the Hotel.
C. Franchisee shall acquire no interest in the Trade Secrets, other
than the right to utilize them in the development and operation of the
Hotel during the term of this Agreement. The use or duplication of the
Trade Secrets in any other business will constitute an unfair method of
competition. The Trade Secrets are proprietary and are disclosed to
Franchisee in confidence and solely on the condition that Franchisee
agrees, and Franchisee hereby agrees that Franchisee (i) will not use the
Trade Secrets in any other business or capacity; (ii) will maintain the
absolute confidentiality of the Trade Secrets during and after the term of
this Agreement; (iii) will not make unauthorized copies of any portions of
the Trade Secrets disclosed in written form, including, without
limitation, any plans, the Manual, bulletins or supplements and additions
thereto; and (iv) will operate and implement all reasonable procedures
prescribed from time to time by CHC to prevent the unauthorized use and
disclosure of the Trade Secrets. Franchisee shall immediately notify CHC
of any unauthorized use of disclosure of the Manual or any of the Trade
Secrets or if the Manual or any other manuals or materials containing any
Trade Secrets are lost or stolen.
D. The foregoing restrictions on Franchisee's disclosure and use of
Trade Secrets shall not apply to information, processes, or techniques
that are or become generally known and used by other similar hotels, other
than through disclosure (whether deliberate or inadvertent) by Franchisee,
and disclosure of Trade Secrets in judicial or administrative proceedings
to the extent that Franchisee is legally compelled to disclose such
information, provided, Franchisee shall have used his best efforts, and
shall have afforded CHC the opportunity, to obtain an appropriate
protective order or other assurance satisfactory to CHC of confidential
treatment for the information required to be so disclosed.
11.5. During the term of the Franchise Agreement, and for a period of two
years after any transfer or termination of the Franchise Agreement for any
reason, Covenantors shall not compete, or be associated, directly or indirectly
as an owner, officer, director, employee, consultant, 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.
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11.6. Unless the context otherwise requires, the term "Franchisee" as used
in this Article shall include, individually and collectively, all partners,
officers, directors, and managers of Franchisee, and holders, directly or
indirectly (and any partners, officers, directors, and managers of any such
holder), of five percent or more of the beneficial interest in Franchisee.
11.7. At CHC's request, Franchisee shall require and obtain execution of a
Covenant Agreement in the form substantially similar to that attached hereto as
Exhibit C, except for reasonable changes as may be necessary to comply with
applicable law, from time to time (including a Covenant Agreement applicable
upon the termination of a person's relationship with Franchisee) from any or all
of the following persons: (a) all officers, directors, and holders of a
beneficial interest of five percent or more of the securities of (i) Franchisee
and (ii) any corporation directly or indirectly controlling Franchisee, if
Franchisee is a corporation; (b) the general partners and any limited partners
(including any corporation or other entity, and the officers, directors, and
holders of a beneficial interest of five percent or more of the securities of
such corporation or other entity which controls, directly or indirectly, any
general or limited partner), if Franchisee is a partnership; and (c) the
managers and members (including any corporation or other entity, and the
officers, directors, and holders of a beneficial interest of five percent or
more of the securities of any corporation or other entity which controls,
directly or indirectly, any member or manager), if Franchisee is a limited
liability company. Failure by Franchisee to obtain execution of the Covenant
Agreement required by this Section , or to deliver such Covenant Agreement to
CHC, shall constitute a material breach of this Agreement.
11.8. Franchisee shall require every person employed as general manager or
director of sales of the Hotel to devote full time to such employment and to
agree to be bound by the restrictions set forth in this Article. Franchisee
shall also take all reasonable steps to require other employees to be bound by
the confidentiality provisions of this Article, and, if requested by CHC, to be
bound by the noncompetition provisions hereof. Upon CHC's request, Franchisee
shall promptly provide copies of all such agreements to CHC.
11.9. Franchisee shall not employ or seek to employ any person who is or
was within the immediate past six months employed by CHC, any of the Affiliated
Companies, or any other System franchisee or induce or seek to induce any such
person to leave his or her employment without the consent of such employee's
current employer. CHC shall not employ or seek to employ any person who is or
was within the immediate past six months employed by Franchisee or induce or
seek to induce any such person to leave his or her employment. These
restrictions shall not apply if the employee obtains written consent from his or
her previous employer before making application for new employment. Any party
violating the provisions of this Section shall pay to the former employer as
liquidated damages (which the parties agree are difficult of ascertainment) an
amount equal to two times the annual salary of the employee involved, plus all
costs and attorneys fees incurred by the former employer in connection with such
default. The parties hereto agree that each current and future franchisee in the
System shall be a third party beneficiary of the provisions of this Section ,
and shall be entitled to enforce the provisions
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hereof. CHC shall have no obligation to enforce the provisions of this Section
for the benefit of any current or future franchisee in the System.
11.10. In the event any provision of this Article is deemed by a court of
competent jurisdiction to be more restrictive than permissible at law or equity,
then Franchisee agrees that the provisions hereof may be reformed and modified
and enforced by such court to the maximum extent permissible under applicable
law and principles of equity. Franchisee agrees that specific performance and
injunctive relief are necessary and appropriate remedies for violations of this
Article and agrees to the enforcement of such remedies, but without prejudice to
the right of CHC to recover money damages, which are in no event a full and
adequate remedy for such violations.
ARTICLE 12. INSURANCE AND INDEMNITY.
12.1. During the term of this Agreement, Franchisee shall comply with all
insurance requirements of any lease, mortgage, or deed of trust covering the
Hotel as well as all insurance requirements of CHC as set forth in the Manual
from time to time. All insurance shall be procured as the earliest possible time
that Franchisee has an insurable interest with respect thereto, and shall be
written by insurance companies acceptable to CHC. At a minimum, Franchisee shall
maintain the following:
A. Comprehensive-commercial general liability insurance, in an
occurrence form, including premises, products/completed operations,
contractual liability, independent contractors, automobile liability
(owned, non-owned, and hired vehicles), liquor liability (if Franchisee
distributes, sells, serves, or furnishes alcoholic beverages), and
personal injury liability, with a combined single limit in the amount of
$10,000,000 per occurrence, and $15,000,000 in the aggregate, naming CHC
and its members, the Affiliated Companies, and each of their respective
owners, shareholders, managers, agents, representatives, officers,
directors, employees, partners, and other affiliates (except for CHC, all
of the foregoing entities and individuals are hereinafter collectively
referred to as the "Indemnitees") as additional insureds.
