<PAGE>
As filed with the Securities and Exchange Commission on January 20, 1998
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
CAVANAUGHS HOSPITALITY CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
WASHINGTON 7011 91-1032187
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
201 W. North River Drive,
Suite 100
Spokane, Washington 99201
(509) 459-6100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------------
DONALD K. BARBIERI
President and Chief Executive Officer
Cavanaughs Hospitality Corporation
201 W. North River Drive, Suite 100
Spokane, Washington 99201
(509) 459-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
BARRY LAWRENCE, ESQ. JAY L. BERNSTEIN, ESQ.
BRIAN HOYE, ESQ. ROGERS & WELLS
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP 200 Park Avenue
1999 Avenue of the Stars, Suite 1600 New York, New York 10166
Los Angeles, California 90067 (212) 878-8000
(310) 788-1000
-----------------
Approximate date of commencement of 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 this form is a post-effective amendment filed pursuant to Rule 462(d) 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 PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value
$.01 per share.............. 5,951,250 $14.00 $83,317,500 $24,579
====================================================================================================================
</TABLE>
(1) Includes 776,250 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of determining the registration fee.
-----------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
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 January 20, 1998
PROSPECTUS
5,175,000 SHARES [LOGO OF CAVANAUGHS
HOSPITALITY CORPORATION]
CAVANAUGHS HOSPITALITY CORPORATION
COMMON STOCK
All of the shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by Cavanaughs
Hospitality Corporation (the "Company"). Prior to the Offering, there has been
no public market for the Common Stock of the Company. The Company anticipates
that the initial public offering price per share will be between $12.00 and
$14.00. See "Underwriting" for a discussion of the factors that will be
considered in determining the initial public offering price. Application has
been made to list the Common Stock on the New York Stock Exchange (the "NYSE")
under the symbol "CVH."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
MATERIAL RISKS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE COMMON STOCK.
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.
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS AND COMPANY (2)
COMMISSIONS (1)
- --------------------------------------------------------------------------------
Per Share............ $ $ $
Total (3)............ $ $ $
================================================================================
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 776,250 additional shares of Common Stock on the
same terms and conditions set forth above. If such additional shares are
purchased by the Underwriters, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the shares of Common Stock
will be made against payment on or about , 1998 at the office of
CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, One World Financial Center, New
York, New York 10281.
------------------
CIBC OPPENHEIMER NATIONSBANC MONTGOMERY SECURITIES LLC
The date of this Prospectus is ____________, 1998
<PAGE>
[ON THE INSIDE FRONT COVER OF THE PROSPECTUS IS A MAP OF CERTAIN STATES IN THE
NORTHWESTERN UNITED STATES HIGHLIGHTING VARIOUS CITIES AND, BELOW, THE LOCATIONS
WHERE THE COMPANY HAS PROPERTIES AND PROVIDES ENTERTAINMENT, MANAGEMENT AND
SERVICES.]
[ON THE INSIDE BACK COVER OF THE PROSPECTUS IS A COLLAGE REPRESENTING FEATURES
OF THE ENTERTAINMENT, MANAGEMENT AND SERVICES DIVISION AND PHOTOS OF SOME OF THE
COMPANY'S HOTELS, OFFICE AND RETAIL BUILDINGS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE ITS
MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the Combined Financial Statements and
notes thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise requires, all references in this Prospectus to the "Company" include
Cavanaughs Hospitality Corporation, its subsidiaries, including Cavanaughs
Hospitality Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), and its predecessors. Unless otherwise indicated, all information
in this Prospectus (i) assumes an initial public offering price of $13.00 per
share (which is the midpoint of the range set forth on the cover page of this
Prospectus), (ii) gives retroactive effect to the merger of Goodale & Barbieri
Companies, the Company's predecessor, and Barbieri Investment Company which
occurred in November 1997 (the "Merger"), whereby the Company was recapitalized
and 7,084,251 shares of common stock, par value $.01 per share (the "Common
Stock"), were issued to the existing shareholders and (iii) assumes that the
Underwriters' over-allotment option is not exercised. As used herein, the term
"Northwest" includes the states of Washington, Oregon, Idaho, Montana, Utah and
Alaska, northern California and the Canadian provinces of Alberta and British
Columbia.
THE COMPANY
Cavanaughs Hospitality Corporation is a hotel operating company that owns,
operates, acquires, develops, renovates and repositions full service hotels
throughout the Northwest under its proprietary brand name, "Cavanaughs". The
Company's hotel portfolio contains 11 full service hotels (the "Hotels"), with
2,369 guest rooms and approximately 120,000 square feet of meeting space,
located in Seattle, Spokane, Yakima and Kennewick, Washington; Idaho Falls and
Post Falls, Idaho; and Kalispell, Montana. The Company plans to pursue
additional growth opportunities by continuing to acquire and develop full
service hotels in the Northwest. The Company has entered into purchase
agreements to acquire two additional full service hotels, containing 343 guest
rooms and approximately 14,500 square feet of meeting space, located in
Kalispell, Montana and Portland, Oregon. With an average of more than 20 years
of experience in the lodging industry, management believes the Company enjoys an
excellent reputation in, and its Cavanaughs brand name is well recognized
throughout, the Northwest. The Company also provides entertainment services,
including event ticketing and theatrical presentations and other special events,
property management services for third parties and owns and manages retail and
office properties.
The Company is seeking to become the dominant full service hotel company in
the Northwest by providing customers with access to a Cavanaughs brand hotel in
multiple locations throughout the region. As a result of consolidation among
hotel chains, the Company believes there is an absence of a dominant Northwest
based, regionally focused hotel company. The Company's growth strategy focuses
on: (i) the acquisition and re-branding of full service hotels with the
Cavanaughs name, (ii) the acquisition, conversion and redevelopment of non-hotel
properties into Cavanaughs brand hotels, (iii) the construction of new
Cavanaughs hotels and (iv) the expansion of existing Cavanaughs Hotels.
The Company's operating strategy is designed to enhance its revenue and
operating margins by increasing revenue per available room ("REVPAR"), average
daily rates ("ADR"), occupancy and operating efficiencies at the Hotels. This
strategy includes: (i) building brand name recognition by maintaining its
strategic focus on the Northwest; (ii) promoting a coordinated marketing program
utilizing corporate level sales and marketing departments in conjunction with
local hotel-based sales and marketing personnel; (iii) controlling operating
expenses and achieving cost reductions through operating efficiencies and
economies of scale; (iv) enhancing guest satisfaction and loyalty by providing
high quality service; (v) utilizing the Company's yield management and
proprietary management information systems to enable the general managers of
each Hotel to optimize REVPAR, ADR, occupancy and net income; (vi) maintaining a
consistent level of quality at the Hotels through its maintenance and capital
expenditure programs; (vii) emphasizing the quality of the Company's food and
beverage services to attract convention, group and special event business and to
create local awareness of the Hotels; (viii) providing valuable guest benefit
programs that promote customer loyalty, such as frequent flier mileage and
repeat guest programs; and (ix) attracting and retaining qualified employees by
providing on-going training and stock incentive programs at all levels of
employment to enhance productivity and align the efforts of employees with the
Company's objectives. For the fiscal year ended October 31, 1997, the Company's
3
<PAGE>
revenues were $52.0 million, operating income was $10.7 million, net income was
$1.8 million, REVPAR was $45.72 and ADR was $73.43. On a pro forma basis,
giving effect to the three Hotels acquired since October 31, 1997, the two
hotels under contract to be acquired and the Offering, for the year ended
October 31, 1997, the Company's revenues were $77.4 million, operating income
was $14.6 million, net income was $5.6 million, REVPAR was $39.09 and ADR was
$65.40.
The Company has received a commitment from U.S. Bank to provide, upon
consummation of the Offering, up to $80.0 million under a revolving credit
facility (the "Revolving Credit Facility") which will be used by the Company to
finance property acquisitions, development and capital improvements and for
general corporate purposes. As an alternative to debt financing, the Company may
issue shares of Common Stock or units of limited partner interests in the
Operating Partnership ("OP Units") as consideration in future hotel
acquisitions. The issuance of OP Units in exchange for hotels may allow the
current owners of such hotels to achieve certain tax advantages when selling
such hotels to the Company.
In addition to the Hotels, the Company operates two other divisions: (i)
entertainment, management and services and (ii) rental operations. The
entertainment, management and services division includes computerized event
ticketing through G&B Select-a-Seat, which was founded in 1987 and distributed
in excess of 2.0 million tickets in 1997, and the presentation of shows and
special events through G&B Presents, which was also founded in 1987 and has
presented over 79 Broadway theatrical presentations and special events in the
last ten years. These services generate income from ticket sales and handling
fees as well as additional room occupancy at the Hotels. The entertainment,
management and services division is supported by the same Company-operated toll-
free call center (the "Toll-Free Call Center") used for hotel reservations. The
Company's rental operations division includes ownership of three office
properties and one retail property containing in excess of 590,000 square feet
of leasable space, the majority of which are located near the Hotels, and third-
party management of more than 3.1 million square feet of retail and office
properties and approximately 2,200 residential units throughout the Northwest.
The Company, which was formerly known as Goodale & Barbieri Companies, has
been a family-owned enterprise since it was founded in 1937. Between 1937 and
1976, the Company focused on third-party property management services and real
estate development in Spokane, Washington. The Company's history of owning and
operating hotels commenced in 1976 when it constructed the River Inn in Spokane.
In 1980, the Company established its proprietary Cavanaughs brand name. After
changing its name in October 1997 to Cavanaughs Hospitality Corporation, the
Company merged with Barbieri Investment Company, an affiliated Washington
corporation ("BIC"), on November 3, 1997. In connection with its merger with
BIC, the Company contributed certain assets not related to its core hospitality
business, including, among other things, a long-term residence inn and a milk
processing and distribution business, to a wholly-owned subsidiary and
distributed the capital stock of such subsidiary, as well as the capital stock
of another wholly-owned subsidiary owning recreation real estate in Priest Lake,
Idaho and a retail sales operation, to the shareholders of the Company. Shortly
thereafter, the Company contributed substantially all of its assets, including
its interests in various family limited partnerships, to the Operating
Partnership in exchange for general and limited partner interests therein. The
Company is the sole general partner of the Operating Partnership and owns a
controlling 98.8% interest therein. All of the Hotels and the other assets of
the Company are held by or for the benefit of, and substantially all of the
Company's operations are conducted through, the Operating Partnership.
Since 1968 when Donald Barbieri, the Company's Chairman, President and
Chief Executive Officer, joined the Company, the Company has grown from five
employees to approximately 1,900 employees. The Company's principal executive
offices are located at 201 W. North River Drive, Suite 100, Spokane, Washington
99201 and its telephone number is (509) 459-6100. The Company's website address
is www.cavanaughs.com.
INDUSTRY OVERVIEW
The domestic lodging industry completed its third year of record
profitability in 1996, during which it produced record income of $12.5 billion.
Coopers & Lybrand L.L.P.'s Hospitality Directions (November 1997) ("Coopers &
Lybrand Hospitality Directions") estimates that the industry is expected to
again achieve record profitability in 1997.
4
<PAGE>
Coopers & Lybrand Hospitality Directions indicates that average U.S. hotel
occupancy reached 65.1% in 1996, its highest level in 13 years. U.S. hotel
occupancy is expected to decline slightly in 1997 to 64.6% due to supply growth
exceeding demand growth. The increase in room supply in the full service hotel
segment has been lower than the limited service hotel segment due, in part, to
the higher cost of developing a full service hotel. High occupancy during 1992
to 1997 has provided hotel operators with the ability to support increases in
ADR without affecting occupancy percentages. Sustained ADR growth has
contributed to total lodging industry revenue growth which was 8.6% in 1996 and
is expected to be 8.5% in 1997.
The following table reflects the percentage changes in REVPAR, ADR and
occupancy in 1996 and 1997, compared to 1995 and 1996, respectively, for (i) the
Hotels that were open for each of the periods presented and (ii) all U.S.
hotels.
<TABLE>
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PERCENTAGE CHANGE VERSUS PRIOR PERIOD
-----------------------------------------------------------------
REVPAR(1) ADR OCCUPANCY(2)
--------------------- --------------- ---------------
1996 1997 1996 1997 1996 1997
---- ---- ---- ---- ---- ----
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Cavanaughs Hotels........ 8.3% 8.7% 9.3% 9.1% -1.5% -1.6%
U.S. Hotels (3).......... 6.2% 5.5% 6.2% 6.1% 0.0% -0.7%
</TABLE>
_____________________________________________________________
(1) Determined by dividing annual room revenue by annual available rooms.
(2) The occupancy as a percentage of available rooms declined slightly,
primarily because of the addition of new rooms associated with the opening
of Cavanaughs on Fifth Avenue, which management believes has not reached
stabilized occupancy.
(3) Source: Coopers & Lybrand Hospitality Directions (November 1997).
Lodging room demand has historically tracked the national economy. In
1997, the U.S. economy's ongoing expansion has been marked by low inflation and
unemployment and, in the northwest states of Idaho, Oregon and Washington,
employment and population growth has been above national averages. In addition,
according to the Federal Reserve Bank of San Francisco, for the twelve months
ended August 1997 the metropolitan areas of Seattle, Washington and Portland,
Oregon were the fourth and tenth fastest growing metropolitan economies in the
nation, respectively. The northwest region of the United States is expected to
continue to achieve above average economic performance and population growth
through the year 2000, according to the U.S. Bank 1997 Regional Economic Review
and Forecast.
5
<PAGE>
HOTEL PROPERTIES
The Company's hotel portfolio currently contains 11 full service Hotels,
with 2,369 guest rooms and approximately 120,000 square feet of meeting space,
located in the Northwest. In addition, the Company has entered into purchase
agreements to acquire two additional full service hotels. The following table
sets forth certain information regarding the Company's hotel portfolio and
hotels under contract.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
MEETING ------------------------------
YEAR BUILT/ YEAR GUEST SPACE AVERAGE
LOCATION ACQUIRED RENOVATED ROOMS (SQ. FT.) REVPAR ADR OCCUPANCY
------------- --------- --------- ------- --------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hotels Owned as of October 31, 1997:
Cavanaughs on Fifth Avenue Seattle, WA 1996 1996 297 12,500 $73.55 $116.24 64.9%
Cavanaughs Inn at the Park Spokane, WA 1983 1997 402 26,300 48.61 80.90 61.1
Cavanaughs River Inn Spokane, WA 1976 1997 245 3,700 40.17 53.01 74.2
Cavanaughs Fourth Avenue Spokane, WA 1991 1997 153 2,600 23.63 48.33 51.7
Cavanaughs at Yakima Center Yakima, WA 1991 1997 155 11,000 37.13 55.98 63.3
Cavanaughs Gateway Hotel Yakima, WA 1997 (1) 1997 172 8,000 34.16 58.96 57.9
Cavanaughs at Columbia Center Kennewick, WA 1978 1997 162 9,700 31.15 55.86 58.9
Cavanaughs at Kalispell Center Kalispell, MT 1986 1997 132 10,500 36.89 59.30 63.2
------ ------- ------ ------- ----
Total/Weighted Average for
Owned Hotels (2) 1,718 84,300 $45.72 $73.43 63.0%
Hotels Acquired since October 31, 1997:
Cavanaughs Ridpath Hotel Spokane, WA 1998(3) 1996 342 16,000 $33.49 $58.43 57.3%
CCavanaughs on the Falls Idaho Falls, ID 1998(4) 1994 142 8,800 34.49 57.38 60.1
Cavanaughs Templins Resort Post Falls, ID 1998(5) 1996 167 11,000 36.45 62.65 58.2
</TABLE>
Hotels Currently Under Contract:
<TABLE>
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Cavanaughs Outlaw Hotel Kalispell, MT 1998(6) 1995 220 11,000 $29.88 $68.88 43.4%
Cavanaughs Hillsboro Hotel Portland, OR 1998(7) 1997 123 3,500 50.13 72.38 69.3
------ ------- ------- ------- ----
Total/Weighted Average for Hotels
Acquired or Under Contract
Since October 31, 1997 994 134,600 $35.40 $62.99 56.2%
Total/Weighted Average for All
Hotels 2,712 218,900 $39.09 $65.40 59.8%
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</TABLE>
(1) Leased by the Company on October 15, 1997. See "Business and Properties --
Hotel Properties."
(2) The total/weighted average for owned Hotels includes REVPAR, ADR and
average occupancy of Cavanaughs Gateway Hotel for the period from October
15, 1997 through October 31, 1997.
(3) Leased by the Company on January 1, 1998. See "Business and Properties --
Hotel Properties."
(4) Acquired by the Company on January 7, 1998.
(5) Expected to be acquired by the Company in February 1998.
(6) The Company has entered into a purchase agreement to acquire this hotel,
subject to the satisfaction of normal closing conditions, for a purchase
price of $9.9 million within 60 days of the closing of the Offering. This
hotel, which is currently known as the Outlaw Inn, will be re-branded as
the "Cavanaughs Outlaw Hotel" upon acquisition.
(7) The Company has entered into a purchase agreement to acquire this hotel,
subject to the satisfaction of normal closing conditions, for a purchase
price of $5.7 million. This hotel, currently known as the Hallmark Inn,
will be re-branded as the "Cavanaughs Hillsboro Hotel" upon acquisition.
6
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STRUCTURE OF THE COMPANY
The Company is the sole general partner of the Operating Partnership. The
Company will conduct substantially all of its business, and will hold
substantially all of the Hotels and other assets through, the Operating
Partnership. As sole general partner of the Operating Partnership, the Company
has exclusive power to manage and conduct the operations of the Operating
Partnership. Subject to certain holding period requirements, OP Units will be
exchangeable, at the option of the holders thereof, for cash in an amount equal
to the market value of the shares of Common Stock. The Company has the right,
however, if OP Units are presented for exchange, to deliver to the holder of
such OP Units, in lieu of cash, shares of Common Stock, on a one-for-one basis
(subject to adjustment in the event of stock splits, dividends, combinations and
reorganizations). As general partner of the Operating Partnership, whenever the
Company shall issue shares of capital stock, such as in the Offering, the
Company will contribute the net proceeds therefrom to the Operating Partnership
and the Operating Partnership will issue to the Company an equivalent number of
OP Units with rights corresponding to the shares of capital stock issued by the
Company. See "Partnership Agreement of the Operating Partnership." In addition
to the Operating Partnership, the Company holds a 50% general partner interest
in Cowley Street Limited Partnership, a Washington limited partnership which
owns Cavanaughs Fourth Avenue. Each of G&B Select-a-Seat, G&B Presents and G&B
Real Estate Services are fictitious business names of the Company and operate
within the Company's entertainment, management and services division which will
continue to be operated by the Company following the Offering for the benefit of
the Operating Partnership.
The following diagram depicts the ownership structure of the Company upon
completion of the Offering:
[GRAPH APPEARS HERE]
7
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THE OFFERING
Common Stock Offered by the Company........ 5,175,000 shares
Common Stock Outstanding after the
Offering................................. 12,270,251 shares (1)
Use of Proceeds............................ The Company expects to use the net
proceeds of the Offering to repay
certain indebtedness, including
indebtedness incurred with respect
to certain acquisitions, and for
general corporate purposes. See
"Use of Proceeds."
Proposed NYSE symbol....................... "CVH"
______________
(1) Includes 7,084,251 restricted shares owned by David Barbieri, Donald
Barbieri, Mark Barbieri, Richard Barbieri, Stephen Barbieri, Thomas
Barbieri, David Bell and certain family trusts (collectively, the "Barbieri
Family") and an aggregate of 11,000 restricted shares to be issued to five
of the Company's employees concurrently with the Offering. See "Management
--Restricted Stock and Certain Stock Option Grants." Excludes 150,817
shares issuable upon exchange of currently outstanding OP Units, which units
may not be exchanged by the holders thereof for one year from the date of
this Prospectus. See "Partnership Agreement of the Operating Partnership."
Excludes 1,489,000 shares reserved for issuance with respect to options or
stock awards to be granted under the Company's 1998 Stock Incentive Plan
(the "1998 Plan"), Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and the Company-Wide Stock Option Plan (the "Company-Wide
Plan" and together with the Employee Stock Purchase Plan and the 1998 Plan,
the "Plans."). See "Management."
8
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SUMMARY COMBINED FINANCIAL AND OTHER DATA
The following table sets forth summary combined financial data of the Company
as of and for the five years ended October 31, 1997. The summary combined
statement of income data for the fiscal years ended October 31, 1993 and 1994
and the summary combined balance sheet data as of October 31, 1993, 1994 and
1995 are derived from the Company's unaudited financial statements and reflect
all normal recurring adjustments, which in the opinion of management, are
necessary for a fair presentation. The summary combined statement of income
data for the fiscal years ended October 31, 1995, 1996 and 1997 and the summary
combined balance sheet data as of October 31, 1996 and 1997 are derived from the
Company's audited financial statements included elsewhere in this Prospectus.
The pro forma combined statement of income data and balance sheet data as of and
for the year ended October 31, 1997 are unaudited and are derived from the pro
forma financial statements included elsewhere in this Prospectus as adjusted for
the Offering.
The summary combined financial data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Historical
Combined Financial Statements and related notes, Pro Forma Combined Financial
Statements and related notes, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, (1)
-----------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(2)
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
STATEMENTS OF INCOME DATA:
Revenues:
Hotels and restaurants............... $28,417 $30,573 $ 31,244 $ 35,205 $ 41,662 $ 67,001
Entertainment, management
and services...................... 4,468 3,205 3,092 3,168 3,842 3,842
Rental operations.................... 4,572 4,987 6,027 6,790 6,539 6,539
------- ------- -------- -------- -------- --------
Total revenues.................... 37,457 38,765 40,363 45,163 52,043 77,382
------- ------- -------- -------- -------- --------
Operating income (3)................. 8,528 8,178 7,984 8,930 10,658 14,578
Interest expense..................... 5,301 5,649 6,866 7,319 8,817 5,939
Income before taxes and
extraordinary item (3)............ 3,539 2,745 1,749 2,148 2,742 9,346
Income taxes......................... 1,254 574 542 730 932 3,216
Extraordinary item (4)............... 191 --- --- --- --- 541
------- ------- -------- -------- -------- --------
Net income (3)....................... $ 2,476 $ 2,171 $ 1,207 $ 1,418 $ 1,810 $ 5,589
Pro forma income per share before
extraordinary item................ --- --- --- --- $ 0.26 $ 0.50
Pro forma extraordinary item
per share......................... --- --- --- --- --- $ 0.04
Pro forma net income per
share (5)......................... --- --- --- --- $ 0.26 $ 0.46
Shares used in the pro forma
per share calculation (5)......... --- --- --- --- 7,084 12,259
BALANCE SHEET DATA:
Total assets......................... $80,220 $86,924 $107,037 $120,271 $124,448 $160,162
Long-term debt and capital leases
excluding current maturities...... $57,100 $66,755 $ 77,636 $ 88,799 $ 96,026 $ 70,039
Stockholders' equity (6)............. $ 6,017 $ 5,483 $ 9,384 $ 10,409 $ 9,423 $ 70,640
OTHER DATA:
EBITDA (3)(7)........................ $11,645 $11,813 $ 12,043 $ 13,682 $ 16,334 $ 21,132
EBITDA as a percentage of
revenues.......................... 31.1% 30.5% 29.8% 30.3% 31.4% 27.3%
HOTEL STATISTICS:
Hotels open (at end of period)....... 6 6 6 7 8 13
Available rooms (at end of period)... 1,242 1,242 1,242 1,539 1,718 2,712
REVPAR (8)........................... $ 38.69 $ 38.70 $ 38.83 $ 42.04 $ 45.72 $ 39.09
ADR (9).............................. $ 56.40 $ 60.27 $ 61.54 $ 67.29 $ 73.43 $ 65.40
Average occupancy percentage (10).... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8%
</TABLE>
9
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- --------------------------
(1) The summary combined financial and other data has been presented as though
the predecessor businesses of Cavanaughs Hospitality Corporation, Barbieri
Investment Company and their respective subsidiaries and partnership
interests which they controlled had been combined as of October 31, 1993,
1994, 1995, 1996 and 1997.
(2) Pro forma results reflect the historical financial and other data as of
October 31, 1997 after reflecting (i) the Merger which occurred in
November 1997, (ii) the acquisitions which occurred or are probable of
occurring as of January 16, 1998 as if they occurred on November 1, 1996
for purposes of the statement of income and as of October 31, 1997 for
purposes of the balance sheet, and (iii) the Offering and the application
of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
(3) Operating income, income before income taxes and extraordinary item, net
income and EBITDA reflect a nonrecurring charge of $421,000 related to
final settlement of litigation in 1997.
(4) Extraordinary item in the 1997 pro forma presentation includes charges for
the write-off of deferred loan fees and prepayment penalties, net of
income taxes, related to long-term debt which is being repaid out of the
proceeds of the Offering.
(5) Due to the Merger in November 1997, the historical earnings per share is
not relevant or meaningful. Therefore, pro forma earnings per share for
the year ended October 31, 1997 has been presented based upon the number
of shares of Common Stock of the Company which were outstanding after the
Merger.
(6) Changes in stockholders' equity between fiscal years reflect (i) net
income, (ii) cash dividends and (iii) distributions to or contributions
from shareholders for the activities related to the subsidiaries,
investments or divisions which have been excluded from the combined
financial statements. See Note 1 to the Historical Combined Financial
Statements.
(7) EBITDA represents income before income taxes and extraordinary item,
interest expense, depreciation and amortization. EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles and such information should not be considered as an
alternative to net income, cash flow from operations or any other measure
of performance prescribed by generally accepted accounting principles.
EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring the Company's ability
to service debt.