B. Workers' compensation insurance as required by applicable law,
employer's liability insurance with $1,000,000 minimum coverage, and such
other insurance as may be required by applicable law.
C. Insurance on the Hotel (including furniture, fixtures, equipment,
boiler and machinery) against such risks as CHC may specify, including
fire, lightning, vandalism, malicious mischief, flood (if located in a
flood hazard zone), earthquake (if available and the cost is not
excessive) and all other risks covered by the special extended coverage
endorsements, in an amount equal to full replacement value thereof.
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D. Business interruption covering loss of profits and necessary
continuing expenses, including coverage for payments of royalty fees and
contributions to the Marketing Fund, for any interruption in Franchisee's
business operations.
E. Fidelity bond coverage on all Hotel employees in an amount not
less than $250,000.
F. During any significant construction at the Hotel (including the
initial construction of the Hotel), Franchisee shall maintain or cause the
general contractor to maintain with a reputable insurer (i)
comprehensive-commercial general liability insurance, in an occurrence
form, including premises, contractual liability, automobile liability
(owned, non-owned, and hired vehicles), products/completed operations, and
independent contractors coverage, in at least the amount of $10,000,000
per occurrence and $15,000,000 in the aggregate, naming CHC and the
Indemnitees as additional insureds, (ii) workers' compensation as required
by applicable law, employer's liability insurance with $1,000,000 minimum
coverage, and such other insurance as may be required by law, and (iii)
builder's risk property insurance of not less than the full contract
price.
G. Such other insurance as may be customarily carried by other hotel
operators on hotels similar to the Hotel.
12.2. All policies of insurance (a) shall be written on a fully insured
basis with no deductibles in excess of $25,000 nor any self-insured retentions,
(b) shall be specifically endorsed to provide that the coverages will be primary
and that any insurance carried by any additional insured, including CHC and/or
the Indemnitees, shall be excess and non-contributory, (c) shall contain a
waiver of any rights of subrogation against CHC and the Indemnitees, and (d)
contain a severability of interest provision in favor of CHC and the
Indemnitees. At all times during the term of this Agreement, Franchisee will
furnish to CHC certificates of insurance evidencing the term and limits of
coverage in force, names of applicable insurers, and persons insured, and a
statement that coverage may not be canceled, altered, or permitted to lapse or
expire without 30 days' advance written notice to CHC. Revised certificates of
insurance shall be forwarded to CHC each time a change in coverage or insurance
carrier is made by Franchisee, and/or upon renewal of expired coverages. At
CHC's option, Franchisee may be required to provide certified insurance policy
copies. CHC may increase the minimum protection or coverage requirements of any
policy required under this Article, and may require different or additional
kinds of insurance at any time to reflect inflation, identification of special
risks, changes in law or standards of liability, higher damage awards or other
relevant changes in circumstances. Franchisee acknowledges and understands that
CHC makes no representation or warranty with respect to the adequacy or
sufficiency of the insurance required under this Article, and that Franchisee
shall have the sole responsibility to determine whether additional insurance or
higher limits are appropriate.
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12.3. If Franchisee does not obtain and maintain the insurance coverage
required by this Agreement, as revised from time to time by the Manual or
otherwise in writing, CHC may, but shall not be obligated to, procure such
insurance, and the cost or expense thereof, together with a reasonable fee for
CHC's expenses in so acting, shall be payable by Franchisee immediately upon
demand.
12.4. Franchisee shall indemnify, hold harmless, and promptly reimburse
CHC and the Indemnitees for, from, and against any and all fines, damages, legal
fees, costs, expenses, and other liabilities suffered or incurred by CHC and/or
the Indemnitees by reason of any actual or threatened claim, demand, lawsuit,
tax, penalty, investigation, or other proceeding (even where CHC's and/or
Indemnitee's negligence or other wrongful conduct is alleged) arising directly
or indirectly from, as a result of, or in connection with (a) the development,
construction, operation, condition, use, occupancy, or sale of the Hotel, (b)
any occurrence at or on the Hotel premises, (c) any environmental matters of any
kind pertaining to the Hotel, (d) any breach of any terms and provisions of this
Agreement by Franchisee, and (e) any offering of securities, units, or other
ownership interests of Franchisee, including, without limitation, the violation
of any federal and/or state securities laws. Upon CHC's request, Franchisee
shall defend CHC and/or Indemnitees against all such matters. In any event, CHC
shall have the right, through counsel of its choice, to control any matter to
the extent CHC reasonably determines that such matter may have a significantly
adverse effect on CHC and/or the Indemnitees. Franchisee shall also indemnify
and promptly reimburse CHC for all expenses reasonably incurred by CHC to
protect itself from, or to remedy, any breach of this Agreement by Franchisee.
Franchisee's indemnity obligations under this Agreement shall survive the
expiration or other termination of this Agreement and shall be in addition to
all other rights and remedies of CHC. Franchisee's obligations to indemnify CHC
under this Section shall not be limited in any way by reason of any insurance
which may be maintained by CHC, nor shall Franchisee's performance of its
obligation to maintain insurance relieve Franchisee of liability under this
indemnity provision or be construed to be a limitation on the amount of
Franchisee's indemnity obligations. The right of CHC and the Indemnitees to
indemnity under this Agreement shall arise notwithstanding that joint or
concurrent liability may be imposed on CHC and/or the Indemnitees by statute,
ordinance, regulation, or other law.
12.5. Franchisee shall notify CHC in writing within five days of receipt
of notice or knowledge of any claim, dispute, loss or damage, real or alleged,
arising from Franchisee's activities in, at or around the Hotel, whether or not
such claim names CHC. Franchisee has no authority to, and shall not, accept any
service of process on behalf of CHC, any of the Affiliated Companies, or the
Indemnitees.
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ARTICLE 13. TRANSFER OF INTEREST OR MANAGEMENT.
13.1. CHC shall have the right to transfer or assign all or any part of
its rights or obligations herein to any person or legal entity.
13.2. The rights and duties set forth in this Agreement are personal to
Franchisee and are granted in reliance on the individual and collective business
skill, financial capacity, and personal character of Franchisee and its
principals. Accordingly, neither Franchisee nor any immediate or remote
successor to any part of Franchisee's interest in this franchise, nor any
individual, partnership, corporation, or other legal entity which directly or
indirectly owns any interest in such entity, in the franchise or in the
Franchisee, shall sell, assign, transfer, convey, give away, pledge, mortgage,
or otherwise encumber any interest in this franchise or in Franchisee without
the prior written consent of CHC, which consent shall not be unreasonably
withheld by CHC. Any purported assignment or transfer, by operation of law or
otherwise, not having the written consent of CHC required by this Section shall
be null and void and shall constitute a material breach of this Agreement, for
which CHC may then terminate in accordance with Section 14.1.C without
opportunity to cure. If a transfer, alone or together with other previous,
simultaneous, or proposed transfers, would have the effect of transferring a
controlling interest (as reasonably determined by CHC) in this franchise or in
Franchisee, CHC, in its sole discretion, may require any or all of the following
as conditions of its approval:
A. All of Franchisee's accrued monetary obligations to CHC and the
Affiliated Companies and all other outstanding obligations related to the
franchised business shall have been satisfied.
B. Franchisee shall not be in default of any provision of this
Agreement, any amendment hereof or successor hereto, or any other
agreement between Franchisee and CHC, or the Affiliated Companies.
C. The transferor shall have executed a general release, in a form
prescribed by CHC, of any and all claims against CHC, the Affiliated
Companies, and the Indemnitees, in their corporate and individual
capacities, including, without limitation, claims arising under federal,
state and local laws, rules, and ordinances; provided, however, that all
rights enjoyed by the Franchisee and any causes of action arising in its
favor from the provisions of any applicable franchise laws and regulations
shall remain in force; it being the intent of this proviso that any
non-waiver provisions of such laws be satisfied.
D. The transferee (and, if transferee is other than an individual,
such owners of a beneficial interest in the transferee as CHC may request)
shall enter into a written assignment and assumption agreement, in a form
satisfactory to CHC, assuming and agreeing to discharge all of
Franchisee's obligations under this Agreement.
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E. The transferee (or, if transferee is other than an individual,
all owners of any beneficial interest in transferee) shall demonstrate to
CHC's satisfaction that transferee meets CHC's educational, managerial,
and business standards; possesses a good moral character, business
reputation, financial capacity, and credit rating; has the aptitude and
ability to conduct the business franchised herein (as may be evidenced by
prior related business experience or otherwise); and has adequate
financial resources and capital to operate the business.
F. The transferee (and, if transferee is other than an individual,
such owners of a beneficial interest in the transferee as CHC may request)
shall execute, for a term ending on the expiration date of this Agreement
and with such renewal term as may be provided by this Agreement, the
standard form franchise agreement then being offered to new System
franchisees and such other ancillary agreements as CHC may require for the
franchised business, which agreements shall supersede this Agreement in
all respects, and the terms of which may differ from the terms of this
Agreement; provided, however, that the transferee shall not be required to
pay any initial franchise fee and the royalties and marketing and
advertising contributions payable pursuant to Section 4.1 of this
Agreement shall remain the same.
G. Franchisee shall remain liable for all of the obligations to CHC
in connection with the franchised business prior to the effective date of
the transfer and shall execute any and all instruments reasonably
requested by CHC to evidence such liability.
H. At the transferee's expense, the transferee or, if requested by
Franchisee and consented to by CHC, the transferee's manager shall
complete any training program then in effect for franchisees upon such
terms and conditions as CHC may reasonably require.
I. Except in the case of a transfer pursuant to Section 13.5 of this
Agreement or a transfer to a corporation, partnership, or limited
liability company formed by the Franchisee for the convenience of
ownership and not involving a change of beneficial ownership, which
transfer meets the conditions set forth in Section 13.4 of this Agreement,
Franchisee shall pay to CHC a transfer fee in an amount equal to $5,000,
to cover CHC's administrative and other expenses in connection with the
transfer.
13.3. Franchisee shall grant no security interest, lien, mortgage, or deed
of trust on any or all of the real estate or fixtures of the Hotel unless the
secured party, lienholder, mortgagee, or beneficiary of the deed of trust
provides CHC with a non-disturbance agreement as to such real estate and/or
fixtures of the Hotel in form and substance reasonably acceptable to CHC.
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13.4. In the event that the Franchisee proposes, subsequent to the
execution of this Agreement, to transfer this franchise to a corporation,
partnership, or limited liability company formed by Franchisee, CHC's consent to
such transfer shall be conditioned upon satisfaction of and compliance with
Section 7.13 of this Agreement and to the following additional requirements:
A. Franchisee shall be the owner of all of the voting stock,
interests, or units of the corporation, partnership, or limited liability
company; and, if Franchisee is more than one individual, each individual
shall have the same proportionate ownership interest in the corporation,
partnership, or limited liability company as he had in Franchisee prior to
the transfer.
B. All transferors shall execute a written agreement personally
guaranteeing the full payment and performance of Franchisee's obligations
to CHC from the date of transfer and agreeing to be bound by all the terms
and conditions of this Agreement.
C. Transferee shall comply with all of the terms and conditions set
forth in Sections 13.2.A through 13.2.I of this Agreement.