(8) REVPAR represents the total revenues divided by total available rooms, net
of rooms out of service due to significant renovations.
(9) ADR represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(10) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of
rooms available multiplied by the number of days in the reported period.
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<PAGE>
RISK FACTORS
An investment in the Common Stock of the Company involves various risks.
Prospective investors should carefully consider the following risk factors in
conjunction with other information contained in this Prospectus before making a
decision to purchase Common Stock in the Offering.
OPERATING RISKS IN THE LODGING INDUSTRY. The Company's business is subject
to the operating risks inherent in the lodging industry. These risks include
adverse changes in national or local economic conditions, overbuilding in the
lodging industry or a reduction in demand for hotel rooms and related services
in the Northwest generally and, in particular, the markets where the Hotels are
concentrated, competition from other hotels, changes in travel patterns, extreme
weather conditions, cancellation of, or changes in, events scheduled to occur in
the Company's markets, 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 and changes in real
estate tax rates and other operating expenses. Further, the Hotels are located
in the Northwest where a number of major industries, including agriculture,
tourism, technology, timber and aerospace, are concentrated. These industries
may be affected by changes in governmental regulations and economic conditions,
such as the relative strength of national and local economies, the rate of
national and local unemployment and the rate of inflation, all of which could
materially affect the local economies in which these industries and the Company
operate. There is no assurance that downturns or prolonged adverse conditions
in these industries or in national or local economies will not have a material
adverse impact on the Company's results of operations.
COMPETITION IN THE LODGING INDUSTRY. The lodging industry is highly
competitive. The Company competes with other national limited and full service
hotel companies, as well as with various regional and local hotels. Many of the
Company's competitors have a larger network of locations and greater financial
resources than the Company. Competition in the United States lodging industry is
based generally on brand name recognition, convenience of location, price, range
of services and guest amenities offered, quality of customer service and overall
product. Demographic or other changes in one or more of the Company's markets
could impact the convenience or desirability of the sites of certain of the
Hotels which would adversely affect the operations of those Hotels. Further,
there can be no assurance that new or existing competitors will not offer
significantly lower rates or greater convenience, services or amenities or
significantly expand or improve facilities in a market in which the Hotels
compete, thereby adversely affecting the Company's operations.
GEOGRAPHIC CONCENTRATION. Because all of the Hotels currently are located
in the Northwest, the Company's results of operations and financial condition
are dependent on the economy of the Northwest. To the extent that general
economic or other relevant conditions in the Northwest decline and result in a
decrease in consumer demand in this region, the Company's performance and
results of operations will be adversely affected. In addition, four of the
Hotels are located in Spokane, Washington, two are located in Yakima, Washington
and two are located in Kalispell, Montana. A downturn in general economic or
other relevant conditions in these specific markets or in any other market in
which the company operates could adversely impact the Company's results of
operations and financial condition.
CONSTRAINTS ON GROWTH OPPORTUNITIES. The Company intends to continue to
pursue an aggressive growth strategy for the foreseeable future. Since December
1996, the Company has acquired four Hotels and has entered into agreements to
acquire two additional hotels. The Company's ability to successfully pursue new
growth opportunities will depend on a number of factors, including, among
others, the Company's ability to identify suitable hotels for acquisition or
development, to finance acquisitions and renovations and to successfully
integrate new hotels into its operations. There is no assurance that suitable
hotels for acquisition or development will be available or, if available, will
be on terms acceptable to the Company or that capital will be available on terms
acceptable to the Company. While the Company believes that it will have
sufficient capital following the Offering to fund its growth strategy in the
near term, this belief is based on adequate cash being generated from operations
and the availability of the Revolving Credit Facility. There is no assurance
that the Company will generate adequate cash from operations or that the Company
will ultimately be successful in obtaining the Revolving Credit Facility. Even
if the Company generates anticipated cash from operations and obtains the
Revolving Credit Facility, the Company may seek to obtain additional debt or
equity
11
<PAGE>
financing, depending upon the amount of capital required to pursue future growth
opportunities or address other liquidity needs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources."
INTEGRATION OF NEW HOTELS. There is no assurance that the Company will be
able to successfully integrate new hotels or new hotel products into its
operations, that new hotels or new hotel products will achieve revenue and
profitability levels comparable to the Hotels or that the combined business will
be profitable. Newly acquired, developed or converted hotels typically begin
with lower occupancy and room rates. Furthermore, the Company's expansion
within its existing markets could adversely affect the financial performance of
the Hotels in such markets or the Company's overall results of operations.
Expansion into new markets may present operating and marketing challenges that
are different from those currently encountered by the Company in its existing
markets. There is no assurance that the Company will be able to anticipate all
of the changing demands that expanding operations will impose on its management
and management information and reservation systems, and the failure to adapt its
systems and procedures could have a material adverse effect on the Company's
business.
COMPETITION FOR GROWTH OPPORTUNITIES. The Company intends to pursue a full
range of growth opportunities, including acquisitions and new construction. The
Company competes for growth opportunities with national and regional hospitality
companies, some of which have greater name recognition, marketing support,
reservation system capacity and financial resources than the Company. The
Company's ability to make acquisitions is dependent upon the Company's
relationships with owners of existing hotels and certain major hotel investors.
The Company's failure to compete successfully for acquisitions or to attract or
maintain relationships with hotel owners and major hotel investors could
adversely affect the Company's ability to expand its portfolio of hotels. The
Company's inability to implement its external growth strategy would limit its
ability to grow its revenue base.
ACQUISITION, DEVELOPMENT AND REDEVELOPMENT RISKS. The Company intends to
acquire additional hotels in the future. Acquisitions entail the risk that
investments will fail to perform in accordance with the Company's expectations.
The Company also intends to continue the redevelopment and re-branding of other
acquired hotels into "Cavanaughs" hotels. In addition, the Company expects to
develop new hotels in the future, depending on market conditions. Hotel
redevelopment and new project development is subject to a number of risks,
including, without limitation, risks of construction delays or cost overruns,
risks that the hotels will not achieve anticipated performance levels and new
project commencement risks such as receipt of zoning, occupancy and other
required governmental permits and authorizations. These and other risks could
result in the incurrence of substantial costs for a project that is never
completed. There is no assurance that financing for these projects will be
available or, if available, will be on terms acceptable to the Company. In
addition, the renovation of the Hotels is subject to a number of risks,
including, without limitation, construction delays or cost overruns due to
various factors. Any unanticipated delays or expenses in connection with the
renovation of the Hotels could have an adverse effect on the results of
operations and financial condition of the Company.
REAL ESTATE OWNERSHIP RISKS. Upon closing of the Offering, the Company's
portfolio will contain 15 properties, including the 11 Hotels, three office
properties and one retail property. Accordingly, the Company is subject to
varying degrees of risk generally related to owning real estate. These risks,
many of which are beyond the control of the Company, include, among others,
changes in national, regional and local economic conditions, local real estate
market conditions, changes in interest rates, the availability, cost and terms
of financing, lease obligations, the potential for uninsured casualty and other
losses, the impact of present or future environmental legislation and compliance
with environmental laws, and adverse changes in zoning laws and other
regulations. In addition, real estate investments are relatively illiquid;
therefore, the ability of the Company to vary its portfolio in response to
changes in economic and other conditions may be limited.
CONTROL BY PRINCIPAL SHAREHOLDERS. Upon completion of the Offering,
members of the Barbieri Family will beneficially own, in the aggregate, 57.7% of
the outstanding shares of Common Stock. Donald Barbieri, Chairman, President
and Chief Executive Officer of the Company, will have sole voting and investment
power with respect to 21.6% of the outstanding shares of Common Stock. So long
as the Barbieri Family owns a substantial portion of the
12
<PAGE>
outstanding Common Stock, it will have the ability to control the management and
affairs of the Company and will have the power to approve or block most actions
requiring the approval of the shareholders of the Company, including the sale of
all the assets of the Company. See "Ownership of Common Stock."
ENVIRONMENTAL MATTERS. 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, as well as the cost of compliance with future
legislation. Under current federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of such hazardous or toxic substances. In addition, the presence
of contamination from hazardous or toxic substances, or the failure to remediate
such contaminated property properly, may adversely affect the ability of the
owner of the property to borrow using such property as collateral for a loan or
to sell such property. Environmental laws also may impose restrictions on the
manner in which a property may be used or transferred or in which businesses may
be operated, and may impose remedial or compliance costs. The costs 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.
In connection with the Company's acquisition of a property, a Phase I
environmental assessment is conducted by a qualified independent environmental
engineer. Phase I environmental assessments have been performed on all of the
Company's properties and it is expected that all future hotel acquisitions will
be subject to a Phase I environmental assessment. A Phase I environmental
assessment involves researching historical usages of a property, databases
containing registered underground storage tanks and other matters, including an
on-site inspection, to determine whether an environmental issue exists with
respect to the property which needs to be addressed. If the results of a Phase
I environmental assessment reveal potential issues, a Phase II environmental
assessment, which may include soil testing, ground water monitoring or borings
to locate underground storage tanks, may, depending upon the circumstances, be
ordered for further evaluation.
A Phase I environmental assessment conducted with respect to the Kalispell
Center Mall has revealed a potential environmental concern. Specifically, the
report determined that underground storage tanks had been located on the site as
part of previous historical uses, and due to lack of documentation regarding
their removal, there exists a possibility that soils and/or groundwater below
the site could have been contaminated due to leakage. While the Phase I
assessment recommended further analysis, the Company has determined that such
action is unwarranted at this time. Based on the information provided by the
Phase I environmental assessments, the Company is not aware of any environmental
liability or compliance concern at the properties that the Company believes
would have a material adverse effect on the Company's business, assets, results
of operations or liquidity.
It is possible that Phase I environmental assessments will not reveal all
environmental liabilities or compliance concerns or that there will be material
environmental liabilities or compliance concerns of which the Company will not
be aware. While the Company has not been notified by any governmental
authority, and has no other knowledge of, any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental
substances in connection with any of its properties, no assurances can be given
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Company's existing and future properties will not be affected by the condition
of neighboring properties (such as the presence of leaking underground storage
tanks) or by third parties (whether neighbors such as dry cleaners or others)
unrelated to the Company.
REGULATORY RISKS. The lodging industry is subject to numerous federal,
state and local government regulations, including building and zoning
requirements. Also, the Company is subject to laws governing its relationship
with employees, including minimum wage requirements, overtime, working
conditions and work permit requirements. An increase in the minimum wage rate,
employee benefit costs or other costs associated with employees, could adversely
affect the Company. Under the Americans with Disabilities Act of 1990 (the
"ADA"), all public accommodations are required to meet certain federal
requirements related to access and use by disabled persons.
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<PAGE>
Although the Company believes it is in compliance with the ADA, there is no
assurance that a material ADA claim will not be asserted against the Company.
SEASONAL FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS. The lodging
industry is seasonal in nature, with the months from May through October
generally accounting for a greater portion of annual revenues than the months
from November through April. Quarterly earnings also may be adversely affected
by events beyond the Company's control such as extreme weather conditions,
economic factors and other considerations affecting travel. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Seasonality."
DEPENDENCE ON SENIOR MANAGEMENT. The Company will place substantial
reliance on the lodging industry experience and the continued availability of
its senior management led by Donald Barbieri, Chairman, President and Chief
Executive Officer, Arthur Coffey, Executive Vice President and Chief Financial
Officer, Richard Barbieri, Senior Vice President and General Counsel, Thomas
Barbieri, Senior Vice President-Acquisitions and Commercial Operations and David
Bell, Senior Vice President-Project Design, Development and Construction. The
Company believes that its future success and its ability to manage future growth
depends in large part upon the efforts of the senior management and on the
Company's ability to attract and retain other highly qualified personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel. The
Company intends to enter into employment agreements with Donald Barbieri, Arthur
Coffey, Richard Barbieri, Thomas Barbieri and David Bell for terms which expire
on December 31, 1999. See "Management -- Employment Agreements." The Company
does not carry key man insurance on any of its senior management.
RENTAL INCOME RISKS. The Company owns approximately 590,000 square feet of
office and retail space in Spokane, Washington and Kalispell, Montana. The
Company will be subject to the risk that upon expiration, leases may not be
renewed, the space may not be relet or the terms of renewal or reletting
(including the cost of required renovations) may be less favorable than current
lease terms. There is no assurance that the Company will be able to locate
tenants for rental spaces vacated in the future or receive satisfactory rents
from tenants. Delays or difficulties in attracting tenants and costs incurred
by the Company in preparing for tenants could reduce cash flow, decrease the
value of a property or jeopardize the Company's ability to pay its expenses.
Vacancies could subsequently result due to termination of a tenant's tenancy,
the tenant's financial failure or a breach of the tenant's obligations.
RISKS ASSOCIATED WITH TERMINATION OF MANAGEMENT AND LEASING CONTRACTS. The
Company expects to continue to manage and lease properties owned by third
parties. Risks associated with these activities include the risk that the
related contracts (which are typically cancelable upon 30-days' notice or upon
certain events, including sale of the property) will be terminated by the
property owner or will be lost in connection with a sale of such property, that
contracts may not be renewed upon expiration or may not be renewed on terms
consistent with current terms and that the rental revenues upon which management
and leasing fees are based will decline as a result of general real estate
market conditions or specific market factors affecting properties managed or
leased by the Company, resulting in decreased management or leasing fee income.
RISK ASSOCIATED WITH ENTERTAINMENT, MANAGEMENT AND SERVICES DIVISION. The
Company's entertainment services include computerized event ticketing and the
presentation of touring Broadway shows. In addition, the Company attracts
additional hotel guests through cross-selling the products of its entertainment,
management and services division. This division is vulnerable to risks
associated with changes in general regional and economic conditions, the
potential for significant competition and a change in consumer trends, among
others. In addition, there is no assurance that Broadway shows will continue to
tour the Northwest or that such productions will use the Company as a promoter.
CERTAIN TYPES OF LOSSES MAY EXCEED INSURANCE COVERAGE. The Company carries
comprehensive liability, public area liability, fire, flood, boiler and
machinery, extended coverage and rental loss insurance covering its properties.
There are, however, certain types of losses that are not generally insured
because it is not economically feasible to insure against such losses. Should
an uninsured loss or a loss in excess of insured limits occur with respect to
any particular property, the Company could lose its capital invested in the
property, as well as the anticipated future
14
<PAGE>
revenue from the property and, in the case of debt which is with recourse to the
Company, would remain obligated for any mortgage debt or other financial
obligations related to the property. Although the Company believes that its
properties are adequately insured, any such loss would adversely affect the
Company. There is no assurance that material losses in excess of insurance
proceeds will not occur in the future.
RISK OF DEBT FINANCING; NO LIMIT ON INDEBTEDNESS. As described under "Use
of Proceeds," the Company will use $61.7 million of the net proceeds of the
Offering to repay a portion of its outstanding indebtedness. After giving
effect to such repayment and the acquisition of the five Hotels acquired by the
Company since October 31, 1997, the Company's outstanding indebtedness will be
approximately $72.4 million. Borrowings under the Revolving Credit Facility, if
obtained, will be used by the Company to repay existing indebtedness, to fund
the acquisition of hotels, to fund renovations and capital improvements to
hotels and for general working capital needs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." There is no assurance that the Company will ultimately
enter into an agreement with U.S. Bank regarding the Revolving Credit Agreement.
Failure to enter into the Revolving Credit Facility or to obtain other financing
required to repay the Company's indebtedness could have a material adverse
effect on the Company.
Neither the Company's Amended and Restated Articles of Incorporation (the
"Articles") nor its Amended and Restated By-Laws (the "By-Laws") limit the
amount of indebtedness that the Company may incur. Subject to limitations in
its debt instruments, including those expected to be included in the Revolving
Credit Facility, the Company expects to incur additional debt in the future to
finance acquisitions and renovations and for general corporate purposes. The
Company's continuing indebtedness could increase its vulnerability to general
economic and lodging industry conditions (including increases in interest rates)
and could impair the Company's ability to obtain additional financing in the
future and to take advantage of significant business opportunities that may
arise. The Company's indebtedness is, and will likely continue to be, secured
by mortgages on the Hotels. There is no assurance that the Company will be able
to meet its debt service obligations and, to the extent that it cannot, the
Company risks the loss of some or all of its assets, including the Hotels, to
foreclosure. Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable. In such circumstances, if the
Company is in need of capital to repay indebtedness in accordance with its terms
or otherwise, it could be required to liquidate one or more investments in
Hotels at times which may not permit realization of the maximum return on such
investments.
Upon completion of the Offering, most of the Company's outstanding
indebtedness, including the Revolving Credit Facility, if obtained, will bear
interest at a variable rate. Economic conditions could result in higher
interest rates, which would increase debt service requirements on variable rate
debt and could reduce the amount of cash available for various corporate
purposes. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
IMMEDIATE AND SUBSTANTIAL DILUTION. As set forth more fully under
"Dilution," the pro forma net tangible book value per share of the Company after
the Offering will be substantially less than the initial public offering price
per share in the Offering. Accordingly, purchasers of the Common Stock offered
hereby will experience an immediate and substantial dilution of $7.35 per share
(based on an assumed initial public offering price of $13 per share) in the net
tangible book value of the Common Stock. See "Dilution."
ABSENCE OF PUBLIC MARKET. Prior to the Offering, there has been no public
market for the Common Stock. There is no assurance that an active public market
will develop or continue after the Offering. The initial public offering price
of the Common Stock was determined through negotiations between the Company and
representatives of the Underwriters and there is no assurance that the Common
Stock will trade at or in excess of the initial public offering price. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
PRICE VOLATILITY. 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
have often been unrelated
15
<PAGE>
or disproportionate to the operating performance of particular companies. These
broad fluctuations may adversely affect the market price of the Common Stock.
SHARES AVAILABLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have 12,270,251 shares of Common Stock outstanding (13,046,501
shares if the Underwriters' over-allotment option is exercised in full). Of the
shares outstanding after the Offering 7,084,251 of such shares will be shares of
"restricted" common stock as such term is defined under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). In addition
to shares of Common Stock sold by the Company in the Offering, the Company will
issue an aggregate of 55,000 shares of "restricted" Common Stock over four years
to certain members of management, of which 11,000 shares will be issued upon
closing of the Offering. In addition, concurrently with the Offering, options
to purchase up to 900,000 shares of Common Stock may be granted to certain
officers, directors and employees of the Company. Sales of a substantial number
of shares of Common Stock (including shares issued upon the exercise of stock
options), or the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock. No prediction can be made about
the effect that future sales of Common Stock will have on the market prices of
shares.
NO DIVIDENDS ON COMMON STOCK. The Company anticipates that for the
foreseeable future, all earnings, if any, will be retained for the operation and
expansion of its business and that it will not pay cash dividends on Common
Stock. See "Dividend Policy."
ANTI-TAKEOVER MATTERS. The Articles and By-Laws contain provisions that
may have the effect of delaying, deterring or preventing a takeover of the
Company that shareholders purchasing shares in the Offering may consider to be
in their best interest. The Articles and By-Laws provide for a classified board
of directors serving staggered terms of three years, and advance notice
requirements for shareholder proposals and director nominations. The Articles
also grant the Board of Directors (the "Board") the authority to issue up to
5,000,000 shares of preferred stock, having such rights, preferences and
privileges as designated by the Board without shareholder approval. See
"Description of Capital Stock."
16
<PAGE>
THE COMPANY
The Company, which was formerly known as Goodale & Barbieri Companies, has
been a family-owned enterprise since it was founded in 1937 by Louis Barbieri
and Frank Goodale. Between 1937 and 1976, the Company focused on third-party
property management services and real estate development in Spokane, Washington.
The Company's history of owning and operating hotels commenced in 1976 when it
constructed the River Inn in Spokane. In 1980, the Company established its
proprietary Cavanaughs brand name. After changing its name in October 1997 to
Cavanaughs Hospitality Corporation, the Company merged with BIC on November 3,
1997. In connection with its merger with BIC, the Company contributed certain
assets not related to its core hospitality business, including, among other
things, a long-term residence inn and a milk processing and distribution
business, to a wholly-owned subsidiary and distributed the capital stock of such
subsidiary, as well as the capital stock of another wholly-owned subsidiary
owing recreational real estate in Priest Lake, Idaho and a retail sales
operation, to the shareholders of the Company. Shortly thereafter, the Company
contributed substantially all of its assets, including its interests in various
family limited partnerships, to the Operating Partnership in exchange for
general and limited partner interests therein. The Company is the sole general
partner of the Operating Partnership and owns a controlling 98.8% interest
therein. All of the Hotels and the other assets of the Company are held by or
for the benefit of, and substantially all of the Company's operations are
conducted through, the Operating Partnership. As sole general partner of the
Operating Partnership, the Company has exclusive power to manage and conduct the
operations of the Operating Partnership. See "Partnership Agreement of the
Operating Partnership." In addition to the Operating Partnership, the Company
holds a 50% general partner interest in Cowley Street Limited Partnership, a
Washington limited partnership which owns Cavanaughs Fourth Avenue.
The Company's principal executive offices are located at 201 W. North River
Drive, Suite 100, Spokane, Washington 99201 and its telephone number is (509)
459-6100. The Company's website address is www.cavanaughs.com.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after giving effect to
underwriting discounts and commissions and estimated expenses, are expected to
be approximately $61.7 million (approximately $71.1 million if the Underwriters'
over-allotment option is exercised in full). The Company expects to use the net
proceeds from the Offering to repay approximately $61.7 million of indebtedness
outstanding, of which $850,000 was incurred in connection with the purchase of
the Cavanaughs on the Falls hotel. Any remaining proceeds will be used by the
Company for future investments in, or acquisitions of, hotel properties and for
other general corporate purposes. Pending such uses, the Company intends to
invest the net proceeds in short-term investment grade, interest-bearing
securities, certificates of deposit or guaranteed obligations of the United
States of America. The indebtedness to be repaid bears interest at fixed and
variable rates, with a weighted average annual rate of 8.6% and a weighted
average maturity of seven years and two months. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company intends to retain earnings to
provide funds for the continued growth and development of its business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Any determination to pay cash
dividends in the future will be at the discretion of the Board and will depend
upon, among other things, the Company's results of operations, financial
condition, contractual restrictions (including those expected to be set forth in
the Revolving Credit Facility) and other factors deemed relevant by the Board.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1997 (i) on a combined historical basis and (ii) on a pro forma
basis, giving effect to (a) the Offering and the application of the net proceeds
therefrom and (b) the five hotels acquired, or contracted for, since October 31,
1997. The information set forth in the following table should be read in
conjunction with the Historical Combined Financial Statements and related notes,
Pro Forma Combined Financial Statements and related notes, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1997
----------------------
HISTORICAL
COMBINED PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt, including current portion:...........................
Existing long-term debt.................................. $ 98,056 $ 42,955
Existing capital lease obligations....................... 2,754 2,754
Borrowings under Revolving Credit Facility............... --- 26,748
-------- --------
Total debt........................................... 100,810 72,357
-------- --------
Stockholders' equity (1):
Preferred Stock, $.01 par value, 5,000,000 authorized;
no shares issued and outstanding..................... --- ---
Common Stock, $.01 par value, 50,000,000 authorized;
7,095,251 shares issued and outstanding (2);
12,270,251 shares issued and outstanding as
adjusted (2)......................................... 71 123
Additional paid-in capital............................... 3,935 65,549
Retained earnings........................................ 5,417 4,968
-------- --------
Total stockholders' equity........................... 9,423 70,640
-------- --------
Total capitalization................................. $110,233 $142,997
======== ========
</TABLE>
______________________
(1) The historical amounts reflect the number and amount of shares of Common
Stock outstanding after the Merger which occurred in November 1997. See
Note 1 to the Historical Combined Financial Statements.
(2) Includes 7,084,251 restricted shares owned by the Barbieri Family and an
aggregate of 11,000 restricted shares to be issued to five of the Company's
employees concurrently with the Offering. Excludes 150,817 shares issuable
upon exchange of currently outstanding OP Units, which units may not be
exchanged for one year from the date of this Prospectus. See "Partnership
Agreement of the Operating Partnership." Excludes 1,489,000 shares reserved
for issuance with respect to options or stock awards to be granted under the
Plans. See "Management."
18
<PAGE>
DILUTION
The net tangible book value of the Company at October 31, 1997 was
approximately $7,633,000, or approximately $1.08 per share of Common Stock. Net
tangible book value per share is equal to the Company's total tangible assets
less its total liabilities divided by the number of outstanding shares of Common
Stock. After giving pro forma effect to the sale by the Company of the
5,175,000 shares offered hereby (at an assumed initial public offering price of
$13 per share) and the application of the net proceeds from the Offering, the
pro forma net tangible book value per share of the Company at October 31, 1997
would have been approximately $69,299,000, or approximately $5.65 per share of
Common Stock. This amount represents an immediate increase in the pro forma net
tangible book value per share of $4.57 per share to the existing shareholders
and an immediate dilution in pro forma net tangible book value per share to new
investors of approximately $7.35 per share. The following table illustrates
this per share dilution.
<TABLE>
<CAPTION>
<S> <C>
Assumed initial public offering price per share......................... $13.00
Net tangible book value per share before the
Offering....................................................... $ 1.08
Pro forma net tangible book value increase per share
attributable to the Offering................................ 4.57
------
Pro forma net tangible book value per share after the Offering.......... 5.65
------
Pro forma net tangible book value dilution per share to new investors... $ 7.35
======
</TABLE>
The following table sets forth: (i) the number of shares of Common Stock
held by the existing shareholders and the number of shares of Common Stock
purchased by new investors in this Offering, (ii) the net book value on a pro
forma basis as of October 31, 1997 of the consideration received by the Company
from the existing shareholders and (iii) the net tangible book value of the
consideration received by the Company in this Offering (assuming the sale of
5,175,000 shares of Common Stock by the Company at an initial public offering
price of $13.00 per share).
<TABLE>
<CAPTION>
Total
Shares Acquired Contribution Book Value of
-------------------- ----------------- Consideration Received
Number (1) Percent Amount Percent By Company Per Share
---------- ------- ------ ------- ----------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 7,084 57.8% $ 9,423 12.3% $ 1.33
Common Stock purchased
by new investors in the
Offering.................. 5,175 42.2 67,275 87.7 13.00
------ ----- ------- ----- ------
Total................. 12,259 100.0% $76,698 100.0% $ 6.26
====== ===== ======= ===== ======
</TABLE>
- --------------------------------
(1) Include 7,084,251 restricted shares owned by the Barbieri Family. Excludes
150,817 shares issuable upon exchange of currently outstanding OP Units,
which OP Units cannot be exchanged for one year from the date of this
Prospectus, and an aggregate of 11,000 restricted shares to be issued to
five of the Company's employees concurrently with the Offering. See
"Partnership Agreement of the Operating Partnership." Excludes 1,489,000
shares reserved for issuance with respect to options or stock awards to be
granted under the Plans. See "Management."
19
<PAGE>
SELECTED COMBINED FINANCIAL AND OTHER DATA
The following table sets forth selected combined financial data of the
Company as of and for the five years ended October 31, 1997. The selected
combined statement of income data for the fiscal years ended October 31, 1993
and 1994 and the selected combined balance sheet data as of October 31, 1993,
1994 and 1995 are derived from the Company's unaudited financial statements and
reflect all normal recurring adjustments, which in the opinion of management,
are necessary for a fair presentation. The selected combined statement of
income data for the fiscal years ended October 31, 1995, 1996 and 1997 and the
selected combined balance sheet data as of October 31, 1996 and 1997 are derived
from the Company's audited financial statements included elsewhere in this
Prospectus. The pro forma combined statement of income data and balance sheet
data as of and for the year ended October 31, 1997 are unaudited and are derived
from the pro forma financial statements included elsewhere in this Prospectus as
adjusted for the Offering.
The selected combined financial data set forth below should be read in
conjunction with, and are qualified in their entirety by, the Historical
Combined Financial Statements and related notes, Pro Forma Combined Financial
Statements and related notes, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, (1)
-------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997 (2)
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
<S>
- --------------------------------
STATEMENTS OF INCOME DATA:
Revenues:
Hotels and restaurants:
Rooms............................. $16,276 $17,531 $ 17,587 $ 20,972 $ 25,147 $ 39,809
Food and beverage................. 11,469 12,027 12,397 12,141 13,926 23,547
Other............................. 672 1,015 1,260 2,092 2,589 3,645
------- ------- -------- -------- -------- --------
Total hotels and restaurants.... 28,417 30,573 31,244 35,205 41,662 67,001
Entertainment, management
and services.................... 4,468 3,205 3,092 3,168 3,842 3,842
Rental operations................. 4,572 4,987 6,027 6,790 6,539 6,539
------- ------- -------- -------- -------- --------
Total revenues.................. 37,457 38,765 40,363 45,163 52,043 77,382
------- ------- -------- -------- -------- --------
Operating Expenses:
Direct:
Hotels and restaurants:
Rooms........................... 4,822 4,868 4,931 5,719 6,820 11,420
Food and beverage............... 9,193 9,657 10,034 10,181 11,483 19,312
Other........................... 503 808 716 1,008 1,066 1,409
------- ------- -------- -------- -------- --------
Total hotels and
restaurants................ 14,518 15,333 15,681 16,908 19,369 32,141
Entertainment, management
and services................. 2,310 1,519 1,802 2,204 2,052 2,052
Rental operations............... 364 783 1,026 1,464 1,506 1,506
------- ------- -------- -------- -------- --------
Total direct operating
expenses..................... 17,192 17,635 18,509 20,576 22,927 35,699
------- ------- -------- -------- -------- --------
Undistributed operating
expenses:
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31, (1)
-------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997 (2)
-------- -------- --------- --------- --------- ---------
(in thousands, except per share data and hotel statistics)
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative............... 4,909 3,979 5,420 6,445 8,165 12,075
Property operating costs (3).... 4,023 5,554 5,022 4,997 5,518 9,183
Depreciation and
amortization................. 2,805 3,419 3,428 4,215 4,775 5,847
------- ------- -------- -------- -------- --------
Total undistributed
operating expenses........... 11,737 12,952 13,870 15,657 18,458 27,105
------- ------- -------- -------- -------- --------
Total expenses............... 28,929 30,587 32,379 36,233 41,385 62,804
------- ------- -------- -------- -------- --------
Operating income (3)................ 8,528 8,178 7,984 8,930 10,658 14,578
Interest expense.................... 5,301 5,649 6,866 7,319 8,817 5,939
Other............................... 312 216 631 537 901 707
Income before income taxes and
extraordinary item (3).......... 3,539 2,745 1,749 2,148 2,742 9,346
Income taxes........................ 1,254 574 542 730 932 3,216
Extraordinary item (4).............. 191 -- -- -- -- 541
Net income (3)...................... $ 2,476 $ 2,171 $ 1,207 $ 1,418 $ 1,810 $ 5,589
Pro forma income per share
before extraordinary item....... -- -- -- -- $ 0.26 $ 0.50
Pro forma extraordinary
item per share.................. -- -- -- -- -- $ 0.04
Pro forma net income
per share (5)................... -- -- -- -- $ 0.26 $ 0.46
Shares used in the pro forma per
share calculation (5)........... -- -- -- -- 7,084 12,259
Dividends per share (6)
BALANCE SHEET DATA:
Total assets.................... $80,220 $86,924 $107,037 $120,271 $124,448 $160,162
Current maturities of long-
term debt and capital leases.. 2,652 2,458 10,306 10,509 4,784 2,318
Long-term debt and capital
leases excluding current
maturities.................... 57,100 66,755 77,636 88,799 96,026 70,039
Stockholders' equity (7)........ 6,017 5,483 9,384 10,409 9,423 70,640
OTHER DATA:
EBITDA (3)(8)................... $11,645 $11,813 $ 12,043 $ 13,682 $ 16,334 $ 21,132
EBITDA as a percentage of
revenues...................... 31.1% 30.5% 29.8% 30.3% 31.4% 27.3%
HOTEL STATISTICS:
Hotels open (at end of year)........ 6 6 6 7 8 13
Available rooms (at end of
period)....................... 1,242 1,242 1,242 1,539 1,684 2,712
REVPAR (9).......................... $38.69 $38.70 $38.83 $42.04 $ 45.72 $ 39.09
ADR (10)............................ $56.40 $60.27 $61.54 $67.29 $ 73.43 $ 65.40
Average occupancy
percentage (11)............... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8%
- ------------------------------
</TABLE>
21
<PAGE>
(1) The summary combined financial and other data has been presented as though
the predecessor businesses of Cavanaughs Hospitality Corporation, Barbieri
Investment Company and their respective subsidiaries and partnership
interests which they controlled had been combined as of October 31, 1993,
1994 1995, 1996 and 1997.
(2) Pro forma results reflect the historical financial and other data as of
October 31, 1997 after reflecting (i) the Merger which occurred in November
1997, (ii) the acquisitions which occurred or are probable of occurring as
of January 16, 1998 as if they occurred on November 1, 1996 for purposes of
the statement of income and as of October 31, 1997 for purposes of the
balance sheet, and (iii) the Offering and the application of the net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
(3) Property operating costs, operating income, income before income taxes and
extraordinary item, net income and EBITDA reflect a nonrecurring charge of
$421,000 related to final settlement of litigation in 1997.
(4) Extraordinary item included in the 1997 pro forma presentation includes
charges for the write-off of deferred loan fees and prepayment penalties,
net of income taxes related to long-term debt, which is being repaid out of
the proceeds of the Offering.
(5) Due to the Merger, which was consummated in November 1997, the historical
earnings per share is not relevant or meaningful. Therefore, pro forma
earnings per share for the year ended October 31, 1997 has been presented
based upon the number of shares of Common Stock of the Company which were
outstanding after the Merger.
(6) Due to the Merger in November 1997, historical dividends per share is not
relevant or meaningful and therefore is not presented. Dividends
historically have been paid to the stockholders of Cavanaughs Hospitality
Corporation and Barbieri Investment Companies. See Combined Statement of
Changes in Stockholders' Equity in the historical financial statements
included elsewhere herein.
(7) Changes in stockholders' equity between fiscal years reflect (i) net
income, (ii) cash dividends and (iii) distributions to or contributions
from shareholders for the activities related to the subsidiaries,
investments or divisions which have been excluded from the combined
financial statements. See Note 1 to the Historical Combined Financial
Statements.
(8) EBITDA represents income before income taxes and extraordinary item,
interest expense, depreciation and amortization. EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles and such information should not be considered as an
alternative to net income, cash flow from operations or any other measure
of performance prescribed by generally accepted accounting principles.
EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring the Company's ability
to service debt.
(9) REVPAR represents the total revenues divided by total available rooms, net
of rooms out of service due to significant renovations.
(10) ADR represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(11) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of
rooms available multiplied by the number of days in the reported period.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis addresses the results of operations
for the Company for the fiscal years ended October 31, 1995, 1996, and 1997.
The following should be read in conjunction with the Historical Combined
Financial Statements and the notes thereto and the "Selected Combined Financial
and Other Data" included elsewhere in this Prospectus. In addition to
historical information, the following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ significantly from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed in "Risk
Factors" and elsewhere in this Prospectus.
The financial statements of the Company, which have been audited by Coopers
& Lybrand L.L.P., have been presented as though the predecessor businesses of
Cavanaughs Hospitality Corporation (formerly known as Goodale and Barbieri
Companies), Barbieri Investment Company and their respective subsidiaries and
partnership interests which they controlled had been combined as of October 31,
1995, 1996 and 1997. These companies were merged on November 1, 1997. The
audited financial statements also include Lincoln Building Limited Partnership,
a partnership controlled by the Barbieri Family. See Note 1 to the Combined
Financial Statements. Income or losses attributed to the minority interests of
partners in Lincoln Building Limited Partnership and Cowley Street Limited
Partnership are reported as minority interest in partnerships. The Company has
changed its fiscal year end from October 31 to December 31, which change shall
take effect with the fiscal year beginning on January 1, 1998.
The Company's revenues are derived primarily from the Hotels and reflect
revenue from rooms, food and beverage and other sources, including telephone,
guest services, banquet room rentals, gift shops and other amenities. Hotel
revenues accounted for 80.0% of total revenue in 1997 and increased at a
compound annual rate of 15.5% from $31.2 million in 1995 to $41.7 million in
1997. This increase was primarily the result of the addition of Cavanaughs on
Fifth Avenue and an increase in REVPAR from $38.83 in 1995 to $45.71 in 1997.
The balance of the Company's revenues are derived from its entertainment,
management and services and rental operations divisions. These revenues are
generated from ticket distribution handling fees, real estate management fees,
sales commissions and rents. In 1997, entertainment, management and services
accounted for 7.4% of total revenues and rental operations accounted for 12.6%
of total revenues. These two divisions are expected to represent a smaller
percent of total revenues in the future as the Company continues to pursue its
hotel growth strategy.
As is typical in the hospitality industry, REVPAR, ADR and occupancy levels
are important performance measures. The Company's operating strategy is focused
on enhancing revenue and operating margins by increasing REVPAR, ADR, occupancy
and operating efficiencies of the Hotels. These performance measures are
impacted by a variety of factors, including national, regional and local
economic conditions, degree of competition with other hotels in their respective
market areas and, in the case of occupancy levels, changes in travel patterns.
The following table sets forth selected items from the combined statements
of income as a percent of total revenues and certain other selected data:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
--------------------------------
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Revenues:
Hotels and restaurants 77.4% 78.0% 80.0%
Entertainment, management and services 7.7 7.0 7.4
Rental operations 14.9 15.0 12.6
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
--------------------------------
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Direct operating expenses 45.9% 45.6% 44.0%
Undistributed operating expenses:
Selling, general and administrative 13.4 14.3 15.7
Property operating costs 12.5 11.1 10.6
Depreciation and amortization 8.5 9.3 9.2
------ ------ ------
Total undistributed operating expenses: 34.4 34.7 35.5
Operating income 19.8 19.8 20.5
Interest (net) 17.0 16.2 16.9
Income before income taxes 4.3 4.7 5.3
Income tax provision 1.3 1.6 1.8
------ ------ ------
Net income 3.0% 3.1% 3.5%
====== ====== ======
REVPAR $38.83 $42.04 $45.71
ADR $61.54 $67.29 $73.43
Occupancy 65.5% 64.5% 63.5%
</TABLE>
RESULTS OF OPERATIONS
Comparison of year ended October 31, 1997 to year ended October 31, 1996
Total revenues increased $6.9 million, or 15.2%, from $45.2 million in 1996
to $52.0 million in 1997. This increase is attributed primarily to revenue
generated from increases in total rooms occupied and REVPAR and the addition of
Cavanaughs on Fifth Avenue in Seattle, Washington.
Total hotel and restaurant revenues increased $6.5 million, or 18.3%, from
$35.2 million in 1996 to $41.7 million in 1997. ADR increased $6.14, or 9.1%,
from $67.29 in 1996 to $73.43 in 1997. Available room nights increased 10.3% in
1997. REVPAR increased $3.67, or 8.7% from $42.04 in 1996 to $45.72 in 1997.
Cavanaughs on Fifth Avenue opened in May 1996; therefore, 1997 was the first
full fiscal year of operation for this 297-room property which contributed, in
part, to this increase in revenues.
Entertainment, management and services revenues increased $0.7 million, or
21.3%, from $3.2 million in 1996 to $3.8 million in 1997. Entertainment revenue
increased due to greater demand for shows presented and distribution of tickets.
Management and services revenue increased from the addition of new third-party
management contracts.
Rental income decreased $0.3 million, or 3.7%, from $6.8 million in 1996
to $6.5 million in 1997 primarily as a result of the Company's need to occupy
additional space in the CHC Building, its corporate headquarters, which had
previously been rented to third parties and the receipt of a one-time settlement
for a lease termination which occurred in 1996.
Direct operating expenses increased $2.4 million, or 11.4%, from $20.6
million in 1996 to $22.9 million in 1997, primarily due to the increase in the
number of hotel guests served. This represents a decline in direct operating
expenses as a percentage of total revenues from 45.6% in 1996 to 44.0% in 1997.
The improvement in direct operating expense percentages is attributed to the
increase in REVPAR while the Company was able to effectively control expenses
and gain volume efficiencies.
Total undistributed operating expenses increased $2.8 million, or 17.9%,
from $15.7 million in 1996 to $18.5 million in 1997. Total undistributed
operating expenses include selling, general and administrative expenses, which
increased 26.7% from $6.4 million in 1996 to $8.2 million in 1997, and
depreciation and amortization, which increased
24
<PAGE>
13.3% from $4.2 million in 1996 to $4.8 million in 1997. Total undistributed
operating expenses as a percentage of total revenues increased 0.8% from 34.7%
in 1996 to 35.5% in 1997. The increase in undistributed operating expenses as a
percentage of total revenues is primarily attributed to the addition of
Cavanaughs on Fifth Avenue (which management believes had not attained
stabilized occupancy) and the additional administrative expenses related to
preparing the Company for future growth and the Offering.
Operating income increased $1.7 million, or 19.4%, from $8.9 million in
1996 to $10.7 million in 1997. As a percentage of total revenues, operating
income increased from 19.8% in 1996 to 20.5% in 1997. This increase is due
primarily to an increase in REVPAR, the addition of Cavanaughs on Fifth Avenue
and improvements in the hotel departmental margins.
Interest expense increased $1.5 million, or 20.5%, from $7.3 million in
1996 to $8.8 million in 1997. This increase is primarily related to the
incurrence of additional debt used for funding the acquisition and conversion of
Cavanaughs on Fifth Avenue and other corporate purposes. Interest expense is
initially anticipated to decline as a result of the application of the net
proceeds of the Offering to repay certain indebtedness, but is expected to
increase in the future due to the funding of hotel acquisitions with additional
debt.
Income tax provision increased 27.7%, from $0.7 million in 1996 to $ 0.9
million in 1997, due to the increase in income before taxes. The effective
income tax rate for both years was 34%.
Net income increased $0.4 million, or 27.6%, from $1.4 million in 1996 to
$1.8 million in 1997.
Comparison of year ended October 31, 1996 to year ended October 31, 1995
Total revenues increased $4.8 million, or 11.9%, from $40.4 million in 1995
to $45.2 million in 1996. The increase is attributed primarily to the addition
of Cavanaughs on Fifth Avenue which opened in May 1996 and additional rental
income from increased occupancy in the rental properties.
Total hotel and restaurant revenues increased $4.0 million, or 12.7%, from
$31.2 million in 1995 to $35.2 million in 1996. ADR increased 9.3% from $61.54
in 1995 to $67.29 in 1996. Available room nights increased 10.1% in 1996. The
increase is primarily attributed to the addition of Cavanaughs on Fifth Avenue.
Entertainment, management and services revenues increased 2.5% from $3.1
million in 1995 to $3.2 million in 1996.
Rental income increased $0.8 million, or 12.7%, from $6.0 million in 1995
to $6.8 million in 1996. The increase is primarily attributed to increased
occupancy and lease payments for the Company's office buildings.
Direct operating expenses increased $2.1 million, or 11.2%, from $18.5
million in 1995 to $20.6 million in 1996. Direct operating expenses as a
percentage of total revenues decreased from 45.9% in 1995 to 45.6% in 1996. This
improvement is attributed primarily to the increase in REVPAR while controlling
expenses.
Total undistributed operating expenses increased $1.8 million, or 12.9%,
from $13.9 million in 1995 to $15.7 million in 1996. Total undistributed
operating expenses include selling, general and administrative expenses, which
increased 18.9% from $5.4 million in 1995 to $6.4 million in 1996, and
depreciation and amortization, which increased 23.0% from $3.4 million in 1995
to $4.2 million in 1996. Total undistributed operating expenses as a percentage
of total revenues increased from 34.4% in 1995 to 34.7% in 1996. Increased
expenses are attributed primarily to the addition of Cavanaughs on Fifth Avenue
which management believes has not attained stabilized occupancy.
Operating income increased $0.5 million, or 11.8%, from $8.0 million in
1995 to $8.9 million in 1996. This increase was primarily caused by an increase
in hotel guests served and an increase in REVPAR coupled with the controlling
operating expenses.
25
<PAGE>
Interest expense increased $0.5 million, or 6.6%, from $6.9 million in 1995
to $7.3 million in 1996 primarily as a result of the additional indebtedness
incurred by the Company in connection with the acquisition and conversion of
Cavanaughs on Fifth Avenue.
Income tax provision increased 34.7%, from $0.5 million in 1995 to $0.7
million in 1996 due to the increase in income before taxes. The effective
income tax rate for both years was 34%.
Net income increased $0.2 million, or 17.5%, from $1.2 million in 1995 to
$1.4 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash on hand, cash
generated by operations and borrowings under a $3.0 million working capital
credit facility. Cash generated by operations in excess of operating expenses
is used for capital expenditures and to reduce amounts outstanding under the
working capital credit facility. Hotel acquisitions, development and expansion
have been and will be financed through a combination of internally generated
cash, borrowing under credit facilities, and the issuance of common stock or OP
Units.
The Company's short-term capital needs include food and beverage inventory,
payroll and the repayment of interest expense on outstanding mortgage
indebtedness. Historically, the Company has met these needs through internally
generated cash.
The Company's long-term capital needs include funds for property
acquisitions, scheduled debt maturities and renovations and other non-recurring
capital improvements. The Company anticipates meeting its future long-term
capital needs through the borrowing of additional debt financing secured by the
Hotels, by unsecured private or public debt offerings or by additional equity
offerings or the issuances of OP Units, along with cash generated from internal
operations. The Company intends to repay approximately $61.7 million of its
outstanding indebtedness with the estimated net proceeds of the Offering. On a
pro forma basis as of October 31, 1997, after giving effect to the Offering, the
application of the net proceeds thereof and the acquisition of the five hotels
acquired, or contracted for, since October 31, 1997, total outstanding
indebtedness decreased from approximately $100.8 million to approximately $72.4
million. See "Use of Proceeds" and "Capitalization."
At October 31, 1997, the Company had $6.4 million in cash and cash
equivalents, a decrease of $0.8 million from $7.2 million on October 31, 1996.
The Company has made extensive capital expenditures over the last three years,
investing $24.1 million, $13.5 million and $6.2 million in owned and joint
venture properties in 1995, 1996 and 1997, respectively. These expenditures
included guest room, lounge and restaurant renovations, public area
refurbishment, telephone and computer system upgrades, tenant improvements,
property acquisitions, construction, and corporate expenditures and were funded
from operating cash flow and debt. The Company establishes reserves for capital
replacement in the amount of 4.0% of the prior year's actual gross income to
maintain the Hotels at acceptable levels. Acquired hotel properties have a
separate capital budget for purchase, construction, renovation, and branding
costs. Capital expenditures planned for Hotels in 1998 are expected to be
approximately $3.0 million. Management believes the consistent renovation and
upgrading of the Hotels and other properties is imperative to its long-term
reputation and customer satisfaction.
To fund its acquisition program and meet its working capital needs, the
Company has received a commitment from U.S. Bank to provide the Revolving Credit
Facility. The commitment letter, which contains a number of conditions to the
initial funding by the lender, provides that the amount available thereunder
will be the lesser of $80.0 million or the gross proceeds (including the gross
proceeds if the Underwriters' over-allotment option is exercised) of the
Offering. During the 12 months following the Offering, the Company will have
approximately $50.0 million available to be drawn under the Revolving Credit
Facility, which amount may be increased to the full amount available thereunder
with the lender's consent, at an interest rate of 185 basis points over LIBOR
and declining to 165 basis points after six months if the Company maintains
certain EBITDA to debt ratios. The Revolving Credit Facility has an initial
term of five years and an annualized fee for the unutilized portion of the
facility. The Company selects from four different interest rates when it draws
funds: the lender's prime rate or one, three, or six month LIBOR plus the
applicable margin of 165 to 210 basis points, depending on the ratio of EBITDA
to total funded debt. The Revolving
26
<PAGE>
Credit Facility has covenants that allow for the Company to draw funds based on
the trailing 12 months performance on a pro forma basis for both acquired and
owned properties. The Revolving Credit Facility allows the Company to choose
which properties are part of the collateral base and, therefore, gives the
Company the ability to utilize other long-term credit facilities that may be
more favorable to the Company. Funds from the Revolving Credit Facility may be
used for acquisitions, renovations, construction and general corporate purposes.
The Company believes the structure and availability of funds under the Revolving
Credit Facility will be sufficient to meet the Company's long-term growth plans.
The Revolving Credit Facility will contain various representations,
warranties, covenants and events of default deemed appropriate for financing of
a similar size and nature. Covenants and provisions in the definitive
agreements governing the Revolving Credit Facility will include, among other
things, limitations on: (i) substantive changes in the Company's current
business activities, (ii) liquidation, dissolution, mergers, consolidations,
dispositions of material property or assets and acquisitions of property or
assets of others, (iii) the creation or existence of liens on property or
assets, (iv) the addition or existence of indebtedness, including guarantees and
other contingent obligations, (v) loans and advances to others and investments
in others, redemption of subordinated debt, (vi) amendment or modification of
certain material documents or of the Articles in a manner adverse to the
interests of the lenders under the Revolving Credit Facility, (vii) payment of
dividends or distributions on the Company's capital stock, and (viii)
maintenance of certain financial ratios. Each of the covenants described above
will provide for certain ordinary course of business and other exceptions. If
the Company breaches any of these covenants and does not obtain a waiver of that
breach, the breach will constitute an event of default under the Revolving
Credit Facility.
As of October 31, 1997, the Company had debt outstanding of $100.8 million
consisting of primarily variable and fixed rate debt secured by individual
properties. The Company had a working capital credit facility of $1.0 million
with zero drawn as of the end of fiscal year 1997. On November 1, 1997, the
working capital credit facility was increased to $3.0 million.
The Company believes that cash generated by operations will be sufficient
to fund the Company's operating strategy for the foreseeable future, and that
any remaining cash generated by operations, together with capital available
under the Revolving Credit Facility (subject to the terms and covenants to be
included therein) and the remaining proceeds from the Offering, will be adequate
to fund the Company's growth strategy in the near term. Thereafter, the Company
expects that future capital needs, including property acquisitions, will be met
through a combination of net cash provided by operations, borrowings and
additional issuances of Common Stock or OP Units.
SEASONALITY
The lodging industry is affected by normally recurring seasonal patterns.
At most Hotels, demand is higher in the late spring through and early fall (May
through October) than during the balance of the year. Demand also changes on
different days of the week, with Sunday generally having the lowest occupancy.
Accordingly, the Company's revenue, operating profit and cash flow are lower
during the first and fourth calendar quarters and higher during the second and
third calendar quarters.
INFLATION
The effect of inflation, as measured by fluctuations in the Consumer Price
Index, has not had a material impact on the Company's revenues or net income
during the periods under review.
YEAR 2000
The Company does not believe that the costs of converting its computer
systems to address the advent of the year 2000 will be material.