13.5 If Franchisee is a natural person, his or her interest in the
franchise and this Agreement may pass to his or her estate at death, or to his
or her legal representative if Franchisee adjudicated to be legally
incapacitated, if adequate provision has been made, in the sole discretion of
CHC, for management of the Hotel and if the executor, administrator, or other
legal representative promptly advises CHC and assumes Franchisee's obligations
under this Agreement in writing. The estate may, with CHC's consent, which will
not be unreasonably withheld, transfer its interest in the franchise and this
Agreement to any one or more of the following if the transferee assumes
Franchisee's obligations under this Agreement in writing: the decedent's spouse,
parent, sibling, niece, nephew, descendant, or spouse's descendant. If an
interest in Franchisee is owned by a natural person, his or her interest in the
Franchisee may pass to his or her estate at death, or to a legal representative
in the event of legal incapacity, if adequate provision has been made, in the
sole discretion of CHC, for management of the Hotel and if the executor,
administrator, or other legal representative promptly advises CHC. The estate
may, with CHC's consent, which will not be unreasonably withheld, transfer the
interest in Franchisee to any one or more of the following if the transferee(s)
assumes in writing, on a continuing basis, the decedent's guarantee of
Franchisee's obligations under this Agreement: the decedent's spouse, parent,
sibling, niece, nephew, descendant, or spouse's descendant. If the death or
legal incapacity of the Franchisee or a person owning an interest in Franchisee
results in a transfer of a controlling interest as defined in Section 13.2 of
this Agreement, in addition to any consent given in accordance with the
foregoing, approval of transfer to a transferee in the manner provided in
Section 13.2 must be obtained within one year after the date of death or legal
incapacity.
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13.6. Securities, units, or other ownership interests in Franchisee may be
offered by public or private offering, or otherwise, only with the prior written
consent of CHC (whether or not CHC's consent is required under Section 13.2 of
this Agreement), which consent CHC may grant or withhold in its sole discretion
based solely upon what CHC deems to be in its best interests. All materials
required for such offering by federal or state law shall be submitted to CHC for
review prior to their being filed with any governmental agency; and any
materials to be used in any exempt offering shall be submitted to CHC for review
prior to their use. No Franchisee offering shall imply (by use of the
Proprietary Marks or otherwise) that CHC is participating in an underwriting,
issuance, or offering of Franchisee or CHC securities, and CHC's review of any
offering shall be limited solely to the subject of the relationship between
Franchisee and CHC. Franchisee and the other participants in the offering must
fully indemnify CHC in connection with the offering. For each proposed public
offering, Franchisee shall pay to CHC a nonrefundable fee of $20,000, or such
greater amount as is necessary to reimburse CHC for its reasonable costs and
expenses associated with reviewing the proposed offering, including, without
limitation, legal and accounting fees. For each private offering of securities,
Franchisee shall pay to CHC a fee in a reasonable amount determined by CHC to
reimburse CHC for time and expense associated with reviewing and approving or
disapproving the proposed private offering. Franchisee shall give CHC written
notice at least 90 days prior to the date of commencement of any offering or
other transaction covered by this Section . Fees required by this Section are in
addition to transfer fees otherwise required by this Article. Franchisee agrees
that it will not make a public offering of securities unless and until (a) CHC
has first made a public offering of its securities or three years after June 11,
1996, whichever is sooner, and (b) Franchisee has opened and is operating at
least five Candlewood Hotels, and CHC agrees that it will not unreasonably
withhold its consent to a public offering by Franchisee at any time after these
conditions are satisfied.
13.7. Notwithstanding any provision to the contrary contained in this
Article, Franchisee may transfer not more than an aggregate of 25% of the
outstanding voting shares, units, or ownership interests of a Franchisee
operating as a corporation, partnership, or limited liability company to
employees of Franchisee who are actively engaged in the 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 Franchisee. The ownership of such shares,
units, or ownership interests by such employees will be subject to all of the
terms and conditions of this Agreement, including, without limitation, Articles
11 and 13 of this Agreement. Franchisee 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. In addition, the
parties agree that, notwithstanding any provision to the contrary in this
Article, equity ownership interests in Franchisee owned by passive investors may
be transferred in amounts not exceeding 10% of the outstanding equity interests
in Franchisee without prior notice to or approval from CHC. For purposes of this
Agreement, "passive investor" shall mean any natural or legal person who (a)
owns in the aggregate not more than 10% of the outstanding equity interests in
Franchisee; (b) is not
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engaged directly, or indirectly through agents or employees, in management or
operations of the Franchisee as an officer, director, manager, general partner,
employee, consultant, or other similar or analogous capacity; (c) has no
agreements or understandings of any nature, directly, or indirectly, to act in
concert with any other person to participate in management or act in concert in
the purchase or sale or voting of equity interests in Franchisee; and (d) is not
related by blood or adoption to any nonpassive investor or officer, director or
manager of Franchisee as a parent, child, grandparent, grandchild, brother or
sister or by marriage to any person of such degree of kinship. Notwithstanding
this paragraph, Franchisee agrees to provide to CHC at any reasonable time upon
CHC's request the names, addresses, and ownership interests of Franchisee's
equity owners, and CHC shall have the right to inspect Franchisee's stock
ledgers or other ownership records at any reasonable time upon request. Passive
investors shall not be required to sign CHC Covenant Agreements, provided,
however, that their participation in any business that would satisfy the
definition of "passive investor" as stated above.
13.8. Franchisee shall not engage any management company to operate the
Hotel without the prior written approval by CHC of the management company, which
consent shall not be unreasonably withheld by CHC. Nevertheless, in order to be
approved by CHC, a proposed management company must be deemed by CHC, in its
reasonable judgment, qualified to manage the Hotel. CHC may refuse to approve
any proposed management company which, in CHC's reasonable judgment, is not
financially capable or responsible, is inexperienced or unqualified in
managerial skills or operatorial capacity or capability, or is otherwise unable
to adhere fully to the obligations and requirements of this Agreement. CHC may
also withhold its approval if the proposed management company does not provide
CHC with all information that CHC may reasonably request in order to reach such
decision. It is understood that confidential information and materials are, in
the normal course of business, imparted to System franchisees and managers, and
CHC will be under no obligation to approve a proposed management company or
replacement management company that is a franchisor or owner, or is affiliated
or associated with the franchisor or owner, of a hotel trade name which is
competitive with CHC, irrespective of the number of hotels operating under such
trade name. When CHC has approved in principle the management company nominated
by Franchisee, Franchisee shall have the right to negotiate and execute a
management agreement with such management company for the management and
operation of the Hotel, subject to the terms, conditions, and obligations of
this Agreement. Prior to such manager's assuming rights thereunder, the
management agreement shall be submitted to CHC for CHC's written approval, which
shall not to be unreasonably withheld. Such management agreement shall include
provisions providing that (a) the manager shall have the authority and
responsibility for the day-to-day management of the Hotel, (b) the Hotel will be
operated during the term of the management agreement in such a manner as shall
not detract from or modify the requirements of this Agreement or otherwise
adversely affect the operation and management of the Hotel, (c) that the manager
shall accept, abide by, and be subject to all rules, regulations, inspections,
and requirements of CHC set forth in this Agreement and (d) that if there is a
conflict between the management agreement and the terms of this Agreement, then
this Agreement shall govern and control.
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13.9. CHC's consent to a transfer of any interest in the franchise granted
herein shall not constitute a waiver of any claims it may have against the
transferring party, nor shall it be deemed a waiver of CHC's right to demand
exact compliance with any of the terms of this Agreement by the transferee.
ARTICLE 14. DEFAULT AND TERMINATION.
This Agreement may not be terminated except as provided in this Agreement.
Termination of this Agreement shall not relieve Franchisee of any unfulfilled
obligations to CHC created hereunder unless it is so agreed by CHC in writing.
14.1. This Agreement may be terminated as follows:
A. Upon the expiration of its term, or by CHC in the case of a
condemnation of a substantial portion of the Hotel in accordance with
Section 7.14 of this Agreement..
B. Upon the mutual agreement of the parties in writing to a
termination.
C. At CHC's option, effective immediately upon the giving of written
notice to Franchisee, if Franchisee (i) fails to open the franchised Hotel
and commence operations within the time schedule established under Article
5 of this Agreement; (ii) ceases to operate the Hotel or otherwise
abandons the business, or forfeits the legal right to do business in the
jurisdiction where the Hotel is located; (iii) is convicted of a felony or
other crime involving moral turpitude, consumer fraud, or crime or offense
CHC believes is likely to have an adverse effect on Franchisee's ability
to carry out the duties imposed by this Agreement or to have an adverse
effect on the System and the goodwill associated therewith; (iv) transfers
(including transfers following death or incompetency) of any rights or
obligations in violation of the terms of Article 13 of this Agreement; (v)
misuses or discloses confidential information in violation of Article 11
of this Agreement; (vi) knowingly makes any false statements in any report
or document submitted to CHC; (vii) submits more than two written
statements of Room Revenues which under-report Room Revenues for any
reporting period by 2% or more; (viii) suffers a final judgment to remain
unsatisfied or of record for 30 days or longer (unless supersedeas bond is
filed), or has execution levied against Franchisee's business or property,
or any suit is filed to foreclose any lien or mortgage against the
premises or equipment and not dismissed within 30 days; or (ix) becomes
insolvent or has a receiver appointed to take possession of Franchisee's
business or property or any part thereof or makes a general assignment for
benefit of creditors.
D. At CHC's option, without notice, in the event Franchisee shall
become bankrupt or become subject to a proceeding under any chapter of the
United States
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Bankruptcy Code, unless Franchisee shall: (i) timely undertake to reaffirm
the obligations under the Agreement, (ii) timely comply with all
conditions as legally may be imposed by CHC upon such an undertaking to
reaffirm the Agreement, and (iii) timely comply with such other conditions
and provide such assurance as may be legally required in or under relevant
provisions of the United States Bankruptcy Code; provided, however, that
the parties acknowledge that this Agreement constitutes a personal
services contract made in reliance on the qualifications and personal
characteristics of Franchisee and its directors, officers, managers,
shareholders, members, or partners, as the case may be, and in the
expectation of a material degree of personal involvement in the management
and operation of the franchised business, and consequently, the parties
agree that any attempt by any other party, including a trustee in
bankruptcy or any other third party, to assume or accept a transfer or
assignment of this Agreement shall be void, and that in no event shall
this Agreement or any rights or duties of Franchisee hereunder, be
transferred to any individual or entity who does not comply with all
requirements for transfer specified in this Agreement.
E. At the election of CHC, effective upon the expiration of 30 days
after giving of written notice, in the event Franchisee defaults, and does
not cure to CHC's reasonable satisfaction within the 30-day notice period,
in the performance of any other covenant or provision of this Agreement,
including without limitation, the obligation to pay when due any financial
obligation to CHC, the obligation to make reports and provide information
when due hereunder, or failure to maintain any of the standards or
procedures prescribed for the franchised business in this Agreement, the
Manual, or otherwise; provided, however, that Franchisee shall be entitled
to notice and opportunity to cure any such default only once in any
six-month period, and any subsequent occurrence of the same or
substantially similar default within such six-month period shall entitle
CHC, at its option, to terminate this Agreement effective immediately upon
the giving of notice and without opportunity to cure.
F. At the election of Franchisee, effective upon the expiration of
90 days after written notice, if after operating the Hotel for 26 Fiscal
Periods Franchisee, acting in good faith and after using all reasonable
and diligent efforts to operate the Hotel in a profitable manner, is
unable to operate the franchised Hotel at a profit.
G. At the election of the Franchisee, effective upon the expiration
of three months after the written notice to the franchisor, which notice
may be given at any time after the Hotel has been open and operating for
36 consecutive months. To be effective, such notice must be accompanied by
payment of a termination fee equal to the total of all royalty fees and
marketing fund fees (if any) owed by Franchisee for the 26 fiscal periods
preceding the notice. The giving of a termination notice by Franchisee
shall also terminate all further rights of the Franchisee under
Franchisee's Development
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Agreement, but shall not effect Franchisee's rights under any other then
existing Franchise Agreement with CHC.
14.2. No forbearance of CHC from asserting any default or giving any
permitted notice of termination shall constitute a waiver of such default or
right to terminate or an estoppel against such right as to any continuing
default or subsequent occurrence of a default, whether similar or dissimilar in
nature to the prior default. The rights of CHC to terminate this Agreement are
in addition to, and not in lieu of, other remedies available at law or equity
for defaults by Franchisee in the payment and performance of its obligations
hereunder.