27
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," was issued. SFAS No. 128 establishes standards for
computing and presenting earnings per share ("EPS") and simplifies the existing
standards. This standard replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires the dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods,
and requires restatement of all prior-period EPS data presented. The adoption
of SFAS No. 128 will not have a material effect on the presentation of the
Company's EPS.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
This statement requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement does not require a specific format for the financial
statement, but requires that an enterprise display net income as a component of
comprehensive income in the financial statement. Comprehensive income is
defined as the change in equity of a business enterprise arising from non-owner
sources. The classifications of comprehensive income under current accounting
standards include foreign currency items, minimum pension liability adjustments
and unrealized gains and losses on certain investments in debt and equity
securities. This statement is effective for fiscal years beginning after
December 15, 1997. Management does not believe that the implementation of SFAS
No. 130 will have a material impact on the presentation of its combined
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments for an Enterprise and Related Information." This
statement will change the way public companies report information about segments
of their business in their annual financial statements and requires them to
report segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
entity provides, and its major customers. The statement is effective for fiscal
years beginning after December 15, 1997. Management of the Company does not
believe that the implementation of SFAS No. 131 will have a material impact on
the combined financial statements.
28
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Cavanaughs Hospitality Corporation is a hotel operating company that owns,
operates, acquires, develops, renovates and repositions full service hotels
throughout the Northwest under its proprietary brand name, "Cavanaughs". The
Company's hotel portfolio contains 11 full service Hotels, with 2,369 guest
rooms and approximately 120,000 square feet of meeting space, located in
Seattle, Spokane, Yakima and Kennewick, Washington; Idaho Falls and Post Falls,
Idaho; and Kalispell, Montana. The Company plans to pursue additional growth
opportunities by continuing to acquire and develop full service hotels in the
Northwest. The Company has entered into purchase agreements to acquire two
additional full service hotels, containing 343 guest rooms and approximately
14,500 square feet of meeting space, located in Kalispell, Montana and Portland,
Oregon. With an average of more than 20 years of experience in the lodging
industry, management believes the Company enjoys an excellent reputation in, and
its Cavanaughs brand name is well recognized throughout, the Northwest. The
Company also provides entertainment services, including event ticketing and
theatrical presentations and other special events, property management services
for third parties and owns and manages retail and office properties.
The Company is seeking to become the dominant full service hotel company in
the Northwest by providing customers with access to a Cavanaughs brand hotel in
multiple locations throughout the region. As a result of consolidation among
hotel chains, the Company believes there is an absence of a dominant Northwest
based, regionally focused hotel company. The Company's growth strategy focuses
on: (i) the acquisition and re-branding of full service hotels with the
Cavanaughs name, (ii) the acquisition, conversion and redevelopment of non-hotel
properties into Cavanaughs brand hotels, (iii) the construction of new
Cavanaughs hotels and (iv) the expansion of existing Cavanaughs Hotels.
The Company's operating strategy is designed to enhance its revenue and
operating margins by increasing REVPAR, ADR, occupancy and operating
efficiencies at the Hotels. This strategy includes: (i) building brand name
recognition by maintaining its strategic focus on the Northwest; (ii) promoting
a coordinated marketing program utilizing corporate level sales and marketing
departments in conjunction with local hotel-based sales and marketing personnel;
(iii) controlling operating expenses and achieving cost reductions through
operating efficiencies and economies of scale; (iv) enhancing guest satisfaction
and loyalty by providing high quality service; (v) utilizing the Company's yield
management and proprietary management information systems to enable the general
managers of each Hotel to optimize REVPAR, ADR, occupancy and net income; (vi)
maintaining a consistent level of quality at the Hotels through its maintenance
and capital expenditure programs; (vii) emphasizing the quality of the Company's
food and beverage services to attract convention, group and special event
business and to create local awareness of the Hotels; (viii) providing valuable
guest benefit programs that promote customer loyalty, such as frequent flier
mileage and repeat guest programs; and (ix) attracting and retaining qualified
employees by providing on-going training and stock incentive programs at all
levels of employment to enhance productivity and align the efforts of employees
with the Company's objectives. For the fiscal year ended October 31, 1997, the
Company's revenues were $52.0 million, operating income was $10.7 million, net
income was $1.8 million, REVPAR was $45.72 and ADR was $73.43. On a pro forma
basis, giving effect to the three Hotels acquired since October 31, 1997, the
two hotels under contract to be acquired and the Offering, for the year ended
October 31, 1997, the Company's revenues were $77.4 million, operating income
was $14.6 million, net income was $5.6 million, REVPAR was $39.09 and ADR was
$65.40.
In addition to the Hotels, the Company operates two other divisions: (i)
entertainment, management and services and (ii) rental operations. The
entertainment, management and services division includes computerized event
ticketing through G&B Select-a-Seat, which was founded in 1987 and distributed
in excess of 2.0 million tickets in 1997, and the presentation of shows and
special events through G&B Presents, which was also founded in 1987 and has
presented over 79 Broadway theatrical presentations and special events in the
last ten years. These services generate income from ticket sales and handling
fees as well as additional room occupancy at the Hotels. The entertainment,
management and services division is supported by the same Toll-Free Call Center
used for hotel reservations. The Company's rental operations division includes
ownership of three office properties and one retail property containing in
excess of 590,000 square feet of leasable space, the majority of which are
located near the Hotels, and third-party
29
<PAGE>
management of more than 3.1 million square feet of retail and office properties
and approximately 2,200 residential units throughout the Northwest.
INDUSTRY OVERVIEW
The domestic lodging industry completed its third year of record
profitability, during which time it produced record income of $12.5 billion.
Coopers & Lybrand L.L.P.'s Hospitality Directions estimates that the industry is
expected to again achieve record profitability in 1997. Coopers & Lybrand
Hospitality Directions indicates that average U.S. hotel occupancy reached 65.1%
in 1996, its highest level in 13 years. U.S. hotel occupancy is expected to
decline slightly in 1997 to 64.6% due to supply growth exceeding demand growth.
The increase in room supply in the full service hotel segment has been lower
than the limited service hotel segment due, in part, to the higher cost of
developing a full service hotel. High occupancy during 1992 to 1997 has provided
hotel operators with the ability to support increases in ADR without affecting
occupancy percentages. Sustained ADR growth has contributed to total lodging
industry revenue growth which was 8.6% in 1996 and is expected to be 8.5% in
1997.
The following table reflects the percentage changes in REVPAR, ADR and
occupancy in 1996 and 1997, compared to 1995 and 1996, respectively, for (i) the
Hotels that were open for each of the periods presented and (ii) all U.S.
hotels.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE VERSUS PRIOR PERIOD
REVPAR(1) ADR OCCUPANCY(2)
----------------------- ----------------------- -----------------
1996 1997 1996 1997 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cavanaughs Hotel.......... 8.3% 8.7% 9.3% 9.1% -1.5% -1.6%
U.S. Hotels (3)........... 6.2% 5.5% 6.2% 6.1% 0.0% -0.7%
</TABLE>
_____________________________________________________________
(1) Determined by dividing annual room revenue by annual available rooms.
(2) The occupancy as a percentage of available rooms declined slightly,
primarily because of the addition of new rooms associated with the opening
of Cavanaughs on Fifth Avenue, which management believes has not reached
stabilized occupancy.
(3) Source: Coopers & Lybrand Hospitality Directions (November 1997).
Lodging room demand has historically tracked the national economy. In 1997,
the U.S. economy's ongoing expansion has been marked by low inflation and
unemployment and, in the northwest states of Idaho, Oregon and Washington,
employment and population growth has been above national averages. In addition,
according to the Federal Reserve Bank of San Francisco, for the twelve months
ended August 1997 the metropolitan areas of Seattle, Washington and Portland,
Oregon were the fourth and tenth fastest growing metropolitan economies in the
nation, respectively. The northwest region of the United States is expected to
continue to achieve above average economic performance and population growth
through the year 2000, according to the U.S. Bank 1997 Regional Economic Review
and Forecast.
GROWTH STRATEGY
The Company is presently seeking growth opportunities in markets located
throughout the Northwest. The Company will consider the following factors in
evaluating acquisitions, conversions and redevelopments, construction of new
hotels and expansion of existing hotels: (i) the location of the property, (ii)
the construction quality, condition and design of the property, (iii) the
current and projected REVPAR, ADR and occupancy of the property and the
anticipated ability of the Company to increase REVPAR, ADR and occupancy through
management of the property by the Company and (iv) the potential for economic
growth in the communities in which the hotels are located. The Company expects
that future acquisitions will be based on these factors or such other similar
factors or criteria as are
30
<PAGE>
established from time to time by the Board. The Company has successfully
utilized each of these strategies and, since December 1996, has increased its
room count from 1,546 to 2,712.
Following the Offering, the Company expects to have improved access to equity
and debt financing sources with which to implement its growth strategy. The
Company has received a commitment from U.S. Bank which has agreed to provide,
upon consummation of the Offering, the Revolving Credit Facility in an amount up
to $80.0 million which will be used by the Company to finance property
acquisitions, development and capital improvements and for general corporate
purposes. As an alternative to debt financing, the Company may issue shares of
Common Stock or OP Units as consideration in future acquisitions. The issuance
of OP Units in exchange for hotels may allow the current owners of such hotels
to achieve certain tax advantages when selling such hotels to the Company.
Summarized below are the key elements of the Company's growth strategy:
ACQUISITION. The Company is presently seeking to acquire full service hotels
in locations where the Company currently operates properties, as well as in new
markets where the Company believes the potential exists to acquire hotel
properties suitable for conversion to a Cavanaughs brand hotel. Acquisitions
are contemplated by the Company when the cost of acquiring an existing hotel
property is less than replacement cost or where construction and development
opportunities no longer exist in a target market. The Company generally targets
for acquisition hotels with certain physical characteristics that guests
associate with a Cavanaughs brand hotel, including full service hotels with
interior hallways, conference and banquet facilities, restaurants, lounges,
recreational amenities and on-site parking. The Company generally focuses on
acquiring hotels containing 150 to 400 rooms. The Company re-brands an acquired
hotel as soon as practicable after acquisition with the installation of
"Cavanaughs" signage and amenities. In addition, as part of its repositioning
process, a dedicated management team is made responsible for integrating the
acquired hotel into the Company's reservations, information, accounting,
budgeting and management systems and, if necessary, upgrading and renovating the
hotel.
The Company utilizes senior management's knowledge of the Northwest and long-
standing relationships with the other hotel owners and operators to identify
potential acquisitions. These relationships have enabled the Company to acquire
certain of the Hotels before they became generally available for purchase on the
open market. Since December 1996, the Company has acquired four Hotels
(Cavanaughs Gateway Hotel, Cavanaughs Ridpath Hotel, Cavanaughs on the Falls and
Cavanaughs Templin's Resort), containing 823 guest rooms and approximately
43,800 square feet of meeting space. The total purchase and option price of
these Hotels was approximately $31.1 million (including a $6.3 million option
purchase price payable with respect to Cavanaughs Gateway Hotel which the
Company is not required to pay until 2003). This total purchase and option
price is comprised of a combination of cash and assumed indebtedness and, in the
case of Cavanaughs Ridpath Hotel, a combination of cash and OP Units. In
addition, the Company has entered into purchase agreements to acquire two hotels
(Cavanaughs Outlaw Hotel and Cavanaughs Hillsboro Hotel) containing 343 guest
rooms and approximately 14,500 square feet of meeting space. The total purchase
price for these hotels is approximately $15.5 million.
CONVERSION. Based on management's experience in developing hotel, retail and
office properties, the Company believes that it has the ability to convert non-
hotel properties, such as office buildings, into full service hotels. In
completing the conversion process, the Company uses an in-house design and
development staff, combined with third-party architectural and construction
expertise. The Company believes that this in-house capability allows certain
conversion opportunities to be economically feasible for the Company and at a
cost advantage in comparison to its competitors. The Company intends to target
conversion opportunities in markets that do not have hotel properties suitable
for acquisition or where acquisition and conversion of a non-hotel property
offers significant cost saving advantages as compared to new construction.
The Company recently completed the conversion of a non-hotel property into the
Cavanaughs on Fifth Avenue, a full service hotel located in Seattle's central
business and retail district. Prior to its conversion to a Cavanaughs brand
hotel, the property was used by U.S. Bank of Washington as its regional
headquarters. The Company acquired the property in June 1995 for approximately
$18.3 million and in less than eleven months completed the design, zoning,
permitting and construction required to convert the building into a 297-room,
full service Cavanaughs brand hotel, containing two restaurants and 12,500
square feet of banquet and meeting space. The total conversion cost, including
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<PAGE>
acquisition costs, was approximately $36.8 million. The Hotel, which opened in
May 1996, achieved average REVPAR of $73.55, ADR of $116.24 and occupancy of
64.9% during the Company's fiscal year ended October 31, 1997. The Company
believes the Hotel has not yet reached stabilized operating performance.
CONSTRUCTION. The Company intends to construct new hotels when it believes
room demand and local ADR will support the cost of new construction, a well
positioned building site is available and no viable acquisition or conversion
opportunities exist.
EXPANSION. As part of its growth strategy, the Company seeks to acquire hotel
properties with sufficient excess land to allow for potential future expansion.
The Company's current hotel portfolio includes seven Hotels which the Company
believes can be expanded to include additional hotel rooms and meeting space.
The Company's expansion criteria focuses on the demand for additional rooms in a
given area, the costs related to such expansion and the potential return on
investment to the Company. Through the use of its in-house development staff,
in most cases, an expansion is completed within one year from the beginning of
construction, with little or no disruption of existing hotel operations.
Expansion of an existing Hotel allows the Company to obtain economies of scale
in operating the Hotels and increase operating margins because it can leverage
existing staff resources, common areas, restaurants and meeting facilities and
guest amenities, such as pools and fitness facilities.
OPERATING STRATEGY
The Company's operating strategy focuses on increasing REVPAR, ADR and
occupancy and improving operating efficiencies at the Hotels. Summarized below
are the key elements of the Company's operating strategy:
UTILIZATION OF PROPRIETARY CAVANAUGHS(TM) BRAND. The Company is focused on
enhancing its Cavanaughs brand name, which is synonymous with quality and value
throughout the Northwest, thereby earning the loyalty and repeat patronage of
business and leisure travelers. By owning its own proprietary brand, the Company
both retains control over the Hotels and avoids certain operating or marketing
restrictions that a competitor might face being affiliated with a third-party
brand or franchise. The Company believes that the Cavanaughs brand name provides
it with a competitive advantage in its operating profitability over competitors
that do not own a hotel brand and are required to pay third-party franchise fees
which typically can range from 6% to 10% of revenue. As a result of owning its
own Cavanaughs brand name, the Company has the flexibility to freely market as
well as cross-sell hotel rooms with any of its other marketing efforts or
promotions, such as ticketing events or promotional campaigns. These cross-
marketing efforts also serve to strengthen the Cavanaughs brand name. The
Company will use the Cavanaughs brand name on its newly acquired, converted and
developed hotels in order to maximize the long-term value of each of its hotels.
SALES AND MARKETING. The Company develops sales and marketing programs that
target key segments of the hotel user market, including convention, corporate,
government, tour and travel, team, education, promotion, leisure, transient and
contract. Members of the Company's centrally located sales and marketing
department are assigned to each market segment in which the Company operates and
are responsible for communicating with hotel personnel in those markets
regarding the specific hotel needs of such hotel's guests. In addition, each
Hotel has (or shares with an adjacent Cavanaugh's Hotel) sales and banquet and
catering personnel responsible for promoting that property as well as personnel
responsible for the creation of promotional packages designed to attract
individual guests. As a result of the corporate level and hotel level marketing
efforts, the Company believes that it is able to more effectively meet
customers' needs and enhance loyalty. The Company also expects that its
corporate level marketing program will allow it to more easily direct those
customers to other Cavanaughs brand Hotels located throughout the Northwest as
their hospitality needs require.
OPERATING EFFICIENCIES. As a result of owning and operating a portfolio of
hotels, the Company is able to achieve operating efficiencies and economies of
scale. By operating more than one hotel in a specific market, the Company
believes that it can better manage its occupancy levels, match customer needs
with a greater variety of price-points, locations and amenities and achieve
economies of scale. For example, during periods when one of the Hotels is fully
booked, customers can be accommodated at one of the Company's other Hotels,
capturing what would otherwise be lost occupancy. Additionally, the Company is
able to reduce costs through the allocation of fixed costs over a greater number
of rooms. Regional management staff oversees the operations of all Hotels and
certain departments, such as
32
<PAGE>
accounting and sales, and operates in these regions with reduced independent
staffs through shared accounting and sales personnel with the Company's
corporate headquarters. The Company utilizes centralized control for the
purchase of property, casualty and liability insurance policies, telephone and
cable contracts as well as other goods and services.
CONTROL OVER HOTEL OPERATIONS. The Company believes that it is able to
effectively manage the relationship between occupancy and ADR of the Hotels
through the delegation of authority to the general manager of each Hotel. The
Company continuously invests in the development of its yield management and
proprietary information reporting systems that enable general managers to
analyze daily Hotel performance statistics and to use this information to adjust
pricing, staffing and customer mix in an effort to maximize their Hotel's
REVPAR. In addition, management believes that the use of centralized systems
and regional support services allow general managers to control costs, allocate
resources efficiently and maintain consistently high product quality and
services.
POLICY OF REINVESTMENT. It is the Company's policy to continuously reinvest
capital in the Hotels in order to maintain their quality. The Company allocates
4.0% of each Hotel's prior year's gross revenues for reinvestment in the Hotels.
During 1997, the Company reinvested approximately $5.0 million for renovation of
rooms and related Hotel facilities. The Company's reinvestment program is
designed to maintain attractive accommodations, common areas, update
restaurants, lounges and meeting and banquet space and to modernize equipment.
The Company believes that its reinvestment program helps to enhance the
Company's competitive position and the value of the Hotels.
EMPHASIS ON FOOD AND BEVERAGE SERVICES. The Company emphasizes its food and
beverage operations (restaurant and lounge, room service, banquet facilities and
catering) in an effort to strengthen its group and convention business as well
as to establish a positive reputation among its local clientele. The restaurant
and catering business serves to establish each Hotel's reputation and name
recognition in their respective markets. In order to ensure consistency of food
and beverage service throughout the Hotels, a new menu and customer marketing
program, Northwest Signatures, has been introduced to all of the Hotels.
GUEST BENEFIT PROGRAMS. The Company has established several incentive programs
to encourage and reward repeat visits by guests at the Hotels. The incentive
programs include: (i) Cavanaughs Constant Traveler and Cavanaughs Gold Club, a
corporate rate and amenity program, (ii) Cavanaughs Cash, a frequent use program
and (iii) participation in Alaska Airlines/Horizon Air Mileage Plan, a frequent
flyer program. The Company uses the information gained through guest
participation in its incentive programs to design direct mailing and other
promotional programs to attract repeat use of the Hotels.
MAINTAINING A UNIQUE MANAGEMENT CULTURE. The Company has developed a team of
managers which has the expertise, authority and incentive to execute a plan for
each Hotel that is designed to increase operating profitability. Members of the
Company's senior management team have been with the Company on average for more
than 17 years. The Company's management encourages employee loyalty and
longevity through a number of employee programs that enhance productivity and
align employees' interests with those of the shareholders. Significant programs
include (i) employee stock option and stock purchase plans which are available
to all hourly and salaried employees through payroll deduction and 401(k)
programs, (ii) employee bonus plans that target, where possible, all management
level employees to have a significant portion of their annual compensation from
profits generated through their departments thereby encouraging significant
business decision making among all levels of employees and (iii) continuing
education programs that encourage expanded learning with Company sponsored
tuition programs tied to length of service. In addition, the Company sponsors a
not-for-profit day-care program at the Company's headquarters.
SALES AND MARKETING
The Company's hotel sales and marketing approach includes the following
components:
CENTRALIZED SALES MANAGEMENT. In order to serve customers' lodging needs, the
Company's sales department is centrally organized according to expertise and
relationships in each of the following market segments: corporate, convention,
government, tour and travel, education, team, transient, contract, and
promotion/leisure. The sales department works with each Hotel to ensure that
sufficient hotel product is available to accommodate each group, guest or event
in the particular Hotel which best serves the lodging needs of such group, guest
or event. In addition, each
33
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Hotel has (or shares with adjacent Cavanaughs Hotels) sales and banquet and
catering personnel promoting that Hotel to ensure that such Hotel's local
individual and corporate customers are served. The Company's sales and marketing
department includes personnel located at its headquarters as well as sales and
marketing personnel located at each of the Hotels. Sales and marketing personnel
residing at the Company's headquarters are in charge of major national and
regional accounts and promotional campaigns. The Company utilizes media in the
Northwest including television, radio, newspaper, in-flight magazines, business
publications, and billboards, to market the Hotels.
ATTENTION TO CUSTOMER SERVICE. The Company places significant value on
meeting the changing needs of its customers by employing state-of-the-art
technology to track customer preferences and actively measuring guest
satisfaction through surveys which enables it to reinvest in those services and
amenities which are most appreciated.
IN-HOUSE ADVERTISING SERVICES. The Company believes that its in-house
advertising and promotional departments allows it to take advantage of hotel
room sales opportunities by generating promotional campaigns more quickly than
its competitors. Through its internal advertising agency, the Company can
purchase media at lower all-inclusive costs than its competitors who must out-
source these functions.
RESERVATION SYSTEMS. The Company's Toll-Free Call Center is designed to
provide integrated hotel, entertainment information and reservation services.
The Toll-Free Call Center has the capacity to accommodate 48 simultaneous calls
and provides access to standardized reservation systems utilized by travel
agents worldwide to book hotel rooms. The Toll-Free Call Center is open 24
hours per day, seven days per week. The Toll-Free Call Center also maintains a
database of information on over 200,000 repeat customers. Both hotel
reservations and event ticketing requests can also be made through the Company's
website address: www.cavanaughs.com.
PROMOTIONAL PROGRAMS. The Company utilizes its own and affiliated incentive
programs to attract additional customers. The Company's Cavanaughs Cash program
enables participants to enjoy guest room savings by accumulating Cavanaughs Cash
coupons. In addition, the Company participates in the Alaska Airlines/Horizon
Air Mileage Plan Program. Alaska Airlines/Horizon Air is the dominant air
service provider in the northwest United States, serving approximately 77
airports in the United States and 13 additional airports in Canada, Mexico and
Russia. During 1996 Alaska Air/Horizon Air carried 11.8 million passengers.
Guests of the Hotels who pay qualifying rates earn mileage credits for each
stay, redeemable for air travel and other airline benefits. The Company and
Alaska Airlines/Horizon Air have committed to jointly market property-specific
programs that benefit the customers of both companies.
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HOTEL PROPERTIES
The Company's hotel portfolio currently contains 11 full service Hotels, with
2,369 guest rooms and approximately 120,000 square feet of meeting space,
located in the Northwest. In addition, the Company has entered into purchase
agreements to acquire two additional full service hotels. The following table
sets forth certain information regarding the Company's hotel portfolio and
hotels under contract.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997
MEETING ------------------------------
YEAR BUILT/ YEAR GUEST SPACE AVERAGE
LOCATION ACQUIRED RENOVATED ROOMS (SQ. FT.) REVPAR ADR OCCUPANCY
------------- --------- --------- ------- --------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hotels Owned as of October 31, 1997:
Cavanaughs on Fifth Avenue Seattle, WA 1996 1996 297 12,500 $73.55 $116.24 64.9%
Cavanaughs Inn at the Park Spokane, WA 1983 1997 402 26,300 48.61 80.90 61.1
Cavanaughs River Inn Spokane, WA 1976 1997 245 3,700 40.17 53.01 74.2
Cavanaughs Fourth Avenue Spokane, WA 1991 1997 153 2,600 23.63 48.33 51.7
Cavanaughs at Yakima Center Yakima, WA 1991 1997 155 11,000 37.13 55.98 63.3
Cavanaughs Gateway Hotel Yakima, WA 1997 (1) 1997 172 8,000 34.16 58.96 57.9
Cavanaughs at Columbia Center Kennewick, WA 1978 1997 162 9,700 31.15 55.86 58.9
Cavanaughs at Kalispell Center Kalispell, MT 1986 1997 132 10,500 36.89 59.30 63.2
------ ------- ------ ------- ----
Total/Weighted Average for
Owned Hotels (2) 1,718 84,300 $45.72 $73.43 63.0%
</TABLE>
Hotels Acquired since October 31, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cavanaughs Ridpath Hotel Spokane, WA 1998(3) 1996 342 16,000 $33.49 $58.43 57.3%
Cavanaughs on the Falls Idaho Falls, ID 1998(4) 1994 142 8,800 34.49 57.38 60.1
Cavanaughs Templins Resort Post Falls, ID 1998(5) 1996 167 11,000 36.45 62.65 58.2
</TABLE>
Hotels Currently Under Contract:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cavanaughs Outlaw Hotel Kalispell, MT 1998(6) 1995 220 11,000 $29.88 $68.88 43.4%
Cavanaughs Hillsboro Hotel Portland, OR 1998(7) 1997 123 3,500 50.13 72.38 69.3
------ ------- ------- ------- ----
Total/Weighted Average for Hotels
Acquired or Under Contract
Since October 31, 1997 994 134,600 $35.40 $62.99 56.2%
Total/Weighted Average for All
Hotels 2,712 218,900 $39.09 $65.40 59.8%
- -----------------------------------------------
</TABLE>
(1) Leased by the Company on October 15, 1997. See "Business and Properties --
Hotel Properties."
(2) The total/weighted average for owned Hotels includes REVPAR, ADR and
average occupancy of Cavanaughs Gateway Hotel for the period from October
15, 1997 through October 31, 1997.
(3) Leased by the Company on January 1, 1998. See "Business and Properties --
Hotel Properties."
(4) Acquired by the Company on January 7, 1998.
(5) Expected to be acquired by the Company in February 1998.