ARTICLE 15. OBLIGATIONS UPON TERMINATION.
Upon the termination of this Agreement for any reason, all rights granted
hereunder to Franchisee shall terminate; and
15.1. Franchisee shall immediately and permanently cease to operate the
franchised business, and shall not thereafter, directly or indirectly, represent
itself to the public or hold itself out as a franchisee of CHC.
15.2. Franchisee shall immediately and permanently discontinue the use of
all Proprietary Marks, all similar names and marks, or any other designation or
mark indicating or tending to indicate that Franchisee is or was a franchisee of
CHC. Franchisee shall promptly amend or terminate any filings or registrations
with any governmental authorities containing or pertaining to the use of CHC's
name and Proprietary Marks. Franchisee shall not promote or advertise the fact
that it was formerly a franchisee of CHC.
15.3. Franchisee shall surrender and transfer to CHC or its designee any
and all rights to use the telephone numbers and other business listings used by
Franchisee for the franchised business. Franchisee agrees to cooperate and
execute any and all documents required to effect transfer of the telephone
numbers and other business listings from Franchisee to CHC or its designee.
15.4. Franchisee shall immediately turn over to CHC all materials,
including, without limitation, the Manual and all other manuals, all customer
and supplier lists, marketing materials, instructions, and brochures, and any
and all other materials relating to the operation of the franchised business in
Franchisee's possession, custody, or control, and all copies thereof (all of
which are acknowledged to be CHC's property), and shall retain no copy or record
of the foregoing, excepting only Franchisee's copy of this Agreement and of any
correspondence between the parties, and any other documents which Franchisee
reasonably needs for compliance with any provision of law.
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15.5. Franchisee shall immediately and permanently discontinue all
advertising as a franchisee of CHC, including but not limited to removal of all
signs and other identifying marks and colors, and shall destroy or surrender to
CHC any letterheads, forms, printed matter, and advertising containing CHC's
Proprietary Marks and any similar or related names marks or designations tending
to indicate that Franchisee is or was an authorized franchisee of CHC.
15.6. Franchisee shall, at its expense, immediately make such
modifications or alterations as may be necessary to distinguish the Hotel so
clearly from its former appearance and from other System Hotels as to prevent
any possibility of confusion therewith by the public, and to prevent the
operation of any business at the location of the Hotel by Franchisee or others
in derogation of this Section (including, without limitation, removal of all
distinctive physical and structural features identifying Hotel in the System and
removal of all signs and emblems, and changing of telephone numbers and other
directory listings). Franchisee shall, at Franchisee's expense, make such
specific additional changes as CHC may reasonably request for this purpose. If
Franchisee fails to initiate immediately and complete such alterations when
required by hereunder, Franchisee agrees that CHC or its designated agents may
enter the Hotel and adjacent areas, and hereby grants CHC an irrevocable license
and permit to go upon the Hotel premises for such purposes, at any time to make
such alterations, at Franchisee's sole risk and expense, without responsibility
for any actual or consequential damages to the property of Franchisee or others.
Franchisee acknowledges that such actions by CHC are authorized and permitted
and shall not be deemed a violation of any civil or criminal law or any basis
for an action under such laws by Franchisee or others. Franchisee expressly
acknowledges that its failure to make such alterations will cause irreparable
injury to CHC, and consents to entry, at Franchisee's expense, of an ex parte
order by any court of competent jurisdiction authorizing CHC or its agents to
take such action, if CHC seeks such an order.
15.7. Franchisee shall immediately and permanently cease using CHC's
System, including, but not limited to the Manual, any other operating or
training manuals or aids, advertising and promotional materials, and all
confidential material delivered to Franchisee pursuant to this Agreement.
15.8. CHC shall have the right, at its sole option, for a period of 60
days following termination, to purchase at Franchisee's cost all usable
materials owned by Franchisee bearing the Proprietary Marks, and/or to purchase
Franchisee's office equipment, furniture, fixtures and moveable signs used in
the Hotel or at the Approved Location at their fair market value. Franchisee
shall not during such 60 day period remove from the Hotel or the Approved
Location, transfer, assign, hypothecate, pledge, or otherwise encumber such
office equipment, furniture, fixtures, and moveable signs.
15.9. Franchisee shall promptly pay all sums owing to CHC and the
Affiliated Companies. In the event of termination for any default of Franchisee,
such sums shall include payment of all damages, costs, and expenses, including
reasonable attorneys' fees, incurred by
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CHC as a result of the default, which obligation shall give rise to and remain,
until paid in full, a lien in favor of CHC against any and all of the personal
property (including, without limitation, signs, equipment, furnishings,
furniture, and supplies) owned and used by Franchisee in connection with the
Hotel at the time of default.
15.10. Franchisee shall pay to CHC all damages, costs, and expenses,
including reasonable attorneys' fees, incurred by CHC in connection with
obtaining injunctive or other relief for the enforcement of any provisions of
this Article.
15.11. Except upon the expiration of the term of this Agreement pursuant
to Article 3, termination by CHC in connection with the condemnation of a
substantial portion of the Hotel pursuant to Section 7.14, or termination by
Franchisee pursuant to Section 14.1.F., Franchisee shall pay to CHC a lump sum
payment (as liquidated damages and not as a penalty or in lieu of any other
payments required under this Agreement) equal to the total of all amounts
required under Article 4 of this Agreement (franchise fees, royalty fees, and
marketing and advertising contributions) for (a) the 26 Fiscal Periods of
operation of the Hotel under the System preceding Franchisee's default, or (b)
if there have not been 26 full Fiscal Periods of actual operation under the
System, then for the period of time the Hotel has been in actual operation under
the System projected over a 26 Fiscal Period basis.
15.12. Termination of this Agreement shall not relieve Franchisee of the
obligations under Article 10 hereof to maintain and preserve financial and other
records and to make them available for inspection and audit by CHC.
15.13. All covenants, obligations, and agreements of Franchisee which by
their terms or by reasonable implication are to be performed, in whole or in
part, after the termination or expiration of the term of this Agreement, shall
survive such termination or expiration.
ARTICLE 16. ADDITIONAL COVENANTS.
16.1. Franchisee agrees and acknowledges that, prior to executing this
Agreement, Franchisee has made such investigation of CHC and the System as
Franchisee deems necessary, that Franchisee understands that the results of
operations of the franchised Hotel are dependent upon the efforts and management
of Franchisee, and Franchisee hereby assumes full responsibility for such
operations.
16.2. It is understood and agreed by all parties hereto that this
Agreement does not create a fiduciary relationship between them; that Franchisee
shall be an independent contractor; and, that nothing in this Agreement is
intended to constitute either party an agent, legal representative, subsidiary,
joint venturer, partner, employee, or servant of the other for the purpose
whatsoever. Nothing in this Agreement authorizes Franchisee to make any
contract,
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<PAGE> 41
agreement, warranty, or representation on CHC's behalf, or to incur any debt or
other obligation in CHC's name or on CHC's behalf; and that CHC shall in no
event assume liability for, or be deemed liable hereunder as a result of, any
such action, or by reason of any act or omission of Franchisee in its conduct of
the franchised business, or any claim or judgment arising therefrom against CHC.
Franchisee agrees that CHC is not in a position to, and does not undertake to,
exercise control over the employment, supervision, or discharge of Hotel
employees; Hotel maintenance; guest safety and health; or other matters arising
out of or affecting Hotel operations, which are within the responsibility of
Franchisee as a qualified independent business operator. Franchisee shall hold
itself out to the public as an independent contractor operating the business
pursuant to a franchise from CHC. Franchisee agrees to take such affirmative
action as may be necessary to do so, including, without limitation, exhibiting a
notice of that fact in a conspicuous place on the premises of the franchised
business, and, as directed by CHC, in Franchisee's advertising and on
Franchisee's agreements, forms, stationery, and promotional materials.
16.3. All payments to CHC hereunder shall be made payable to Candlewood
Hotel Company, L.L.C. and, except as provided in the next sentence, shall be
tendered to CHC in person at the address set forth in Article 18 below, or by
making such payment by mail, postage prepaid, to that address. At CHC's option,
Franchisee shall make payments to CHC hereunder by wire transfer to an account
or accounts specified by CHC. All payments received by CHC from Franchisee shall
be applied to the oldest obligation, regardless of any contrary designation by
Franchisee. Franchisee agrees that Franchisee will not, on grounds of the
alleged non-performance by CHC of any of its obligations hereunder, withhold
payment of any royalties, marketing and advertising contributions, amounts due
to CHC for purchases by Franchisee, or any other amounts due CHC.
ARTICLE 17. APPROVALS AND WAIVERS.
17.1. Whenever this Agreement requires the prior approval or consent of
CHC, Franchisee shall make a timely written request to CHC therefor, and such
approval or consent shall be obtained in writing. Except as otherwise expressly
provided herein, CHC may withhold any consent or approval herein at its
discretion.
17.2. CHC shall have no liability for withholding any consent or approval
or for any delay or inaction in connection therewith, and the granting of any
approval or consent shall not imply or constitute any representation, warranty,
guaranty, or endorsement of the matter approved or consented to or an assumption
of any liability in connection therewith.
17.3. No delay, waiver, omission, or forbearance on the part of CHC to
exercise any right, option, duty, or power arising out of any breach or default
by Franchisee, or any other franchisee, of any of the terms, provisions,
covenants, or conditions hereof shall constitute a
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waiver by CHC to enforce any such right, option, duty, or power as against
Franchisee, or as to subsequent breach or default by Franchisee. Subsequent
acceptance by CHC of any obligations due to it hereunder shall not be deemed to
be a waiver by CHC of any preceding breach by Franchisee of any terms,
provisions, covenants, or conditions of this Agreement.
ARTICLE 18. NOTICES.
Any and all notices required or permitted under this Agreement shall be in
writing and shall be personally delivered, mailed by certified or registered
mail, postage prepaid, return receipt requested, or sent via a nationally
recognized overnight delivery service, 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 Franchisee: Studio West Hotel Development Company, L.L.C.
101 Larkspur Landing, Suite 318
Larkspur, California 97124
ATTN: Karl K. Hoagland, III
Any notice by certified or registered mail or recognized overnight delivery
service shall be deemed to have been given at the date and time of mailing.
ARTICLE 19. ALTERNATIVE DISPUTE RESOLUTION.
19.1. Franchisee 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 Franchisee and
CHC, or Franchisee's operation of the 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 after cessation of negotiations.
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<PAGE> 43
A. 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.
B. 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.
19.2. Subject to Section 19.1 of this Agreement, all Disputes between
Franchisee 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.
A. 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 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.
B. Franchisee 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. Franchisee 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
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<PAGE> 44
as the claim to which it relates. Any such claim which is not submitted or
filed as described above will be forever barred.
C. Franchisee and CHC agree that arbitration will be conducted on an
individual, not a class-wide, basis, and that an arbitration proceeding
between Franchisee and CHC may not be consolidated with any other
arbitration proceeding involving Franchisee or CHC and another party.
19.3. Notwithstanding anything to the contrary contained in this Article,
Franchisee 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 Franchisee and CHC must
contemporaneously submit the Dispute for non-binding mediation under Section
19.1 and then for arbitration under Section 19.2 under this Agreement on the
merits as provided herein if such Dispute cannot be resolved through mediation.
Franchisee 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:
A. Any Dispute involving actual or threatened disclosure or misuse
of the contents of the Manual or any other confidential information or
Trade Secrets of CHC;
B. Any Dispute involving the ownership, validity, use of, or right
to use or license the Proprietary Marks;
C. Any action by CHC to enforce the covenants set forth in Article
11 and Article 13 of this Agreement; and
D. Any action by CHC to stop or prevent any threat or danger to
public health or safety resulting from the construction, maintenance, or
operation of the Hotel.
The provisions 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.
ARTICLE 20. ENTIRE AGREEMENT.
This Agreement, the documents referred to herein, and the attachments
hereto, if any, constitute the entire, full, and complete Agreement between CHC
and Franchisee concerning the subject matter hereof, and supersede all prior
agreements. No amendments, change, or variance
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from this Agreement shall be binding on either party unless mutually agreed to
by the parties and executed by their authorized officers or agents in writing.