(6) The Company has entered into a purchase agreement to acquire this hotel,
subject to the satisfaction of normal closing conditions, for a purchase
price of $9.9 million within 60 days of the closing of the Offering. This
hotel, which is currently known as the Outlaw Inn, will be re-branded as
the "Cavanaughs Outlaw Hotel" upon acquisition.
(7) The Company has entered into a purchase agreement to acquire this hotel,
subject to the satisfaction of normal closing conditions, for a purchase
price of $5.7 million. This hotel, currently known as the Hallmark Inn,
will be re-branded as the "Cavanaughs Hillsboro Hotel" upon acquisition.
Cavanaughs on Fifth Avenue - Seattle, Washington. Formerly the regional
headquarters for U.S. Bank of Washington, the 20-story property was acquired by
the Company in June 1995 and, in eleven months, converted into a 297-room, full
service hotel which opened in May 1996. The Hotel is located in the central
business district of Seattle, and is two blocks from the Washington State
Convention Center. Amenities include two restaurants, a lounge, business
center, fitness center and 12,500 square feet of meeting and banquet space which
can be divided into six separate meeting rooms. The Hotel also includes 14,300
square feet of retail space and 25,000 square feet of office space. The retail
and office space is 100% leased.
35
<PAGE>
Cavanaughs Inn at the Park - Spokane, Washington. Developed by the Company
in 1983 and expanded in 1986 and 1993, the property is a 402-room, full service
hotel located along the banks of the Spokane River in Spokane, Washington, the
cultural, entertainment and sports center for the region. The Hotel is adjacent
to the 100 acre Riverfront Park, near the 80,000 square foot Spokane Convention
Center and 2,600-seat Opera House and is two blocks from the central business
district and one block from the 12,000-seat Spokane Arena. The Hotel is
comprised of three guest room wings: the five story Main Wing containing 181
rooms, the seven story Executive Wing containing 85 rooms, and the 12-story
Tower Wing containing 136 rooms. Amenities include two restaurants, two
lounges, two outdoor pools, one indoor lap pool, fitness center, sauna, two
whirlpools, and gift shop. The Hotel, which is the largest hotel conference
facility in the region, offers approximately 26,300 square feet of meeting and
banquet space which can be divided into separate meeting rooms. The property
contains approximately 2.1 acres of excess land which could be reallocated for
parking and enable the Company to develop an estimated 336 additional guest
rooms on its primary site in the future, if market conditions warrant.
Cavanaughs River Inn - Spokane, Washington. Developed by the Company in
1976, the property is a two-story, 245-room, full-service hotel located on the
banks of the Spokane River along the 40 mile long Centennial Trail pedestrian
walk. Amenities include two outdoor pools, tennis court, sauna and whirlpool,
gift shop, and a 2,800 square foot ballroom divisible into two meeting rooms.
The Hotel also has two additional meeting rooms totaling 900 square feet. The
property contains approximately 0.5 acre of excess land upon which, if some of
the Hotel's parking requirements were allocated to a parking lot controlled by
Cavanaughs Inn at the Park, an estimated 168 additional guest rooms in a high-
rise tower may be built in the future, if market conditions warrant.
Cavanaughs Fourth Avenue - Spokane, Washington. Acquired by the Company in
1991 and re-branded as a Cavanaughs hotel, the property is a six story, 153-room
full service hotel located in the center of Spokane's medical community,
adjacent to four hospitals, numerous public and private clinics and
rehabilitation centers. Amenities include a restaurant and lounge, an outdoor
pool and 2,600 square feet of meeting and banquet space divisible into four
meeting rooms. This Hotel is owned by a limited partnership of which the
Company is a 50% owner and general partner and an unaffiliated person is the
sole limited partner.
Cavanaughs Ridpath Hotel - Spokane, Washington. Acquired by the Company in
January 1998 and re-branded as a Cavanaughs hotel, the property is a 13-story,
342-room, full service hotel located in the Spokane central business district
and is four blocks from the Spokane Convention Center and Opera House.
Amenities include two restaurants, two lounges, an outdoor pool, fitness center
and approximately 12,700 square feet of retail space which is leased to seven
tenants. As of January 1998, the retail space was 80% leased. The Hotel offers
approximately 16,000 square feet of meeting banquet space divisible into 14
meeting rooms. The Hotel is held by the Company pursuant to a lease which
expires in November 1999, and provides the Company with a purchase option, and
the lessor with a put option, exercisable during the term, to acquire the Hotel
from the lessor for an amount ranging from $11.5 million to $12.5 million,
depending on the date of exercise.
Cavanaughs at Yakima Center - Yakima, Washington. Acquired by the Company
in 1991 and re-branded as a Cavanaughs hotel, the property is a two-story, 155-
room, full service hotel located in the center of Yakima's central business
district and is attached to the Yakima Convention Center by a covered walkway.
Yakima is located in the center of the state of Washington and has a diverse
agricultural, industrial and manufacturing base. The Hotel is comprised of four
buildings: the two-story Corporate Building, the two-story Garden Building, the
two-story free standing Townhouse Building and the two-story, free standing Main
Building. Amenities include a restaurant, lounge, two outdoor pools, and
business center. The Hotel offers approximately 11,000 square feet of meeting
and banquet space which can be divided into nine separate meeting rooms and is
often used for convention center overflow. The property contains approximately
0.3 acres of excess land that could be used to facilitate the addition of an
estimated 80 guest rooms, if market conditions warrant.
Cavanaughs Gateway Hotel - Yakima, Washington. Acquired by the Company in
October 1997 and re-branded as a Cavanaughs Gateway Hotel, the property is a
three-story, 172-room full service hotel located adjacent to the Yakima
Convention Center and across the street from the Company's Cavanaughs at Yakima
Center Hotel. Amenities include a restaurant, lounge, outdoor pool and jacuzzi.
The property offers approximately 8,000 square feet of meeting space which is
divisible into ten meeting rooms and is often used for convention center
overflow. The Hotel is held by
36
<PAGE>
the Company pursuant to a lease which expires in October 2112, subject to the
Company's right to extend the term of the lease for two additional five-year
periods, and provides the Company with a purchase option, exercisable in 2003,
to acquire the Hotel from the lessor for $6.3 million.
Cavanaughs at Columbia Center - Kennewick, Washington. Developed by the
Company in 1978, the property is a two-story, 162-room full service hotel
located across the street from the five anchor, 90-store Columbia Center Mall
and a 6,000 seat arena. Amenities include a restaurant, lounge, outdoor pool
and gift shop. The Hotel offers 9,700 square feet of meeting and banquet space
which is divisible into nine meeting rooms. The property contains approximately
4.0 acres of excess land upon which an estimated 144 additional guest rooms in a
three-story structure, together with an estimated 50,000 square feet of retail
facilities may be built in the future, if market conditions warrant.
Cavanaughs on the Falls - Idaho Falls, Idaho. Acquired by the Company in
January 1998 and re-branded as a Cavanaughs hotel, the property is an eight-
story, 142-room full service hotel located in downtown Idaho Falls overlooking
the falls on the Snake River. Amenities include a restaurant, lounge, an
outdoor pool, sauna, spa and fitness center. The Hotel offers 8,800 square feet
of meeting and banquet space which is divisible into eight meeting rooms. The
property underwent major renovations in 1993 and 1994. The property includes a
13,300 square foot building which could be demolished and re-built into an
estimated 30 additional guest rooms in the future, if market conditions warrant.
Cavanaughs Templins Resort - Post Falls, Idaho. The property will be
acquired by the Company in February 1998 and re-branded as a Cavanaughs hotel.
The property is a three-story, 167-room full service hotel which was built in
three phases between 1986 and 1996. The Hotel, which is located on the Spokane
River, has a 76 slip marina offering boating access to Lake Coeur d'Alene, a
popular vacation destination. Amenities include two restaurants, lounge, indoor
pool, sauna, spa, fitness center, two tennis courts, and private beach and swim
area. The Hotel offers 11,000 square feet of meeting space which is divisible
into 14 meeting rooms. The property contains approximately 10.5 acres of excess
land upon which an estimated 288 additional guest rooms in a series of low-rise
buildings, together with an estimated 10,000 square foot executive conference
center and 20,000 square foot retail facilities, may be built in the future, if
market conditions warrant.
Cavanaughs at Kalispell Center - Kalispell, Montana. Developed by the
Company in 1986 in conjunction with the Company's development of the Kalispell
Center Mall, the property is a three-story, 132-room full service hotel located
near Glacier National Park, Flathead Lake and Big Mountain Ski Resort.
Amenities include a restaurant, lounge, indoor pool, whirlpool, sauna and
fitness center. The Hotel offers 10,500 square feet of meeting and banquet
space which is divisible into nine meeting rooms. The Hotel is connected to the
Company's Kalispell Center Mall. The property contains approximately 3.5 acres
of excess land upon which an estimated 48 additional guest rooms and 100,000
square feet of additional retail space may be built in the future, if market
conditions warrant.
Cavanaughs Outlaw Hotel - Kalispell, Montana. The property, which the
Company intends to acquire for a purchase price of $9.9 million within 60 days
of the closing of the Offering, is a two-story, 220-room full service hotel and
is the largest full service hotel in northwest Montana. Amenities include a
restaurant, lounge, two indoor pools, four whirlpools, sauna, tennis and
racquetball courts, and fitness center. The hotel offers approximately 11,000
square feet of meeting and banquet space divisible into 13 meeting rooms.
Cavanaughs Hillsboro Hotel. The property, which the Company intends to
acquire for a purchase price of $5.7 million, is a two-story, 123-room full
service hotel located in the suburban Portland metropolitan area. The hotel is
adjacent to the Portland/Hillsboro Airport, Washington County Fairplex and in
the heart of the Silicon Forest, Oregon's premier high-tech business area.
Amenities include a restaurant, lounge, outdoor pool, indoor spa and fitness
center. The hotel offers 3,500 square feet of meeting and banquet space
divisable into five meeting rooms. The property contains excess land upon which
an estimated 70 additional guest rooms may be built, if market conditions
warrant.
ENTERTAINMENT SERVICES AND THIRD-PARTY PROPERTY MANAGEMENT
The entertainment, management and services division of the Company is
comprised of: (i) G&B Select-a-Seat, a full service theatrical and event
ticketing agency, (ii) G&B Presents, a promoter of touring Broadway shows and
other
37
<PAGE>
special events, and (iii) G&B Real Estate Services, a third-party property
management service. Reservations for entertainment events and hotel information
and reservations are made through the Toll-Free Call Center. The combination of
event ticketing, presentation of Broadway shows, hotel event packages and a
centralized reservations systems enables the Company to offer packages for hotel
guests, generating additional room night occupancy and income from ticket
distribution service fees.
G&B SELECT-A-SEAT. G&B Select-a-Seat, established in 1987, is a full
service ticketing agency offering box office ticket distribution through 20
regional outlets and box offices in Washington, Idaho and Montana. G&B Select-
a-Seat is the exclusive contracted ticket services vendor for certain facilities
in these states, including the Spokane Arena, Spokane Opera House, Spokane
Symphony, Washington State University's stadium and coliseum, Eastern Washington
University and the University of Idaho. During its fiscal year ended October
31, 1997, the Company distributed in excess of 2.0 million tickets. G&B Select-
a-Seat uses state of the art software which enables the agency to access the
many entertainment events being presented throughout the Northwest. Phone
agents are able to coordinate the sales of entertainment and event tickets with
guests making hotel room reservations and vice versa. The Company is actively
seeking additional ticket distribution opportunities in the Northwest.
G&B PRESENTS. G&B Presents, established in 1987, is one of the largest
regional presenters of events in the Washington area. In addition to special
events, such as sporting events and musical acts, G&B Presents organizes the
presentation of touring Broadway shows in Spokane as part of its "Best of
Broadway" series. During 1997, the Company presented nine Broadway shows and
special events. Past events have included shows such as Cats, South Pacific and
Les Miserables. In its last ten years of operation the Company has attracted
over 500,000 patrons to its 79 Broadway and special event shows. The Company
cross-markets these productions by creating special event/Hotel packages.
THE TOLL-FREE CALL CENTER. The Toll-Free Call Center is designed to
provide centralized hotel and entertainment information and reservation
services. Each agent is trained to cross-sell Hotel reservations, event
tickets, and special event/Hotel packages. Guests that are traveling to see
entertainment events are able to book their hotel room and confirm event tickets
in one toll-free call. The Toll-Free Call Center is open 24 hours per day,
seven days a week and has the capacity to accept as many as 48 simultaneous
phone conversations and provides access to reservations systems used by travel
agents world-wide to book hotel rooms. The Toll-Free Call Center also maintains
a database which gives reservation agents information on current room and event
availability, guest information, history and preferences. Event ticket requests
and hotel reservations can be made by calling the Toll-Free Call Center at 1-
800-325-4000 and via the Company's website address at www.cavanaughs.com.
G&B REAL ESTATE SERVICES. The Company is a leading property manager of
office, retail and residential space in regions of eastern Washington, northern
Idaho and western Montana, with over 3.1 million square feet of commercial space
under management. The Company's property management staff includes leasing
agents, property managers and building engineers providing full-service
commercial property management. The Company's residential property management
department manages approximately 2,200 residential units in 39 properties. The
Company is experienced in the management of a full range of multi-family
projects, including low income housing, retirement communities, market rate
apartment properties and condominiums.
RENTAL OPERATIONS
The Company is the owner and manager of approximately 590,000 square feet
of leasable office and retail space located in Spokane, Washington and
Kalispell, Montana. The following is a description of each of the Company's
office and retail properties:
Crescent Court - Spokane, Washington. Acquired and substantially re-
developed by the Company in 1994, the property is an eight-story, 234,000 square
foot mixed-use commercial building comprised of approximately 59,000 square feet
of leasable retail space, including a food court, 157,000 square feet of
leasable office space and an 8,000 square foot lower level exhibition hall,
located in Spokane's central business district. The property is located
directly across the street from River Park Square, a $100 million redevelopment
project which, when completed in 1999, is expected to include a 130,000 square
foot Nordstrom's department store, a number of speciality retailers, a 20 screen
38
<PAGE>
AMC multiplex cinema and 300,000 square feet of additional retail and restaurant
space. As of December 1997, the retail portion of the property was 63.3% leased
to 19 tenants and the office portion of the property was 77.4% leased to four
tenants including the Bonneville Power Administration, the U.S. Postal Service
regional headquarters, Sallie Mae and The Travelers Group which has an option to
lease an additional floor in the building effective December 1999. The Company
has determined to retain 22,000 square feet of retail space in the project for
future development and leasing pending completion of the River Park Square
project.
Lincoln Building - Spokane, Washington. Acquired by the Company in 1984,
the property is a 114,000 square foot mixed-use commercial building comprised of
approximately 32,000 square feet of retail space, 82,000 square feet of office
space, and two floors of underground parking which can accommodate 200
automobiles. The building is located in Spokane's central business district,
one block west of the Company's Crescent Court property and one block south of
River Park Square. As of December 1997, the retail portion of the property was
66.8% leased to six tenants, including Pacific Northwest Life and Farmers and
Merchants Bank. The office tower was 88.4% leased to 25 tenants, including New
York Life Insurance and Equitable of Iowa. The Company has determined to retain
26,000 square feet of retail space for future development and leasing pending
completion of the River Park Square project.
CHC Building - Spokane, Washington. Developed by the Company in 1986, the
property is a six-story, 100,000 square foot office building having an attached
three-story parking deck which can accommodate 250 automobiles. The building is
located on the north bank of the Spokane River, adjacent to Cavanaughs Inn at
the Park. As of December 1997, the property was 100% leased to 23 tenants
including the Company, Morgan Stanley Dean Witter Discover, and Avista Energy.
Kalispell Center Mall - Kalispell, Montana. Developed by the Company in
1986 in conjunction with the Company's development of the Cavanaughs at
Kalispell Center hotel, the property is a single level enclosed regional mall
shopping center containing 163,000 square feet of gross leasable area. As of
December 1997, the property was 98% leased to 46 tenants including J.C. Penney
and Herbergers. The property is connected to the Cavanaughs at Kalispell Center
hotel.
MANAGEMENT AND EMPLOYEES
The Company employs approximately 1,900 persons. Employees at Cavanaughs
Ridpath Hotel currently are represented by labor unions. Management believes
its ongoing labor relations are good.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course of
business. The Company believes that the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company.
TRADEMARKS
"Cavanaugh's(R)" is a registered trademark of the Company in the United
States. The Company has filed an application to register "Cavanaughs" as an
additional trademark in the United States and Canada.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of January 16, 1998
regarding the Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Donald K. Barbieri 52 Chairman, President and Chief Executive Officer
Arthur M. Coffey 42 Executive Vice President, Chief Financial Officer and Director
Richard L. Barbieri 55 Senior Vice President, General Counsel and Director
Thomas M. Barbieri 40 Senior Vice President - Acquisitions and Commercial
Operations and Director
David M. Bell 47 Senior Vice President - Project Design, Development
and Construction
Lori L. Farnell 42 Vice President - Sales and Marketing
John M. Taffin 34 Vice President - Hotel Operations
Peter F. Stanton 41 Proposed Director
Ronald R. Taylor 50 Proposed Director
Robert G. Templin 74 Proposed Director
</TABLE>
Donald K. Barbieri has been President and Chief Executive Officer and a
Director of the Company since 1978 and Chairman of the Board since 1996. Mr.
Barbieri joined the Company in 1969 and is responsible for the Company's
development activities in commercial, residential, hotels and entertainment
areas. Mr. Barbieri served as president of the Spokane Chapter of the Building
Owners and Managers Association from 1974 to 1975 and served as president of the
Spokane Regional Convention and Visitors Bureau from 1977 to 1979. He also
served on the Washington Tourism Development Council from 1983 to 1985 and the
Washington Economic Development Board while chairing the State of Washington's
Quality of Life Task Force from 1985 to 1989. Mr. Barbieri is the brother of
Richard and Thomas Barbieri and the brother-in-law of David Bell.
Arthur M. Coffey has been Chief Financial Officer and Executive Vice
President of the Company since June 1997 and a Director of the Company since
1990. Mr. Coffey served as Chief Operating Officer of the Company from 1990 to
June 1997. Mr. Coffey has been in the hotel business since 1971 and joined the
Company in 1981. Mr. Coffey is currently a trustee of the Spokane Area Chamber
of Commerce, served as a director of the Washington State Hotel Association from
1996 to 1997, served as director of the Spokane Regional Convention and Visitors
Bureau from 1982 to 1985 and served as president of the Spokane Hotel
Association from 1989 to 1990.
Richard L. Barbieri has been a Senior Vice President of the Company since
September 1997, full-time General Counsel of the Company since 1995 and a
Director of the Company since 1978. From 1994 to 1997, Mr. Barbieri served as a
Vice President of the Company. From 1978 to 1995, Mr. Barbieri served as
outside counsel and Secretary of the Company, during which time he was engaged
in the practice of law at Edwards and Barbieri, a Seattle law firm, and then at
Riddell Williams Bullitt and Walkinsaw, a Seattle law firm, where he headed the
real estate practice group. Mr. Barbieri has also served as chairman of various
committees of the State and County Bar Association and as a
40
<PAGE>
member of the governing board of the County Bar Association. He also served as
vice chairman of the Citizens' Advisory Committee to the Major League Baseball
Stadium Public Facilities District in Seattle in 1996 and 1997. Mr. Barbieri is
the brother of Donald and Thomas Barbieri and the brother-in-law of David Bell.
Thomas M. Barbieri has been Senior Vice President - Acquisitions and
Commercial Operations of the Company since September 1997 and a Director of the
Company since 1985. From 1985 to 1997, Mr. Barbieri served as a Vice President
of the Company. Mr. Barbieri joined the Company in 1979 and from 1987 to the
present has overseen the management, supervision, and development of the
Company's real estate portfolio. From 1982 to 1987, Mr. Barbieri was Operations
Manager of the Company's hospitality division. From 1979 to 1981, Mr. Barbieri
was the General Manager of Cavanaughs River Inn. He served on Washington State
Governor Lowery's Real Estate Advisory Council from 1993 to 1994, as a president
of the Downtown Spokane Association from 1992 to 1994, as a director of the
Spokane Convention and Visitors Bureau from 1983 to 1987, as a trustee of the
Spokane Area Chamber of Commerce from 1987 to 1991 and as a director of the
Spokane Economic Development Council from 1991 to 1996. Mr. Barbieri is the
brother of Donald and Richard Barbieri and the brother-in-law of David Bell.
David M. Bell has been Senior Vice President - Project Design, Development
and Construction of the Company since September 1997 and a Director of the
Company since 1985. From 1985 to 1997, Mr. Bell served as Vice President of the
Company. He is in charge of new project development, property renovations and
major building construction. Since joining the Company in 1984, Mr. Bell has
been responsible for numerous projects, including the development of the CHC
Building, the Cavanaughs at Kalispell Center hotel and the Kalispell Center
Mall, two major room tower additions to Cavanaughs Inn at the Park and the
conversion of the U.S. Bank of Washington office building in Seattle into
Cavanaughs on Fifth Avenue. Mr. Bell is a registered Professional Engineer.
Mr. Bell is the brother-in-law of Donald, Richard and Thomas Barbieri.
Lori L. Farnell has been the Vice President - Sales and Marketing since
October 1993. Ms. Farnell joined the Company in 1981 as Director of Sales for
the hospitality division. Ms. Farnell is responsible for directing the sales
and marketing activities of the Company and the in-house advertising and art
department. Prior to joining the Company, Ms. Farnell worked as Director of
Sales for the Spokane Davenport Hotel. She is a member of the Eastern
Washington University Foundation Board, the Sacred Heart Hospital Ambassadors
Board, a past President and Woman of the Year of Executive Women International
and an active member of the Washington Society of Association Executives and the
National Tour Association.
John M. Taffin has been Vice President - Hotel Operations since September
1997. Mr. Taffin is responsible for the Company's overall hotel operations and
directs the Company's yield management strategy. Mr. Taffin joined the
Company's hospitality division in November 1995 as a regional manager. Mr.
Taffin's prior lodging experience includes 13 years of service with Red Lion
Hotels, during which time he was a general manager of various full service
hotels throughout the Northwest. Prior to September 1997, Mr. Taffin was
responsible for all aspects of operations for the Hotels located in Spokane.
Mr. Taffin directs the Company's yield management strategy.
Peter F. Stanton has agreed to become a Director of the Company upon
consummation of the Offering. Mr. Stanton is the Chairman, Chief Executive
Officer and President of Washington Trust Bank. Mr. Stanton has been with
Washington Trust Bank since 1982 and has served as its President since 1990,
Chief Executive Officer since 1993 and Chairman since 1997. Mr. Stanton is also
Chief Executive Officer, President and a director of W.T.B. Financial
Corporation (a bank holding company) and a director of Northern State Bank and
Reardon and Rivard & Associates (a registered investment advisor). In addition
to serving on numerous civic boards, Mr. Stanton was president of the Washington
Bankers Association from 1995 to 1996 and serves as state chairman of the
American Bankers Association for 1997 and 1998.
Ronald R. Taylor has agreed to become a Director of the Company upon
consummation of the Offering. From 1996 to the present, Mr. Taylor has worked
as an independent business consultant. From 1987 to 1996, Mr. Taylor was
chairman, president and chief financial officer of Pyxis Corporation (a health
care services provider). He is currently a director of Watson Pharmaceuticals,
Inc. (a pharmaceutical manufacturer), Allelix Biopharmaceuticals (a
biotechnology company) and Cardio Dynamics (a medical device manufacturer).
41
<PAGE>
Robert G. Templin has agreed to become a Director of the Company upon
consummation of the Offering. Mr. Templin has had 50 years of continuous
experience in ownership, acquisition and disposition, transaction counseling,
development, construction and management work in the lodging industry in the
Northwest. From 1962 to 1983, he was Chief Executive Officer of Western
Frontiers, a hotel operator. Since 1986, Mr. Templin has served as governor for
District II for Best Western, Inc. In 1986, he built Templin's Resort and
Conference Center. He served as president of the Idaho Inn Keepers Association
from 1975 to 1976 and president of the Coeur d'Alene Chamber of Commerce in
1963. Mr. Templin also served on the Government Affairs Committee of Holiday
Inn, Inc. from 1981 to 1982. In addition to his responsibilities as a Director
of the Company, Mr. Templin will be asked to represent the Company on the board
of the Idaho Travel Council.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the closing of the Offering, the Board
will establish an audit committee consisting of Peter Stanton and Ronald Taylor
(the "Audit Committee"). The Audit Committee will be responsible for making
recommendations concerning the engagement of the Company's independent public
accountants, reviewing with the independent public accountants the plans and
results of the audit engagement, approving professional services provided by the
independent public accountants, reviewing the independence of the independent
public accountants, considering the range of audit and non-audit fees and
reviewing the adequacy of the Company's internal accounting controls.
Compensation Committee. Promptly following the closing of the Offering,
the Board will establish a compensation committee consisting of Peter Stanton
and Ronald Taylor (the "Compensation Committee"). The Compensation Committee
will be responsible for determining compensation for the Company's executive
officers and administering the Plans.
OPERATIONS COMMITTEE
The Board has established an operations committee (the "Operations
Committee"). The Operations Committee is chaired by Donald Barbieri and
consists of Art Coffey, Thomas Barbieri, John Taffin, Lori Farnell, David
Barbieri, Stephen Barbieri, David Bell and Jack Lucas. The Operations
Committee, which is not a committee of the Board, is responsible for
implementing the policies established by the Board and shall be under the
direction of the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company expects that the Compensation Committee will consist of Peter
Stanton and Ronald Taylor, neither of whom have ever served as an officer of the
Company.
COMPENSATION OF DIRECTORS
The Company intends to pay an annual fee of $6,000 to its non-employee
Directors which will be paid 50% in cash and 50% in shares of Common Stock. In
addition, each non-employee Director will be paid $500 for attendance at each
meeting of the Board and $250 for attendance at each meeting of a committee of
the Board of which such Director is a member. Directors who are employees of
the Company will not receive any fees for their service on the Board or any
committee thereof. In addition, the Company will reimburse Directors for their
out-of-pocket expenses incurred in connection with their service on the Board.
Upon consummation of the Offering, each non-employee Director will be granted
options to purchase 10,000 shares of Common Stock at the initial public offering
price. These options will vest in 20% increments over the five-year period
following the Offering subject to the accelerated vesting schedule described in
"--Restricted Stock and Certain Stock Option Grants." Any non-employee Director
who ceases to be a Director will forfeit the right to receive any options not
previously vested.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Company with
respect to the fiscal year ended October 31, 1997 to the Chief Executive Officer
and the four most highly compensated executive officers whose total annual
compensation from the Company exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)
--------------------------- ---- ------- -------- ----------------
<S> <C> <C> <C> <C>
Donald K. Barbieri 1997 $88,776 $256,037 $7,129
President and Chief Executive
Officer
Arthur M. Coffey 1997 $76,680 $211,055 $8,799
Executive Vice President and
Chief Financial Officer
Richard L. Barbieri 1997 $79,572 $ 50,891 $6,544
Senior Vice President and
General Counsel
David M. Bell 1997 $67,530 $ 36,136 $7,667
Senior Vice President - Project
Design, Development and
Construction
Thomas M. Barbieri 1997 $86,645 $ 46,926 $8,289
Senior Vice President -
Acquisitions and Commercial
Operations
</TABLE>
- ----------------------------
(1) Includes contributions to the Company's 401(k) plan as well as premiums
paid with respect to such executive officer's health, disability and life
insurance policies.
EMPLOYMENT AGREEMENTS
The Company intends to enter into employment agreements with each of Donald
Barbieri, Arthur Coffey, Richard Barbieri, David Bell and Thomas Barbieri which
will provide for annual base salaries of $155,000 in the case of Donald
Barbieri, $130,000 in the case of Mr. Coffey, and $96,000 in the case of Richard
Barbieri, Mr. Bell and Thomas Barbieri, subject, in each case, to periodic
increases. Each executive officer will be eligible to receive annual bonuses as
determined by the Compensation Committee and will be entitled to participate in
all existing or future benefit plans of the Company, on the same basis as other
senior executive officers of the Company.
The employment agreements with these senior executive officers (as used
below, each an "Executive") will be substantially similar and provide as
follows. Each Executive shall serve in the position described above through
December 31, 1999, unless terminated earlier in accordance with the terms of
such agreement. Thereafter, each agreement will automatically be renewed for
additional one-year periods, unless terminated by either party upon 120 days'
notice prior to any renewal. Each agreement may be terminated by the Company
for Cause (as defined in such agreement) or by the Executive (i) for Good Reason
(as defined in such agreement) or (ii) within six months of a Change of Control
of the Company (as defined in such agreement). If the Executive terminates the
agreement for Good Reason
43
<PAGE>
(or the Company terminates the agreement without Cause) or, after the initial
term ends, unilaterally determines to not renew such Executive's agreement, the
Executive will receive a severance payment equal to two times such Executive's
total compensation in the prior year, plus a continuation of all benefits for a
two-year period, and all outstanding options of such Executive shall become
fully vested. If the Executive terminates the agreement following a Change of
Control, the severance payment will be equal to two times such Executive's total
compensation for the prior year. The Executive is required to devote his full
business time and attention to the business and affairs of the Company, except
that he may devote such reasonable amount of time, as he determines, to (i)
serving, with the approval of the Board, as a director, trustee or member of any
board or committee of any organization, (ii) engaging in charitable and
community activities, (iii) managing his personal investments and affairs, and
(iv) acting as a director and officer of Inland Northwest Corporation,
previously a wholly-owned subsidiary of the Company; provided, however, that
such activities may not involve any material conflict of interest with the
interests of the Company or interfere materially with the performance of his
duties and responsibilities under such agreement.
Each Executive is eligible to receive a bonus under Company's management
bonus plan or such other plan adopted from time to time. The award and amount
of such bonus shall be based upon the Compensation Committee's determination of
such Executive's actual performance as measured against established goals. The
Company has also agreed to reimburse the Executive for any federal, state or
local excise taxes ("Excise Tax"), and any additional taxes to which he may be
subject, on any payments to the Executive from the Company as a result of
accelerated vesting of his options, up to a maximum reimbursement equal to two
times the amount of such Excise Tax.
1998 STOCK INCENTIVE PLAN
In January 1998 the Board adopted, and the shareholders of the Company
approved, the 1998 Plan to attract and retain officers, key employees and
consultants. Additional options may be granted subject to Board approval. An
aggregate of 900,000 shares of Common Stock, subject to adjustment for stock
splits, stock dividends and similar events, has been authorized for issuance
upon exercise of options, stock appreciation rights ("SARs"), and other awards,
including restricted or deferred stock awards under the 1998 Plan. Following
the Offering, the Compensation Committee will administer the 1998 Plan and
determine to whom options, SARs, restricted stock purchase rights and other
awards are to be granted and the terms and conditions, including the number of
shares and the period of exercisability, thereof. Upon consummation of the
Offering, non-employee Directors will be granted options under the 1998 Plan to
purchase 10,000 shares of Common Stock, subject to one year restriction on sale
and vesting equal percentages over five years.
The 1998 Plan authorizes the grant or issuance of various options and other
awards. Nonqualified stock options ("NQSOs") may be granted for any term
specified by the Compensation Committee and will provide for the right to
purchase Common Stock at a specified price which, except with respect to NQSOs
intended to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), may be less than
fair market value on the date of grant (but not less than par value), and may
become exercisable (at the discretion of the Compensation Committee) in one or
more installments after the date of grant. Incentive stock options may be
granted only to employees and if granted will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including having an exercise price equal to at least 100% of fair market
value of Common Stock on the grant date and ten year restriction on their term,
but may be subsequently modified to disqualify them from treatment as an
incentive stock option. The maximum fair market value (determined on the date
of grant) of shares which may be issued pursuant to incentive stock options
granted under the 1998 Plan to any individual in any calendar year may not
exceed $100,000. SARs granted by the Compensation Committee in connection with
stock options or other awards typically will provide for payments to the holder
based upon increases in the price of the Common Stock over the exercise price of
the related option or other awards, but alternatively may be based upon other
criteria such as book value. Participants may receive dividend equivalents
representing the value of the dividends per share paid by the Company,
calculated with reference to the number of shares covered by the stock options,
SARs or other awards held by the participant. Performance awards may be granted
by the Compensation Committee on an individual or group basis and may include
bonus or "phantom" stock awards that provide for payments based upon increases
in the price of the Common Stock over a predetermined period. 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.
Deferred stock awards may be granted to participants, typically without payment
of
44
<PAGE>
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Compensation Committee. Whereas
purchasers of restricted stock will have voting rights and will receive
dividends prior to the time when the restrictions lapse, recipients of deferred
stock generally will have no voting or dividend rights prior to the time when
vesting conditions are satisfied.
Payments for the shares purchased upon the exercise of options may be in
cash or, if the terms of an option so provide, with shares of Common Stock owned
by the optionee (or issuable upon exercise of the option) or with other lawful
consideration, including services rendered.
No option, SAR or other right to acquire Common Stock granted under the
1998 Plan may be assigned or transferred by the grantee, except by will or the
laws of succession, although the shares underlying such rights may be
transferred if all applicable restrictions have lapsed. During the lifetime of
the holder of any option or right, such option or right may be exercised only by
the holder.
The Compensation Committee will have the right to accelerate, in whole or
in part, from time to time, including upon a change in control of the Company,
conditionally or unconditionally, the right to exercise any option or other
award granted under the 1998 Plan.
Amendments of the 1998 Plan to increase the number of shares as to which
options, SARs, restricted stock and other awards may be granted (except for
adjustments resulting from stock splits and similar events) will require the
approval of the Company's shareholders. In all other respects, the 1998 Plan
may be amended, modified, suspended or terminated by the Compensation Committee,
unless such action would otherwise require shareholder approval as a matter of
applicable law, regulation or rule. Amendments of the 1998 Plan will not,
without the consent of the participant, affect such person's rights under an
award previously granted, unless the award itself otherwise expressly so
provides. The 1998 Plan will terminate ten years after the date the 1998 Plan
was adopted by the Board and approved by the Company's shareholders.
EMPLOYEE STOCK PURCHASE PLAN
In January 1998, the Company adopted the Employee Stock Purchase Plan to
assist employees of the Company in acquiring a stock ownership interest in the
Company and to encourage them to remain in the employment of the Company. The
Employee Stock Purchase Plan is intended to qualify under Section 423 of the
Code. A maximum of 300,000 shares of Common Stock will be reserved for issuance
under the Employee Stock Purchase Plan. The Employee Stock Purchase Plan
permits eligible employees to purchase Common Stock at a discount through
payroll deductions during specified six-month offering periods. No employee may
purchase more than $25,000 worth of Common Stock in any calendar year. The
price of shares purchased under the Employee Stock Purchase Plan will be equal
to 85% of the fair market value of the Common Stock on the first or last day of
the offering period, whichever is lower. After the Offering, the Employee Stock
Purchase Plan will be administered by the Compensation Committee.
COMPANY-WIDE STOCK OPTION PLAN
In January 1998, the Company adopted the Company-Wide Plan to encourage
ownership of Common Stock by all employees of the Company. A maximum of 300,000
shares of Common Stock will be reserved for issuance under the Company-Wide
Plan. Pursuant to the Company-Wide Plan, the Compensation Committee may grant
options to purchase Common Stock to eligible employees. An eligible employee
includes any full-time or part-time employee who, as of the date the option is
granted, is then an employee and had been an employee of the Company or of any
subsidiary for at least 180 consecutive days during the Company's last fully-
completed fiscal year, provided that no employee may be granted options under
this plan that in the aggregate would result in such employee receiving more
than 5% of the maximum number of shares available for issuance. At any time
after any option becomes exercisable, the Compensation Committee has the right
to elect, in its sole discretion, to cancel such option and to pay such optionee
the excess of the fair market value of the shares of the Common Stock covered by
such option over the option exercise price of such option. After the Offering,
the Company-Wide will be administered by the Compensation Committee.
45
<PAGE>
401(k) PLAN
The Company adopted a tax-qualified employee savings and retirement plan
(the "401(k) Plan") effective as of March 1, 1989 covering all employees who
have been employed by the Company for at least 90 days and who are at least 21
years of age. Pursuant to the 401(k) Plan, participants may elect to reduce
their current compensation by not less than 1.0% nor more than 15.0% of eligible
compensation. The amount of each participant's contributions to the 401(k) Plan
is partially matched by the Company based on years of service and amounts
contributed, up to 6% of a participants earnings. The trustee under the 401(k)
Plan invests the assets of the 401(k) Plan in designated investment options. In
connection with the Offering, the Company intends to amend the 401(k) Plan to
permit participants to designate the Company's Common Stock as an investment
option; provided, however, no more than 15% of a participant's total investments
in the 401(k) Plan may be allocated to the Common Stock. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that (i) contributions to
the 401(k) Plan, and the income earned on such contributions, are not taxable to
participants until withdrawn from the 401(k) Plan and (ii) contributions by the
Company are deductible by the Company when made for income tax purposes.
RESTRICTED STOCK AND CERTAIN STOCK OPTION GRANTS
Prior to the consummation of the Offering, the Company will enter into an
agreement to issue an aggregate of 55,000 restricted shares of Common Stock
under the 1998 Plan to five members of senior management: Arthur Coffey (15,000
shares), John Taffin (10,000 shares), Lori Farnell (10,000 shares), David
Peterson (10,000 shares) and Shannon Kapek (10,000 shares). Twenty percent of
each recipient's stock grant will be issued on the date of grant and an
additional twenty percent will be issued on each anniversary of such date of
grant.
In connection with the Offering, options to purchase up to 900,000 shares
of Common Stock will be granted pursuant to the Plans, at an exercise price
equal to the initial public offering price, including options to be granted to
Donald Barbieri (90,000 shares), Arthur Coffey (55,000 shares), Richard Barbieri
(45,000 shares), Thomas Barbieri (45,000 shares) and David Bell (45,000 shares).
The options will have a term of ten years. Fifty percent of each recipient's
options will vest on the fourth anniversary of the date of grant and the
remaining 50% will vest on the fifth anniversary of the date of grant. This
vesting schedule will change if, beginning one year after the option grant date,
the stock price of the Common Stock reaches the following target levels
(measured as a percentage increase over the exercise price) for 20 consecutive
trading days:
Percent of
Share Price Increase: Option Shares Vested:
-------------------- --------------------
25% 25%
50% 50%
75% 75%
100% 100%
Such options shall be exercisable, subject to vesting, for ten years from the
date of grant and in all other respects shall be subject to the terms and
conditions of the 1998 Plan. Vesting of such options is also conditioned upon
the holder's employment with the Company on the scheduled vesting date.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to November 1, 1997, all of the assets of the Company were held by
the Company and BIC directly, or indirectly through various limited partnerships
(the "Limited Partnerships") and corporations wholly-owned (with one exception)
by the Company and/or BIC, as the case may be, and all of the Hotels and other
properties owned by the Company, BIC and the Limited Partnerships were managed
by the Company, as the general partner of the Limited Partnerships, or through
various management agreements with BIC or the Limited Partnerships. Effective
November 3, 1997, BIC merged with and into the Company. The Merger was a stock-
for-stock merger, pursuant to which the holders of the common stock of BIC and
the holders of preferred and common stock of the Company received an aggregate
of 7,084,251 shares of Common Stock of the Company pursuant to conversion ratios
jointly determined by the boards of directors of the Company and BIC and
unanimously approved by the shareholders of the Company and BIC. By effecting a
merger of the holders of the general and limited partnership interests in the
Limited Partnerships, the Merger resulted in the dissolution of, and a transfer
to the Company by operation of law of all assets and property held by, the
Limited Partnerships, with the exception of Cowley Street Limited Partnership.
Also effective November 1, 1997, the Company (i) contributed certain assets
not related to its core hospitality business to Inland Northwest Corporation, a
wholly owned subsidiary of the Company ("INWC"), and (ii) distributed shares of
capital stock of INWC and Huckleberry Bay Company, another wholly-owned
subsidiary of the Company ("HBC"), on a pro rata basis, to the shareholders of
the Company (the "Spin-Off"). As a result of the foregoing transactions, the
following assets were distributed and are no longer part of the Company's
operations: recreational real estate in Priest Lake, Idaho, a long-term
residence inn operation, an interest in a milk processing and distribution
business and a retail sales operation. The Company recorded management fees and
other income of approximately $35,000, $31,000 and $27,000 during the years
ended October 31, 1997, 1996 and 1995, respectively, for performing management
and administrative functions for INWC and HBC. In addition, the Company
received commissions from INWC and HBC of $87,000, $7,000 and $51,000 for real
estate sales on behalf of INWC and HBC for the years ended October 31, 1997,
1996 and 1995, respectively. In connection with the Spin-Off, the Company
intends to enter into an agreement with INWC, pursuant to which it will provide
accounting and other administrative services to INWC at competitive rates.
The Company acquired a hotel property (Cavanaughs Templins Resort) from
Templin's Resort and Conference Center, Inc. in February 1998. Robert Templin,
the President of Templin's Resort and Conference Center, Inc., has agreed to
become a Director of the Company upon consummation of the Offering. The
purchase price to be paid by the Company for this Hotel is $9.5 million
consisting of cash, assumed indebtedness and a note to the seller. Mr. Templin
and members of his immediate family own 100% of equity interest Templin's Resort
and Conference Center, Inc. and will be entitled to receive all of the net
proceeds of the purchase price paid for this Hotel. The purchase price was
determined through arm's-length negotiations between the Company and Mr.
Templin.
In connection with the acquisition of certain real property, the Company
incurred a $600,000 obligation payable to the Barbieri Family Foundation, Inc.
("BFF"), a corporation controlled by the estate of Louis Barbieri, who was the
father of Donald, Richard and Thomas Barbieri. BFF is entitled to receive a
guaranteed annual payment of approximately $67,000, which, pursuant to the terms
of the obligation, increases by 3% annually. The Company has the right to repay
its obligation at any time after January 1997, and BFF has the right to require
redemption at any time after January 1999. Interest expense of $67,000, $66,000
and $64,000 was paid by the Company to BFF during the years ended October 31,
1997, 1996 and 1995, respectively. The Company will repay this obligation upon
closing of the Offering.
At October 31, 1997, the Company had a $1.3 million non-interest bearing
note payable to HBC. Effective November 1, 1997, the Company began paying
interest on such note. The note will be paid in full upon closing of the
Offering.
The Company intends to enter into employment agreements with each of Donald
Barbieri, Arthur Coffey, Richard Barbieri, David Bell and Thomas Barbieri which
will provide for annual base salaries of $155,000, $130,000, $96,000, $96,000
and $96,000, respectively. Each executive officer will be eligible to receive
annual bonuses as
47
<PAGE>
determined by the Compensation Committee and will be entitled to participate in
all existing or future benefit plans of the Company, on the same basis as other
senior executive officers of the Company.
During the fiscal year ended October 31, 1997, the Company had loans
totaling approximately $11.5 million with Washington Trust Bank, of which Peter
Stanton, a Director nominee, is the Chief Executive Officer and President.
With respect to future material transactions (or series of related
transactions) between the Company and related parties, the Company has
implemented a policy requiring any such transaction to be approved by a majority
of the non-employee Directors, if any, upon such directors' determination that
the terms of the transaction are no less favorable to the Company than those
that could be obtained from unrelated third parties.
48
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of January 16, 1998, and as adjusted to reflect the
sale of 5,175,000 shares of Common Stock by the Company in the Offering and the
issuance concurrent with the closing of Offering of 11,000 restricted shares of
Common Stock, by (i) all persons known by the Company to own beneficially more
than 5% of the Common Stock, (ii) each director, (iii) each of the named
executive officers and (iv) all directors and executive officers as a group.
Unless otherwise indicated, the business address of each shareholder is 201 W.
North River Drive, Suite 100, Spokane, Washington, 99201.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
----------------------------------
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) BEFORE OFFERING AFTER OFFERING
------------------- ---------------------- ---------------- ---------------
<S> <C> <C> <C>
Donald K. Barbieri (2) 3,597,402 50.8% 29.3%
DKB and HHB Unity Trust 958,379 13.5 7.8
Heather H. Barbieri (3) 958,379 13.5 7.8
Barbieri Family Trust 587,070 8.3 4.8
Thomas M. Barbieri 543,871 7.7 4.4
David M. Bell 543,871 7.7 4.4
Richard L. Barbieri (2) 1,488,537 21.0 4.3
Arthur M. Coffey (4) 3,000 -- *
Mark E. Barbieri 423,275 6.0 3.5
Peter F. Stanton (5) -- -- --
Ronald R. Taylor (5) -- -- --
Robert G. Templin (5) -- -- --
All directors and executive officers as a
(5 persons) 5,218,302 73.7% 42.6%
</TABLE>
- -----------------------------
* Represents less than 1%.
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of shares of Common Stock as of a given date which
such person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any security which
such person or persons has the right to acquire within 60 days after such
date is deemed to be outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Includes 958,379 shares of Common Stock held by the DKB & HHB Unity Trust,
an irrevocable trust, of which Mr. Barbieri is a co-trustee. Mr. Barbieri
disclaims beneficial ownership of such shares.
(3) These shares are held by the DKB & HHB Unity Trust, an irrevocable trust,
of which Ms. Barbieri is a co-trustee. Ms. Barbieri disclaims beneficial
ownership of such shares.
(4) The Company has agreed to issue Mr. Coffey an aggregate of 15,000
restricted shares of Common Stock under the 1998 Plan over four years,
3,000 shares of which Mr. Coffey will receive upon closing of the Offering.
(5) Messrs. Stanton, Taylor and Templin have agreed to become directors of the
Company upon closing of the Offering.
49
<PAGE>
PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
The following summary of the Agreement of Limited Partnership of the
Operating Partnership (the "Partnership Agreement") is qualified in its entirety
by reference to the Partnership Agreement, which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information. "
The Operating Partnership is organized as a Delaware limited partnership.
The Company is the sole general partner of the Operating Partnership, and the
Company, its wholly-owned subsidiary, North River Drive Company, and certain
members of the Barbieri Family are currently the sole limited partners of the
Operating Partnership. The Company intends to conduct substantially all of its
business through the Operating Partnership. Generally, pursuant to the
Partnership Agreement, the Company, as the sole general partner of the Operating
Partnership, will have full, exclusive and complete responsibility and
discretion in the management and control of the Operating Partnership, including
the ability to cause the Operating Partnership to enter into certain major
transactions including acquisitions, dispositions and refinancings and to cause
changes in the Operating Partnership's line of business and distribution
policies. The limited partners of the Operating Partnership will have no
authority to transact business for, or participate in the management activities
or decisions of, the Operating Partnership, except as provided in the
Partnership Agreement and as required by applicable law.
INDEMNIFICATION
The Partnership Agreement provides for indemnification of the Company and
officers and directors of the Company and the Operating Partnership (each, an
"Indemnitee") from and against all losses, damages and expenses arising from any
claims that relate to the Operating Partnership in which such Indemnitee may be
involved, unless (i) the act or omission of the Indemnitee was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the Indemnitee actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the Indemnitee had reasonable cause to
believe that the act or omission was unlawful. This indemnification is in
addition to any other rights to which an Indemnitee may be entitled.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer its general partner interest in the
Operating Partnership, without the consent of the holders of a majority of the
partner interests held by the limited partners (including the limited
partnership interests held by the Company, which will represent approximately
98.8% of the total partner interests upon consummation of the Offering).
Pursuant to the Partnership Agreement, the limited partners have agreed not to
transfer, assign, sell, encumber or otherwise dispose of, without the consent of
the general partner, their interest in the Operating Partnership, other than (a)
transfers to (i) the general partner, (ii) immediate family members or (iii)
charitable foundations or (b) pledges to unaffiliated lending institutions.
The Company may not engage in any merger, consolidation or other
combination with or into another person, sale of all or substantially all of its
assets or any reclassification, recapitalization or change of the Common Stock
(other than a change in par value and subdivisions or combinations of the Common
Stock) (each a "Transaction") unless the Transaction has been approved by
holders of at least a majority of the OP Units (including OP Units held by the
Company, which will represent approximately 98.8% of all OP Units outstanding
upon consummation of the Offering) and in connection with which all limited
partners will receive for each OP Unit an amount of cash, securities or other
property equal to the product of the number of shares of Common Stock into which
each OP Unit is then exchangeable and the greatest amount of cash, securities or
other property paid to a holder of one share of Common Stock in consideration of
one share of Common Stock pursuant to such Transaction.
The Company may also merge with another entity if immediately after such
merger substantially all of the assets of the surviving entity, other than OP
Units held by the Company, are contributed to the Operating Partnership
50
<PAGE>
as a capital contribution in exchange for OP Units with a fair market value, as
reasonably determined by the Company, equal to the value of the assets so
contributed.
ISSUANCE OF ADDITIONAL OP UNITS
As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional OP Units,
including units of limited partnership interests having rights superior to those
attaching to outstanding OP Units; provided, however, that no such additional OP
Units shall be issued to the general partner unless either (a) the additional OP
Units are issued in connection with the grant, award, or issuance of shares of
Common Stock, which shares have rights (except for voting rights) such that the
economic interests attributable to such shares are substantially similar to the
rights of the additional OP Units issued to the general partner, and (2) the
general partner makes a capital contribution to the Operating Partnership in an
amount equal to the proceeds, if any, raised in connection with the issuance of
such shares of Common Stock, or (b) the additional OP Units are issued pro rata
to all partners.
ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
The Company may issue shares of Common Stock from time to time after the
Offering; provided, however, that the Company may not issue any additional
shares of Common Stock (other than shares issued pursuant to the
redemption/exchange provisions of the Partnership Agreement described below), or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase Common Stock (collectively "New
Securities"), other than to all holders of Common Stock, unless (i) the Company
causes the Operating Partnership to issue to the Company OP Units or rights,
options, warrants or convertible or exchangeable securities of the Operating
Partnership having designations, preferences and other rights, all such that the
economic interests are substantially the same as those of the grant, award or
issuance of such New Securities, and (ii) the Company contributes the net
proceeds from the grant, award or issuance of such New Securities and from the
exercise of rights contained in such New Securities to the Operating
Partnership.
CAPITAL CONTRIBUTIONS
The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital contributions,
the Company may borrow such funds from a financial institution or other lender
or through public or private debt offerings and lend such funds to the Operating
Partnership on the same terms and conditions as are applicable to the Company's
borrowing of such funds. As an alternative to borrowing funds required by the
Operating Partnership, the Company may contribute the amount of such required
funds as an additional capital contribution to the Operating Partnership. If the
Company so contributes additional capital to the Operating Partnership, the
Company's partnership interest in the Operating Partnership will be increased on
a proportionate basis. Conversely, the partnership interests of the limited
partners will be decreased on a proportionate basis in the event of additional
capital contributions by the Company.
AWARDS UNDER 1998 STOCK INCENTIVE PLAN
If options granted in connection with the 1998 Plan are exercised at any
time or from time to time, or restricted shares of Common Stock are issued under
the 1998 Plan, the Partnership Agreement requires the Company to contribute to
the Operating Partnership as an additional contribution the consideration
received by the Company in connection with the issuance of such options or
shares of Common Stock or the proceeds received by the Company upon issuance of
the shares relating to such options. Upon such contribution the Company will be
issued a number of OP Units in the Operating Partnership equal to the number of
shares of Common Stock so issued.