ARTICLE 21. CONSTRUCTION AND MODIFICATION.
21.1. This Agreement contains the complete expression of the agreement
between the parties and supersedes all previous agreements and understandings
with respect to the Hotel. There are no promises, representations, inducements,
or agreements between them of any nature that are not contained herein. No
change in this Agreement will be valid unless in a writing signed by both
parties. Franchisee acknowledges and agrees that it received ample time and
opportunity to review the Agreement and seek legal counsel with respect to the
terms of this Agreement and the franchise granted hereby and is making this
Agreement based solely on its terms and not on any collateral representation or
promise, including, without limitation, any projections of profits to be
obtained by making this Agreement, which Franchisee acknowledges have not been
made, represented, or warranted to Franchisee.
21.2. This Agreement is governed by and shall be construed in accordance
with the laws of the State of Kansas.
21.3. 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.
21.4. This Agreement is made solely for the benefit of the parties hereto
and their respective successors and permitted assigns, and nothing herein shall
create any right to rely upon the terms hereof in favor of any third party nor
confer any right or remedy upon any third party, except as specifically provided
in Section 11.9 of this Agreement.
21.5. 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 provisions hereof.
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<PAGE> 46
21.6. All terms and words used in this Agreement, regardless of numbers
and genders in which they are used, shall be deemed to include singular or
plural and all genders as the context or sense of this Agreement or any
paragraph or clause herein may require.
21.7. All acknowledgments, promises, covenants, agreements, and
obligations herein made or undertaken by Franchisee shall be deemed jointly and
severally undertaken by all those executing this Agreement on behalf of
Franchisee.
21.8. Time is of the essence of this Agreement and all provisions hereof
shall be so interpreted. Any provision of this Agreement which imposes an
obligation after termination or expiration of this Agreement shall survive such
termination or expiration.
21.9. No right or remedy conferred upon or reserved to CHC or Franchisee
by this Agreement is intended to be, nor shall be deemed, exclusive of any other
right or remedy herein or by law or equity provided or permitted, but each shall
be cumulative of every other right or remedy.
21.10. Nothing herein contained 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.
21.11. In the event that Franchisee 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. Franchisee consents to the
exercise of jurisdiction by courts within Sedgwick County, Kansas over any
claims or counterclaims against Franchisee.
21.12. In the event CHC incurs legal fees or costs or other expenses to
enforce any obligation of Franchisee hereunder, or to defend against any claim,
demand, action or proceeding by reason of Franchisee's failure to perform or
observe any obligation imposed upon Franchisee by this Agreement, then CHC shall
be entitled to recover from Franchisee the amount of all legal fees, costs and
expenses, including reasonable attorneys' fees, whether incurred prior to, or in
preparation for or contemplation of the filing of any claim, demand, action, or
proceeding to enforce any obligation of Franchisee hereunder or thereafter or
otherwise.
ARTICLE 22. EXECUTION OF AGREEMENT.
22.1. This Agreement may be executed in counterparts, which together shall
constitute one agreement of the parties.
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22.2. By signing this Agreement, Franchisee acknowledges that it has
received a complete copy of this Agreement, with any Exhibits referred to herein
attached, at least five business days prior to the date on which this Agreement
was executed, and further acknowledges that it has received 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 on which
this Agreement was executed. Franchisee further acknowledges that no agent or
employee of CHC is authorized to make any representation or warranty
inconsistent with or in addition to the terms of this Agreement or CHC's
offering disclosure document. By signing this Agreement, Franchisee represents
and warrants to CHC that no such representation or warranty, including
specifically any representation as to the potential success or profitability of
the franchised business, has been made or relied upon.
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: /s/ JACK P. DEBOER
----------------- -----------------------------------
Its:
----------------------------------
"CHC"
HILLSBORO STUDIO HOTEL COMPANY, L.L.C.
DATED: July 25, 1996 By: /s/ KARL K. HOYLAND III
----------------- ------------------------------------
"Franchisee"
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<PAGE> 48
Exhibit A
CANDLEWOOD HOTEL COMPANY, L.L.C.
FRANCHISE AGREEMENT
APPROVED LOCATION
Street Address: 3133 Shute Road
City: Hillsboro State: Oregon Zip Code: 97124
Number of Guest Rooms at the Approved Location: 126
A-1
<PAGE> 49
Exhibit B
CANDLEWOOD HOTEL COMPANY, L.L.C.
FRANCHISE AGREEMENT
OWNERS OF FRANCHISEE
Beneficial
Interest in
Name of Owner Franchisee
Studio West Hotel Company 98%
- --------------------------------------------------------- --------------
Studio West Hotel Development Co. 2%
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
- --------------------------------------------------------- --------------
TOTAL 100%
B-1
<PAGE> 50
Exhibit C
CANDLEWOOD HOTEL COMPANY, L.L.C.
FRANCHISE AGREEMENT
COVENANT AGREEMENT
The form of Covenant Agreement currently offered by CHC is attached.
(Refer to Section 11.7 of Franchise Agreement.)
C-1
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PRO FORMA LOSS PER SHARE
<TABLE>
<CAPTION>
For the Period October 1, Six months
1995 (date of inception) Ended
to December 31, 1995 June 30, 1996
------------------------- -------------
<S> <C> <C>
Net loss $ (208,986) $ (773,768)
Pro forma weighted average shares outstanding 5,175,000 5,175,000
Pro forma net loss per share $ (.04) $ (.15)
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Candlewood Blue Ash, L.L.C.
Candlewood Englewood, L.L.C.
Candlewood Hotel Company, L.L.C.
Candlewood Jeffersontown, L.L.C.
Candlewood Omaha, L.L.C.
Candlewood Wichita Northeast, L.L.C.
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
Candlewood Hotel Company, L.L.C.
We consent to the inclusion herein in the registration statement (No. 333-12021)
on Form S-1 of Candlewood Hotel Company, Inc. of our report dated August 23,
1996, relating to the 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 and to the reference to our firm under
the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Wichita, Kansas
October 16, 1996