REDEMPTION/EXCHANGE RIGHTS
Limited partners have the right (the "Redemption Right") to require the
Operating Partnership to redeem part or all of their OP Units for cash, based
upon the fair market value (as defined) of the number of shares of Common
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<PAGE>
Stock for each OP Unit is then exchangeable at the time of such redemption. The
Company may elect to exchange such OP Units for shares of Common Stock (on a
one-for-one basis, subject to adjustment in the event of stock splits, stock
dividends, issuance of certain rights, certain extraordinary distributions and
similar events). With each such redemption or exchange, the Company's percentage
ownership interest in the Operating Partnership will increase. This
redemption/exchange right may be exercised by limited partners from time to
time, in whole or in part, subject to the limitation that such right may not be
exercised prior to the expiration of one year following the date on which such
limited partner acquired his OP Units.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the tax matters
partner of the Operating Partnership and, as such, will have authority to make
tax elections under the Code on behalf of the Operating Partnership. The net
income or net loss of the Operating Partnership will generally be allocated to
the Company and the limited partners in accordance with their respective
percentage interests in the Operating Partnership, subject to compliance with
the provisions of Sections 704(b) and 704(c) of the Code and the Treasury
Regulations promulgated thereunder.
OPERATIONS
The Partnership Agreement provides that the net income of the Operating
Partnership, as well as net sales and refinancing proceeds, will be distributed
from time to time as determined by the Company pro rata in accordance with the
partners' respective percentage interests. Pursuant to the Partnership
Agreement, the Operating Partnership will assume and pay when due, or reimburse
the Company for payment of, all expenses it incurs relating to the ownership and
operation of, or for the benefit of, the Operating Partnership and all costs and
expenses relating to the operations of the Company.
OUTSIDE ACTIVITIES OF THE GENERAL PARTNER; LIMITATIONS ON INDEBTEDNESS;
BORROWINGS
The Company, as general partner, may not enter into or conduct any business
other than in connection with the ownership, acquisition and disposition of OP
Units, the management of the business of the Operating Partnership and such
activities as are incidental or related thereto. The Company may not incur any
debts other than (i) debt of the Operating Partnership for which it may be
liable in its capacity as general partner of the Operating Partnership, and (ii)
indebtedness for borrowed money the proceeds of which are loaned to the
Operating Partnership on the same terms and conditions as the borrowing by the
general partner.
CONTRACTS WITH AFFILIATES
The Operating Partnership may lend or contribute funds or other assets to
its subsidiaries or other entities in which it has an equity investment, and
such persons may borrow funds from the Operating Partnership, on terms and
conditions established in the discretion of the general partner. The Operating
Partnership may transfer assets to joint ventures, other partnerships,
corporations or other business entities in which it is or thereby becomes a
participant upon such terms and subject to such conditions consistent with the
Partnership Agreement and applicable law as the general partner, in its
discretion, believes are advisable. Except as expressly permitted by the
Partnership Agreement, neither the general partner nor any of its affiliates may
sell, transfer or convey any property to, or purchase any property from, the
Operating Partnership, except pursuant to transactions that are determined by
the general partner in good faith to be fair and reasonable and no less
favorable to the Operating Partnership than would be obtained from an
unaffiliated third party.
TERM
The term of the Operating Partnership commenced on October 21, 1997, the
date the certificate of limited partnership was filed in the office of the
Secretary of State of Delaware and will continue until October 31, 2097, unless
the Operating Partnership is dissolved (sooner) pursuant to the provisions of
the Partnership Agreement or as otherwise provided by law.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary information is qualified in its entirety by the
provisions of the Articles and By-Laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
Under the Articles, the authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock").
Following the consummation of the Offering, 12,270,251 shares of Common Stock
will be issued and outstanding and no shares of Preferred Stock will be issued
and outstanding.
COMMON STOCK
Except as otherwise provided by law, each holder of Common Stock is
entitled to one vote for each share owned of record on all matters voted upon by
holders of Common Stock, and a majority vote is required for all action to be
taken by such shareholders. Each share of Common Stock has an equal and ratable
right to receive dividends when, as and if declared by the Board out of funds
legally available therefor and subject to the dividend obligations of the
Company to the holders of any Preferred Stock then outstanding. See "Dividend
Policy." In the event of a liquidation, dissolution or winding-up of the
Company, the holders of Common Stock will be entitled to share equally and
ratably in the assets of the Company, if any, remaining after the payment of all
debts and liabilities of the Company and the liquidation preference of any
holders of outstanding Preferred Stock. The Common Stock has neither preemptive
or cumulative voting rights nor redemption, sinking fund or conversion
provisions.
PREFERRED STOCK
The Board is authorized to issue, without shareholder approval, up to
5,000,000 shares of Preferred Stock in one or more series and to determine at
the time of creating such series the designations, and the powers, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereon including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion privileges. The Board
may issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, have the
effect of delaying, deferring or preventing a change in control of the Company.
As of the date of this Prospectus, the Board has not authorized any series of
Preferred Stock and there are no agreements for the issuance of any shares of
Preferred Stock.
CERTAIN PROVISIONS OF ARTICLES AFFECTING SHAREHOLDERS
The Articles and By-Laws provide for shareholder action by written consent
and reserve to the directors the exclusive right to change the number of
directors or to fill vacancies on the Board. The Articles also provides for the
Board to be divided into three classes of directors serving staggered three year
terms. As a result, approximately one-third of the Board will be elected each
year. The purpose and intended effect of the above described provisions in the
Articles and By-Laws are to enhance the continuity and stability of the
Company's management by making it more difficult for shareholders to remove or
change the incumbent members of the Board. Such provisions, coupled with the
ownership by existing shareholders of approximately 60% of the Common Stock
following the Offering, could also render the Company more difficult to be
acquired pursuant to an unfriendly acquisition by an outsider by making it more
difficult for such person to obtain control of the Company and replace current
management without the approval of the Board.
The Company has included in the Articles and By-Laws provisions to (i)
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the Washington
Business Corporations Act, as amended from time to time (the "Washington Act"),
and (ii) indemnify its directors and officers to the fullest extent permitted by
the Washington Act, including circumstances in which indemnification is
otherwise discretionary. The Company believes that these provisions are
necessary to attract and
53
<PAGE>
retain qualified persons as directors and officers. The Company's employment
agreements with certain executive officers and directors contain additional
indemnification provisions.
WASHINGTON ANTI-TAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a takeover or change in control of the
Company. Chapter 23B.19 of the Washington Act prohibits the Company, with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Board) for a
period of five years after such acquisition. The prohibited transactions
include, among others, a merger with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person, or otherwise allowing the
acquiring person to receive any disproportionate benefit as a shareholder.
After the five-year period, the Company may engage in otherwise proscribed
transactions, so long as the transaction complies with certain fair price
provisions of the statute or is approved by a majority of disinterested
shareholders within each voting group entitled to vote separately. The Company
may not exempt itself from coverage of this statute. These statutory provisions
may have the effect of delaying, deterring or preventing a change in control of
the Company.
TRANSFER AGENT AND REGISTRAR
The Company has appointed American Stock Transfer & Trust Company as the
Company's transfer agent and registrar for the Common Stock.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering (assuming no exercise of the Underwriters'
over-allotment option), the Company will have 12,270,251 shares of Common Stock
outstanding on the date of the Offering. Of these shares, all of the shares of
Common Stock sold in this Offering will be freely tradeable by persons other
than "affiliates" of the Company without restriction or limitation under the
Securities Act. The remaining 7,084,251 shares are "restricted securities"
within the meaning of Rule 144 adopted under the Securities Act (the "Restricted
Shares") and may not be sold in the absence of registration under the Securities
Act unless a exemption from registration is available, including the exemption
contained in Rule 144. The Company and its executive officers and directors
have agreed that, subject to certain limited exceptions, for a period of one
year from the date of this Prospectus they will not, without the prior written
consent of CIBC Oppenheimer Corp., offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exercisable for, Common Stock. Donald Barbieri, who will own 21.6% of the
outstanding Common Stock after the Offering, has agreed, subject to the same
exceptions contained in the foregoing lock-up agreements, not to sell, offer to
sell, contract to sell, pledge or otherwise dispose of or transfer, directly or
indirectly, any shares of Common Stock or other capital stock, or any securities
convertible into or exchangeable or exercisable for, or any rights to purchase
or acquire, shares of Common Stock or other capital stock, for a period of three
years commencing on the date of this Prospectus, without the prior written
consent of CIBC Oppenheimer Corp.; provided, however, Mr. Barbieri may sell or
otherwise transfer ownership of up to one-third of his shares of Common Stock on
each anniversary of the date of this Prospectus without the consent of CIBC
Oppenheimer Corp. See "Underwriting."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is 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 Company or the average weekly trading volume
of the Common Stock on all exchanges and/or reported through the automated
quotation system of a registered securities association during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice, requirements and the availability of
current public information about the Company. If two years have elapsed since
the date of acquisition of Restricted Shares from the Company or from any
"affiliate" of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale, such person would be entitled to sell such shares in the
public market under Rule 144 without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Prior to the Offering, there has been no public market for the Common Stock
and the effect, if any, that future sales of Restricted Shares, the availability
of such Restricted Shares for sale, the issuance of shares of Common Stock upon
the exercise of options or otherwise or the perception that such sales could
occur will have on the market price prevailing from time to time cannot be
predicted. Nevertheless, sales of substantial amounts of Restricted Shares in
the public market could have an adverse effect on the market price for the
Common Stock.
A total of 1,500,000 shares of Common Stock have been reserved for issuance
under the Plans. The Company intends to grant options to purchase an aggregate
of 900,000 shares of Common Stock at an exercise price equal to the initial
public offering price in connection with the closing of this Offering. The
Company intends to file a Registration Statement on Form S-8 under the
Securities Act registering the 1,500,000 shares of Common Stock reserved for
issuance under its the Plans promptly after completion of the Offering. As a
result, shares of Common Stock issued upon exercise of stock options granted
under the Plans will be freely tradeable by persons other than "affiliates" of
the Company without restriction or limitation under the Securities Act.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Company and the underwriters named below (the "Underwriters"), for
whom CIBC Oppenheimer Corp. and NationsBanc Montgomery Securities LLC are acting
as representatives (the "Representatives"), each of the Underwriters has
severally agreed to purchase from the Company, and the Company has agreed to
sell to the Underwriters, the number of shares of Common Stock set forth below
opposite their respective names:
NUMBER OF
SHARES TO BE
UNDERWRITER PURCHASED
----------- -------------
CIBC Oppenheimer Corp............................
NationsBanc Montgomery Securities LLC............
Total...................................... 5,175,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. The Underwriters are committed to purchase and pay
for all of the above shares of Common Stock if any are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $_____ per share of Common Stock. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $_____ per share of Common Stock on sales to certain other brokers or
dealers. After the Offering, the public offering price, concession and re-
allowance to dealers may be changed by the Underwriters.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price for the shares of
Common Stock included in the Offering was determined through negotiations
between the Company and the Representatives. The factors considered in
determining the initial public offering price included the history of, and the
prospects for, the Company's business and the industry in which it competes, an
assessment of the Company's management, the past and present operations of the
Company, the historical results of operations of the Company, the prospects for
future earnings of the Company, the general condition of the securities markets
at the time of the Offering and the recent market prices of securities of
publicly traded companies which are comparable to the Company.
The Company, its executive officers and directors and certain shareholders
of the Company have agreed not to sell, offer to sell, contract to sell, pledge
or otherwise dispose of or transfer, directly or indirectly, any shares of
Common Stock or other capital stock, or any securities convertible into or
exchangeable or exercisable for, or any rights to purchase or acquire, shares or
Common Stock or other capital stock for a period of one year commencing on the
date of this Prospectus, without the prior written consent of CIBC Oppenheimer
Corp., other than the sale of the shares of Common Stock in the Offering and the
issuance or transfer of: (i) options to purchase shares of Common Stock (and
shares of Common Stock issuable upon the exercise of such options) issued
pursuant to the Plans; (ii) shares of Common Stock in connection with estate
planning; (iii) 55,000 restricted shares of Common Stock to be awarded to
certain employees of the Company; and, (iv) securities of the Company or the
Operating Partnership issued in connection with the acquisition by the Company
of real property or interests in entities holding real property, provided that
the recipient or transferee of such securities agrees in writing to be subject
to the lock-up contained in this paragraph (without giving effect to clauses
(i), (ii) and (iii)) for a period ending on the date that is one year after the
date hereof. Donald Barbieri, who will own 21.6% of the Common Stock
outstanding after the Offering, has agreed, subject to the same exceptions
contained in the foregoing lock-up agreements, not to sell, offer to sell,
contract to sell, pledge or otherwise dispose of or transfer, directly or
indirectly, any shares of Common Stock or other capital stock, or any securities
convertible into or exchangeable or exercisable for, or any rights to purchase
or acquire, shares of Common Stock or other capital stock,
56
<PAGE>
for a period of three years commencing on the date of this Prospectus, without
the prior written consent of CIBC Oppenheimer Corp.; provided, however, Mr.
Barbieri may sell or otherwise transfer ownership of up to one-third of his
shares of Common Stock on each anniversary of the date of this Prospectus
without the consent of CIBC Oppenheimer Corp.
The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of 776,250 additional shares of
Common Stock, exercisable at the public offering price less the underwriting
discount and commissions set forth on the cover page of this Prospectus. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown on the above table bears to the total
number of shares of Common Stock offered hereby. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters to
bid for and purchase shares of Common Stock. As an exception to these rules,
the Underwriters are permitted to engage in certain transactions that stabilize
or otherwise affect the price of the Common Stock. Such transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters also may elect to reduce any short position by exercising all or
part of the over-allotment option described herein. In addition, CIBC
Oppenheimer Corp., on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim from
an Underwriter (or selling group member participating in the Offering) for the
account of the other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might also have an effect on the price of a security
to the extent that it were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Representatives have informed the Company that the Underwriters do not
intend to confirm, without customer authorization, sales to their customer
accounts as to which they have discretionary trading power.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including, without limitation, liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
EXPERTS
The combined balance sheets as of October 31, 1997 and 1996 and the
combined statements of income, changes in stockholders' equity and cash flows
for each of the three years in the period ended October 31, 1997, included in
this Prospectus, have been included herein in reliance on the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
57
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Kaye, Scholer,
Fierman, Hays & Handler, LLP, Los Angeles, California and for the Underwriters
by Rogers & Wells, New York, New York. The validity of the Common Stock offered
hereby and certain other legal matters will be passed upon for the Company by
Dennis McLaughlin & Associates P.S., Spokane, Washington.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, 450
Fifth Street N.W., Washington D.C. 20549, a Registration Statement on Form S-1
under the Securities Act and the rules and regulations promulgated thereunder,
with respect to the Common Stock offered pursuant to this Prospectus. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement and such exhibits, copies
of which may be examined without charge at, or obtained upon payment of
prescribed fees from the Public Reference Section of the Securities and Exchange
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and will also be available for inspection and copying at the regional offices of
the Securities and Exchange Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 or by way of the Securities and
Exchange Commission's website address, http://www.sec.gov. In addition, the
Common Stock will be listed on the NYSE and similar information concerning the
Company can be inspected and copied at the offices of the NYSE, 20 Broad Street,
New York, New York 10005.
Statements contained in this Prospectus as to the contents of any contract
or other document which is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended. The Company has changed its fiscal year end from October 31
to December 31, which change shall take effect with the fiscal year beginning on
January 1, 1998. In addition to applicable legal or NYSE requirements, if any,
holders of the Common Stock will receive annual reports containing audited
financial statements with a report thereon by the Company's independent
certified public accountants, and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.
Following consummation of the Offering, holders of the Common Stock will receive
such reports on a calendar year basis.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Historical Combined Financial Statements of Cavanaughs Hospitality Corporation,
Barbieri Investment Company and Lincoln Building Limited Partnership:
- --------------------------------------------------------------------
<TABLE>
<C> <S> <C>
. Report of Independent Accountants...................................... F-2
. Combined Balance Sheets at October 31, 1996 and 1997................... F-3
. Combined Statements of Income for the years ended October 31, 1995,
1996 and 1997.......................................................... F-4
. Combined Statements of Changes in Stockholders' Equity for the years
ended October 31, 1995, 1996 and 1997.................................. F-5
. Combined Statements of Cash Flows for the years ended October 31, 1995,
1996 and 1997.......................................................... F-6
. Notes to Combined Financial Statements................................. F-7
Pro Forma Combined Financial Statements:
- -------------------------------------------
. Condensed Pro Forma Combined Financial Information..................... F-23
. Condensed Pro Forma Combined Balance Sheet at October 31, 1997......... F-24
. Condensed Pro Forma Combined Statement of Income for the year
ended October 31, 1997................................................. F-25
. Notes to Condensed Pro Forma Combined Financial Statements............. F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Boards of Directors, Stockholders and Partners
Cavanaughs Hospitality Corporation
Barbieri Investment Company
Lincoln Building Limited Partnership
We have audited the accompanying combined balance sheets of Cavanaughs
Hospitality Corporation, Barbieri Investment Company and Lincoln Building
Limited Partnership, excluding certain of their subsidiaries or divisions as
described in Note 1 to the combined financial statements (collectively referred
to as "Cavanaughs Hospitality Corporation" or the "Company"), as of October 31,
1996 and 1997, and the related combined statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended October 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 financial statements referred to above present fairly, in
all material respects, the combined financial position of the Company as of
October 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Spokane, Washington
December 10, 1997, except for Notes 7, 14 and 15,
as to which the date is January 15, 1998
F-2
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
October 31, 1996 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,200 $ 6,440
Accounts receivable 1,755 2,864
Inventories 374 376
Prepaid expenses and deposits 395 1,128
-------- --------
Total current assets 9,724 10,808
Property and equipment, net 108,234 109,954
Minority interest in partnerships 149 286
Other assets, net 2,164 3,400
-------- --------
Total assets $120,271 $124,448
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to affiliate $ -- $ 1,333
Accounts payable 1,780 2,263
Accrued payroll and related benefits 830 843
Accrued interest payable 711 741
Other accrued expenses 2,764 3,618
Long-term debt, due within one year 10,086 4,285
Capital lease obligations, due within one year 423 499
-------- --------
Total current liabilities 16,594 13,582
Long-term debt, due after one year 86,450 93,771
Capital lease obligations, due after one year 2,349 2,255
Deferred income taxes 4,469 5,417
-------- --------
Total liabilities 109,862 115,025
-------- --------
Commitments and contingencies (Notes 4, 10, 11 and 14)
Stockholders' equity:
Cavanaughs Hospitality Corporation:
Preferred stock - 1,424 shares authorized,
$450 par value; 1,100 shares issued and outstanding,
liquidation value $495,000 495 495
Common stock - 2,848 shares authorized, $10 par value; 1,858 and
1,766 shares issued and outstanding 19 18
Discount on stock (318) (318)
Barbieri Investment Company:
Common stock - 1,000 shares authorized, no par value; 929 shares issued
and outstanding 686 686
Additional paid-in capital 3,787 3,125
Retained earnings 5,740 5,417
-------- --------
Total stockholders' equity 10,409 9,423
-------- --------
Total liabilities and stockholders' equity $120,271 $124,448
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-3
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED STATEMENTS OF INCOME
for the years ended October 31, 1995, 1996 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Revenues:
Hotels and restaurants:
Rooms $17,587 $20,972 $25,147
Food and beverage 12,397 12,141 13,926
Other 1,260 2,092 2,589
------- ------- -------
Total hotels and restaurants 31,244 35,205 41,662
Entertainment, management and services 3,092 3,168 3,842
Rental operations 6,027 6,790 6,539
------- ------- -------
Total revenues 40,363 45,163 52,043
------- ------- -------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms 4,931 5,719 6,820
Food and beverage 10,034 10,181 11,483
Other 716 1,008 1,066
------- ------- -------
Total hotels and restaurants 15,681 16,908 19,369
Entertainment, management and services 1,802 2,204 2,052
Rental operations 1,026 1,464 1,506
------- ------- -------
Total direct expenses 18,509 20,576 22,927
------- ------- -------
Undistributed operating expenses:
Selling, general and administrative 5,420 6,445 8,165
Property operating costs 5,022 4,997 5,518
Depreciation and amortization 3,428 4,215 4,775
------- ------- -------
Total undistributed operating expenses 13,870 15,657 18,458
------- ------- -------
Total expenses 32,379 36,233 41,385
------- ------- -------
Operating income 7,984 8,930 10,658
Other income (expense):
Interest expense, net of amounts capitalized (6,866) (7,319) (8,817)
Interest income 439 296 416
Other income -- 150 348
Minority interest in partnerships 192 91 137
------- ------- -------
Income before income taxes 1,749 2,148 2,742
Income tax provision 542 730 932
------- ------- -------
Net income $ 1,207 $ 1,418 $ 1,810
======= ======= =======
Pro forma net income per share $0.26
=======
Number of shares used in the pro forma computation 7,084
=======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-4
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended October 31, 1995, 1996 and 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
CAVANAUGHS HOSPITALITY CORPORATION
---------------------------------------------------------
PREFERRED STOCK COMMON STOCK
--------------------- --------------- DISCOUNT
SHARES AMOUNT SHARES AMOUNT ON STOCK
----------- -------- ---------- ------ --------
<S> <C> <C> <C> <C> <C>
Balances, October 31, 1994 1,100 $ 495 1,877 $ 19 $ (318)
Net income
Contributions from stock-
holders
Dividends on Cavanaughs
Hospitality Corporation
common stock ($85.00 per
share)
Dividends on preferred stock
($31.50 per share)
Dividends on Barbieri
Investment Company common
stock ($85.00 per share)
Redemption of stock (19)
------ -------- ---------- ------ --------
Balances, October 31, 1995 1,100 495 1,858 19 (318)
Net income
Contributions from
(distributions
to) stockholders and
partners
Dividends on Cavanaughs
Hospitality Corporation
common stock ($85.00 per
share)
Dividends on preferred stock
($31.50 per share)
Dividends on Barbieri
Investment Company common
stock ($85.00 per share)
------ -------- ---------- ------ --------
Balances, October 31, 1996 1,100 495 1,858 19 (318)
Net income
Distributions to
stockholders
and partners
Dividends on Cavanaughs
Hospitality Corporation
common stock ($102.00
per share)
Dividends on preferred stock
($31.50 per share)
Dividends on Barbieri Investment
Company common stock
($102.00 per share)
Redemption of stock (92) (1)
------ -------- ---------- ------ --------
Balances, October 31, 1997 1,100 $495 1,766 $ 18 $ (318)
====== ======== ========== ===== ========
</TABLE>
<TABLE>
<CAPTION>
BARBIERI
INVESTMENT
COMPANY
----------------
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balances, October 31, 1994 929 $ 686 $3,190 $1,411
Net income 1,207
Contributions from stock-
holders 600 2,496
Dividends on Cavanaughs
Hospitality Corporation
common stock ($85.00 per
share) (158)
Dividends on preferred stock
($31.50 per share) (35)
Dividends on Barbieri Investment
Company common stock
($85.00 per share) (79)
Redemption of stock (129)
------ ------- ------ ------
Balances, October 31, 1995 929 686 3,661 4,842
Net income 1,418
Contributions from
(distributions
to) stockholders and partners 126 (248)
Dividends on Cavanaughs
Hospitality Corporation
common stock ($85.00 per
share) (158)
Dividends on preferred stock
($31.50 per share) (35)
Dividends on Barbieri Investment
Company common stock
($85.00 per share) (79)
------ ------- ------ ------
Balances, October 31, 1996 929 686 3,787 5,740
Net income 1,810
Distributions to stockholders
and partners (1,815)
Dividends on Cavanaughs
Hospitality Corporation
common stock ($102.00
per share) (188)
Dividends on preferred stock
($31.50 per share) (35)
Dividends on Barbieri Investment
Company common stock
($102.00 per share) (95)
Redemption of stock (662)
------ ------- ------ ------
Balances, October 31, 1997 929 $ 686 $3,125 $5,417
====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
for the years ended October 31, 1995, 1996 and 1997
(in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Operating activities:
Net income $ 1,207 $ 1,418 $ 1,810
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,428 4,215 4,775
Gain on disposition of property and equipment -- -- (322)
Deferred income tax provision (benefit) (151) 89 948
Minority interest in partnerships (192) (91) (137)
Change in:
Accounts receivable (4) (372) (1,109)
Inventories 25 (50) (2)
Prepaid expenses and deposits 305 (64) (733)
Accounts payable (153) (1,576) 483
Accrued payroll and related benefits 38 189 13
Accrued interest payable 99 21 30
Other accrued expenses (1,016) 1,421 854
-------- -------- -------
Net cash provided by operating activities 3,586 5,200 6,610
-------- -------- -------
Investing activities:
Additions to property and equipment (24,124) (13,457) (6,192)
Proceeds from disposition of property and equipment 128 185 1,159
Payment for purchase option agreement -- -- (500)
Other, net (432) 88 (735)
-------- -------- -------
Net cash used in investing activities (24,428) (13,184) (6,268)
-------- -------- -------
Financing activities:
Capital contributions from stockholders and partners 3,096 -- --
Distributions to stockholders and partners -- (122) (1,815)
Dividends to stockholders (272) (272) (318)
Proceeds from long-term debt 21,853 34,735 10,559
Repayment of long-term debt (4,389) (24,844) (9,539)
Purchase and retirement of common stock (129) -- (663)
Principal payments on capital lease obligations (981) (239) (659)
Advances from affiliate -- -- 1,333
-------- -------- -------
Net cash provided by (used in) financing activities 19,178 9,258 (1,102)
-------- -------- -------
Change in cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents (1,664) 1,274 (760)
Cash and cash equivalents at beginning of year 7,590 5,926 7,200
-------- -------- -------
Cash and cash equivalents at end of year $ 5,926 $ 7,200 $ 6,440
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during year for:
Interest (net of amount capitalized) $ 6,176 $ 7,298 $ 8,787
Income taxes 300 130 1,646
Noncash investing and financing activities:
Acquisition of capital leases $ 1,112 $ 1,714 $ 641
Issuance of note payable for purchase option -- -- 500
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION:
At October 31, 1997, the Company controlled and operated (through ownership
or lease with purchase option agreements) eight hotel properties in Seattle,
Spokane, Yakima and Kennewick, Washington and Kalispell, Montana under its
Cavanaughs brand. Additionally, the Company provides computerized ticketing
for entertainment events and arranges Broadway and other entertainment event
productions. The Company also leases retail and office space in buildings
owned by the Company and manages residential and commercial properties in
Washington, Idaho and Montana. The Company's operations are classified into
three divisions: (1) hotels and restaurants, (2) entertainment, management
and services, and (3) rental operations.
The combined financial statements include the accounts (except as described
below) of the following entities which are under common control through
Barbieri family ownership.
. Cavanaughs Hospitality Corporation (CHC-Washington), a Washington
corporation (formerly known as Goodale & Barbieri Companies until
October 1997)
. Barbieri Investment Company (BIC)
. Lincoln Building Limited Partnership (Lincoln Building)
CHC-Washington and/or BIC have the following wholly owned subsidiary or
partnership investments which are included in the combined financial
statements.
. Cowley Street Limited Partnership (Cowley)
. Inn on Fifth Avenue Associates, L. P. (Inn on Fifth)
. West 201 North River Drive Limited Partnership (North River Drive
Partnership)
. Kalispell Center Limited Partnership (KCLP)
. North River Drive Company
CHC-Washington is the sole general partner of all of the above partnerships.
CHC-Washington and/or BIC hold all of the limited partnership units in all
of the partnerships except for Cowley (which has a 50% limited partner). The
Lincoln Building Limited Partnership is a partnership which was formed to
operate a commercial office building. The partnership is comprised of the
Barbieri Family Foundation (BFF) and four members of the Barbieri family.
All partners are general partners of the partnership.
Unless otherwise defined, "the Company" refers to all of the above companies
and partnerships collectively. All significant intercompany accounts and
transactions have been eliminated in the combined financial statements.
F-7
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION, CONTINUED:
In October 1997, Cavanaughs Hospitality Limited Partnership (CHLP), a
Delaware partnership, was formed. CHLP was inactive at October 31, 1997.
In November 1997, the Company distributed certain of its operations
(consisting of subsidiaries, partnership investments or divisions of the
Company) to the existing stockholders as they were dissimilar to the
predominant business of the Company. These operations consisted primarily
of real estate development, a wholesale dairy processor and a long-term
residence inn operation. These operations have historically been managed
and financed autonomously, will be operated autonomously in the future
and, after the distributions to the stockholders, will not have material
financial commitments, guarantees or contingent liabilities associated
with the Company. Accordingly, these operations have been excluded from
the combined financial statements for all periods presented. The effects
of excluding the subsidiaries, investments or divisions are recorded as a
contribution from or distribution to stockholders and partners.
In November 1997, BIC was merged into CHC-Washington, and the Company
contributed all of its assets to CHLP in exchange for the general
partnership interest (which holds a 1% interest in CHLP) and limited
partnership interests. Operating units (OP Units) of CHLP will be issued
to the partners for their interest in the Lincoln Building. OP Units may
also be used for future acquisitions (see Note 14). OP Units will be
convertible to common stock of CHC-Washington on a one-for-one basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
remaining maturities at time of purchase of three months or less. The
Company places its cash with high credit quality institutions. At times,
cash balances may be in excess of federal insurance limits.
The Company maintains several trust accounts for owners of real properties
which it manages. These cash accounts are not owned by the Company and
therefore, are not included in the combined financial statements. At
October 31, 1997, these accounts totaled approximately $2.6 million.
INVENTORIES
Inventories consist primarily of food and beverage products held for sale
at the restaurants operated by the Company. Inventories are valued at the
lower of cost, determined on a first-in, first-out basis, or net
realizable value.
F-8
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
the straight-line method over the lesser of the estimated useful lives of
the related assets or the lease term as follows:
Buildings 25-40 years
Equipment 5-20 years
Furniture and fixtures 15 years
Landscaping and land improvements 15 years
Major additions and betterments are capitalized. Costs of maintenance and
repairs which do not improve or extend the lives of the respective assets
are expensed currently. When items are disposed of, the related costs and
accumulated depreciation are removed from the accounts and any gain or
loss is recognized in operations. Management of the Company periodically
reviews the net carrying value of all properties to determine whether
there has been a permanent impairment of value and assesses the need for
any write-downs in carrying value.
INTEREST CAPITALIZATION
The Company capitalizes interest costs during the construction period for
qualifying assets. During the years ended October 31, 1995, 1996 and 1997,
the Company capitalized approximately $459,000, $1,412,000 and $6,000 of
interest costs, respectively.
OTHER ASSETS
Other assets primarily include deferred loan fees, deferred stock offering
costs, purchase option payments and prepaid rental income. Deferred loan
fees are amortized using the interest method over the term of the related
loan agreement. Costs incurred in connection with the Company's planned
common stock offering (the Offering -- see Note 15) are deferred and will
be offset against the proceeds of the offering, if successful. If the
offering is unsuccessful, the costs will be charged to operations. At
October 31, 1997, the Company has deferred purchase option payments made
pursuant to a purchase agreement for a hotel property which is currently
being leased and operated by the Company (see Note 10). If the option is
exercised, the option payments will offset a portion of the purchase
price. If the option is not exercised, the option payments will be charged
to operations.
F-9
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES
CHC-Washington and BIC file separate federal and state income tax returns.
The Lincoln Building and the other partnerships which are owned by CHC-
Washington and/or BIC are not tax paying entities. However, the income tax
attributes of these partnerships flow through to the respective partners
of the partnerships.
LEASE INCOME
The Company records rental income from operating leases which contain
fixed escalation clauses on the straight-line method. The difference
between income earned and lease payments received from the tenants is
included in other assets on the combined balance sheets. Rental income
from retail lessees which is contingent upon the lessees' revenues is
recorded as income in the period earned.
PRO FORMA EARNINGS PER SHARE
Due to the combination of the companies and partnerships, historical
earnings per share information is not relevant or meaningful. Therefore,
pro forma earnings per share for the year ended October 31, 1997 has been
presented based upon the number of common shares of CHC-Washington which
are outstanding after the merger of the companies and partnerships (see
Note 15).
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," was issued. SFAS No. 128 establishes standards
for computing and presenting earnings per share (EPS) and simplifies the
existing standards. This standard replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires the dual presentation
of basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods and requires restatement of
all prior-period EPS data presented. The adoption of SFAS No. 128 will not
have a material effect on the presentation of the Company's EPS.
F-10
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued.
This Statement requires that comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format
for the financial statement, but requires that an enterprise display net
income as a component of comprehensive income in the financial statement.
Comprehensive income is defined as the change in equity of a business
enterprise arising from non-owner sources. The classifications of
comprehensive income under current accounting standards include foreign
currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities.
This Statement is effective for fiscal years beginning after December 15,
1997. Management does not believe that the implementation of SFAS No. 130
will have a material impact on the presentation of its combined financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments for an Enterprise and Related
Information". This Statement will change the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity-
wide disclosures about the products and services an entity provides, and
its major customers. The Statement is effective for fiscal years beginning
after December 15, 1997. Management of the Company does not believe that
the implementation of SFAS No. 131 will have a material impact on the
combined financial statements.
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 and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
F-11
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT:
Property and equipment at October 31, 1996 and 1997 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Buildings and equipment $105,039 $108,507
Furniture and fixtures 11,150 14,163
Equipment acquired under capital leases 4,421 4,543
Landscaping and land improvements 863 863
-------- --------
121,473 128,076
Less accumulated depreciation and
amortization (30,049) (34,325)
-------- --------
91,424 93,751
Land 16,810 16,203
-------- --------
$108,234 $109,954
======== ========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of mortgage notes payable and notes and contracts
payable, collateralized by real property, equipment and the assignment of
certain rental income. Long-term debt as of October 31, 1997 is as follows
(amounts outstanding in thousands):
<TABLE>
<CAPTION>
<S> <C>
Note payable in monthly installments of $146,494 including
interest at a variable rate (9.0% at October 31, 1997),
collateralized by real property $ 16,816
Note payable in monthly installments of $117,487 including
interest at a variable rate (9.0% at October 31, 1997),
collateralized by real property 13,884
Note payable in monthly installments of $79,828 including
interest at 7.25%, collateralized by real property 9,785
Note payable in monthly installments of $85,156 including
interest at a variable rate (8.125% at October 31, 1997),
collateralized by real property 9,083
Note payable in monthly installments of $64,637 including
interest at a variable rate (7.88% at October 31, 1997),
collateralized by assignment of certain rental income 7,773
</TABLE>
F-12
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
4. LONG-TERM DEBT, CONTINUED:
<TABLE>
<S> <C>
Industrial revenue bonds payable in monthly installments
of $73,668 including interest at a variable rate (7.65% at
October 31, 1997), collateralized by real property $ 7,555
Note payable in monthly installments of $63,378 including
interest at a variable rate (10.375% at October 31, 1997),
collateralized by real property 7,128
Note payable in monthly installments of $46,369 including
interest at 8.875%, collateralized by real property 5,046
Note payable in monthly installments of $56,875 including
interest at a variable rate (9.0% at October 31, 1997),
collateralized by real property 4,794
Urban Development Action Grant loan payable in monthly
installments of $27,807 including interest at 9.0%,
collateralized by real property /(A)/ 2,603
Note payable in monthly installments of $25,777 including
interest at 9.25%, collateralized by real property 2,412
Note payable in monthly installments of $37,604 including
interest at an index rate plus 2.375% (8.66% at October 31,
1997), collateralized by real property 2,292
Note payable in monthly installments of $17,608 including
interest at a variable rate (8.5% at October 31, 1997),
collateralized by real property 2,151
Note payable in monthly installments of $18,418 including
interest at an index rate plus 1.5%, subject to a minimum of
9.5% and a maximum of 12.0% (9.75% at October 31, 1997),
collateralized by real property 1,696
Note payable in monthly installments of $22,702 including
interest at a variable rate (9.5% at October 31, 1997),
collateralized by real property 1,190
Note payable in monthly installments of $41,674 including
interest at a variable rate plus 0.5% (9.0% at October 31,
1997), collateralized by real property 1,091
Note payable in monthly installments of $8,497 including
interest at a variable rate (9.5% at October 31, 1997),
collateralized by certain equipment and furniture and fixtures 760
Amount payable at $67,000 interest only annually /(B)/ 600
Note payable of interest only at 8.0% until maturity in
October 2002, collateralized by letter of credit 500
Note payable in monthly installments of $9,000 including
interest at an index rate (8.5% at October 31, 1997),
collateralized by real property 462
</TABLE>
F-13
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
4. LONG-TERM DEBT, CONTINUED:
<TABLE>
<S> <C>
Note payable in monthly installments of $5,113 including
interest at prime plus 1.0% (9.0% at October 31, 1997),
collateralized by real property $ 238
Note payable of interest only at 7.3% until maturity in December
1997, collateralized by real property 100
Note payable in annual principal payments of $37,000 plus
interest at a variable rate (9.0% at October 31, 1997),
collateralized by real property 74
Other 23
-------
98,056
Less current portion (4,285)
-------
Total long-term debt $93,771
=======
</TABLE>
/(A)/ This loan agreement requires the City of Kalispell, Montana (the
City) to receive 15% of cumulative annual net cash flow (as defined
in the agreement) from the property until the loan is paid in full.
The cumulative net cash flow of the property resulted in
participation by the City of approximately $20,000, $45,000 and
$22,000 for the years ended October 31, 1995, 1996 and 1997,
respectively. The Company repaid this note in full in December 1997.
/(B)/ The Company has a $600,000 obligation payable to BFF. BFF is entitled
to a guaranteed annual payment of approximately $67,000, which is
increased by 3% annually. The Company has the right to pay off its
obligation at any time after January 1997, and BFF has the right to
require redemption at any time after January 1999.
Contractual maturities for long-term debt outstanding at October 31, 1997,
are summarized by year as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
OCTOBER 31,
-------------
<S> <C>
1998 $ 4,285
1999 3,326
2000 3,208
2001 3,348
2002 4,119
Thereafter 79,770
-------
$98,056
=======
</TABLE>
F-14
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
5. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under capital leases. The imputed
interest rates on the leases range from 7.6% to 8.6%. Cost and accumulated
amortization of this equipment as of October 31, 1996 are approximately
$4,421,000 and $1,831,000, respectively. Cost and accumulated amortization of
equipment under capital lease obligations as of October 31, 1997 are
approximately $4,543,000 and $2,074,000, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
OCTOBER 31,
------------
<S> <C>
1998 $ 711
1999 697
2000 685
2001 531
2002 408
Thereafter 336
------
Total minimum lease payments 3,368
Less amount representing interest (614)
------
Total obligations under capital lease 2,754
Less current maturities (499)
------
$2,255
======
</TABLE>
6. LINES OF CREDIT:
At October 31, 1997, the Company had a $1.0 million line-of-credit agreement
with U.S. Bank of Washington. The outstanding balance on the unsecured
credit line bears interest at the bank's prime rate plus 0.25%. At October
31, 1997, there were no amounts outstanding on the line of credit. In
November 1997, this agreement was increased to $3.0 million and expires in
March 1998. The agreement requires that the Company maintain a defined
current ratio and minimum levels of cash flow.
Additionally, the Company has a non-revolving line-of-credit agreement. Any
outstanding amounts bear interest at the bank's index rate plus 2.75%. At
October 31, 1997, $9,083,000 is outstanding under this agreement (see Note
4) and $670,000 was available to be drawn.
In December 1997, the Company obtained a commitment for a revolving secured
credit facility with a bank for up to $80.0 million. The credit facility is
contingent upon the successful completion of the Offering. The agreement
requires that the Company maintain certain financial ratios and minimum
levels of cash flows. Any outstanding borrowings will bear interest based on
prime rate or LIBOR. The credit facility matures five years after closing.
F-15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
7. STOCKHOLDERS' EQUITY:
Prior to the mergers described in Note 1, the preferred stock of CHC-
Washington was the only voting stock of CHC-Washington. The preferred
stockholders were entitled to 7% annual, noncumulative dividends if and
when declared by the Board of Directors. In the event of liquidation or
dissolution of CHC-Washington, the preferred stockholders had a
liquidation preference equal to $450 plus any unpaid dividends per share.
At October 31, 1997, all declared dividends have been paid to the
preferred stockholders. In connection with the merger and changes in the
capital structure of CHC-Washington (see Note 15), the outstanding
preferred stock of CHC-Washington was retired and cancelled.
In January 1998, the Board of Directors adopted, subject to shareholder
approval, three Company stock benefit plans. A total of 1,500,000 shares
of common stock were reserved for issuance or grant under the plans of
which 900,000 shares are planned to be granted to certain employees at the
initial public offering price concurrent with the closing of the Offering.
8. INCOME TAXES:
Major components of the Company's income tax provision (benefit) for the
years ended October 31, 1995, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Current $ 693 $ 641 $ (16)
Deferred (151) 89 948
----- ----- -----
$ 542 $ 730 $ 932
===== ===== =====
</TABLE>
The income tax provisions shown in the statements of income for the years
ended October 31, 1995, 1996 and 1997 differ from the amounts calculated using
the federal statutory rate applied to income before income taxes as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------------- -------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision at federal statutory rate $ 595 34.0% $ 730 34.0% $932 34.0%
Effect of tax credits (64) (4.0) -- -- (20) (0.1)
Other 11 1.0 -- -- 20 0.1
----- ---- ----- ---- ---- ----
$ 542 31.0% $ 730 34.0% $932 34.0%
===== ==== ===== ==== ==== ====
</TABLE>
F-16
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES, CONTINUED:
Components of the net deferred tax assets and liabilities as of October 31,
1996 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Depreciation on property and equipment $ -- $5,331 $ -- $5,295
Rental income -- 192 -- 248
Tax credits 577 -- 367 --
Other 477 -- -- 241
------ ------ ------ ------
$1,054 $5,523 $ 367 $5,784
====== ====== ====== ======
</TABLE>
At October 31, 1997, the Company has approximately $352,000 of alternative
minimum tax credits available to offset future regular taxes payable to the
extent they exceed alternative minimum taxes.
9. OPERATING LEASE INCOME:
KCLP leases shopping mall space to various tenants over terms ranging from one
to ten years. The leases generally provide for fixed minimum monthly rent as
well as tenants' payments for their pro rata share of taxes and insurance,
common area maintenance and expenses associated with the shopping mall. In
addition, the Company leases commercial office space over terms ranging from
one to eighteen years. At October 31, 1996, cost and accumulated depreciation
of retail and commercial properties which are subject to operating leases was
$31,008,000 and $7,191,000, respectively. The cost and accumulated
depreciation of these properties at October 31, 1997 was approximately
$31,875,000 and $8,281,000, respectively.
Future minimum lease income under existing noncancellable leases are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
OCTOBER 31,
-------------
<S> <C>
1998 $ 6,840
1999 6,687
2000 6,237
2001 5,466
2002 4,444
Thereafter 16,009
-------
$45,683
=======
</TABLE>
Rental income for the years ended October 31, 1995, 1996 and 1997 was
approximately $6,027,000, $6,790,000 and $6,539,000, respectively, which
included contingent rents of approximately $309,000, $342,000 and $217,000,
respectively.
F-17
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
10. OPERATING LEASE COMMITMENTS:
The Company leases building space under an operating lease agreement which
requires monthly payments of $4,500 through March 2009. Commencing in 1999,
the monthly payments can be increased for inflation.
In October 1997, the Company began operating a hotel in Yakima, Washington
under an operating lease and purchase option agreement. The lease agreement is
for a period of 15 years with two five-year renewal options. The Company pays
all operating costs of the hotel plus monthly lease payments of $35,000
through September 2003. Commencing October 2003, the monthly lease requirement
will be $52,083 and monthly payments shall increase by $5,208 each year
thereafter. The Company agreed to a $1.0 million option payment which allows
the purchase of this hotel at a fixed price. One-half of this option payment
was paid in cash and the remaining $500,000 is payable in October 2002. The
option is exercisable by the Company between March and September 2003 for a
total purchase price of $6,250,000. If the Company exercises its purchase
option, the option payments made by the Company will be applied against the
total purchase price.
Assuming the Company exercises its purchase option for the hotel in March
2003, total payments due under these leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
OCTOBER 31,
------------
<S> <C>
1998 $ 474
1999 474
2000 474
2001 474
2002 474
Thereafter 630
------
$3,000
======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
The Company has guaranteed certain debt of entities affiliated through
common ownership, which are excluded from the combined financial
statements (see Note 1). At October 31, 1997, total debt outstanding
which was guaranteed by the Company was approximately $5,748,000. With
the consummation of the merger described in Note 1, the Company's
guarantee of these affiliated companies' debt was eliminated.
F-18
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
11. COMMITMENTS AND CONTINGENCIES, CONTINUED:
In 1994, the Company was sued by the contractor who constructed one of
the Company's hotel properties asserting lack of payment of cost
overruns. The Company filed a counter claim for the recovery of various
damages. The Company obtained summary judgment for most of the claims. As
of October 31, 1997, the amount of claims against the Company which have
not been dismissed or are subject to appeal is $233,000, plus interest.
The Company's counter claims which have not been dismissed are $419,000.
Management believes that the ultimate resolution of this matter will not
have a material effect on the Company's results of operations, financial
condition or cash flows.
12. RELATED-PARTY TRANSACTIONS:
In addition to related-party transactions described in Notes 4 and 11,
the Company had the following transactions with related parties during
the years ended October 31, 1995, 1996 and 1997:
. Interest expense of approximately $64,000, $66,000 and $67,000 was
incurred related to the payable to BFF (see Note 4) for the years
ended October 31, 1995, 1996 and 1997, respectively.
. The Company recorded management fee and other income of approximately
$27,000, $31,000 and $35,000 during the years ended October 31, 1995,
1996 and 1997, respectively, for performing management and
administrative functions for entities which are owned by the
stockholders of the Company, but are excluded from the combined
financial statements.
. The Company received commissions from entities which are owned by the
stockholders of the Company, but are excluded from the combined
financial statements of $51,000, $7,000 and $87,000 for real estate
sales for the years ended October 31, 1995, 1996 and 1997,
respectively.
. At October 31, 1997, the Company has a $1.3 million non-interest
bearing payable to an affiliated entity due to common control. The
amount is expected to be paid during fiscal 1998.
F-19
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
13. EMPLOYEE BENEFIT PLAN:
The Goodale and Barbieri Retirement Savings Plan, to which both the
Company and employees contribute, was established in March 1989. The
defined contribution plan was created for the benefit of substantially
all employees of the Company. The Company makes contributions of up to 3%
of an employee's compensation based on a vesting schedule and eligibility
requirements set forth in the plan document. Company contributions to the
plan for the years ended October 31, 1995, 1996 and 1997 were
approximately $78,000, $93,000 and $97,000, respectively.
14. SUBSEQUENT EVENTS:
In October 1997, the Company entered into a lease (which was effective in
January 1998) with purchase option for an operating hotel in Spokane,
Washington. The Company is obligated to pay debt service and all costs of
operating the hotel through the lease termination date of November 1,
1999. The purchase price is $11.5 million. Approximately $2.0 million of
the purchase price shall be paid by the transfer of OP Units to the
owner.
In November 1997, CHLP entered into separate purchase agreements to
acquire certain assets of operating hotels in Post Falls, Idaho and in
Idaho Falls, Idaho for a total purchase price of $13.3 million. The Idaho
Falls acquisition was closed in January 1998 and the Post Falls
acquisition is expected to close in February 1998.
In December 1997, the Company entered into an agreement for the
acquisition of an operating hotel in Kalispell, Montana. The acquisition
is contingent upon the Company's successful completion of the Offering.
The purchase price is approximately $9.9 million.
In January, 1998, the Company entered into an agreement to acquire an
operating hotel in Portland, Oregon for a total purchase price of $5.7
million. The transaction is expected to close in March, 1998.
15. CAPITALIZATION OF THE COMPANY AND PROPOSED INITIAL PUBLIC OFFERING:
After the mergers described in Note 1 were completed, the Articles of
Incorporation of CHC-Washington were amended to authorize 50.0 million
common shares and 5.0 million preferred shares. The preferred stock
rights, preferences and privileges will be determined by the Board of
Directors. The existing stockholders of CHC-Washington and BIC received a
total of 7,084,251 newly issued shares in exchange for all of their
outstanding shares. CHC-Washington intends to enter into an underwriting
agreement with CIBC Oppenheimer Corp. for the sale of 5.2 million shares
of the Company's common stock.
F-20
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following estimated fair value amounts have been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required to interpret market data and
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value. Potential income tax ramifications related to the
realization of unrealized gains and losses that would be incurred in an
actual sale or settlement have not been taken into consideration.
The carrying amounts for cash and cash equivalents, accounts receivable
and current liabilities are a reasonable estimate of their fair values.
The fair values of long-term debt and capital lease obligations are based
on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for debt or capital lease
obligations with similar remaining maturities.
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------------------
1996 1997
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,200 $ 7,200 $ 6,440 $ 6,440
Accounts receivable 1,755 1,755 2,864 2,864
Financial liabilities:
Current liabilities, excluding debt 6,085 6,085 8,798 8,798
Long-term debt 96,536 97,764 98,056 99,615
Capital lease obligations 2,772 2,772 2,754 2,754
</TABLE>
F-21
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
17. BUSINESS SEGMENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Revenues:
Hotels and restaurants $ 31,244 $ 35,205 $ 41,662
Entertainment, management and services 3,092 3,168 3,842
Rental operations 6,027 6,790 6,539
-------- -------- --------
$ 40,363 $ 45,163 $ 52,043
======== ======== ========
Operating income:
Hotels and restaurants $ 15,563 $ 18,297 $ 22,293
Entertainment, management and services 1,290 964 1,790
Rental operations 5,001 5,326 5,033
Undistributed operating expenses (13,870) (15,657) (18,458)
-------- -------- --------
$ 7,984 $ 8,930 $ 10,658
======== ======== ========
Capital expenditures:
Hotels and restaurants $ 20,439 $ 11,705 $ 4,960
Rental operations 3,536 1,631 980
General corporate, including entertainment,
management and services 149 121 252
-------- -------- --------
$ 24,124 $ 13,457 $ 6,192
======== ======== ========
Depreciation and amortization:
Hotels and restaurants $ 2,274 $ 2,840 $ 3,457
Rental operations 1,005 1,210 1,179
General corporate, including entertainment,
management and services 149 165 139
-------- -------- --------
$ 3,428 $ 4,215 $ 4,775
======== ======== ========
Identifiable assets:
Hotels and restaurants $ 76,711 $ 89,733 $ 90,878
Rental operations 24,749 24,845 24,932
General corporate, including entertainment,
management and services 5,577 5,693 8,638
-------- -------- --------
$107,037 $120,271 $124,448
======== ======== ========
</TABLE>
Revenues and identifiable assets of each segment are those that are directly
identified with those operations. Capital expenditures and identifiable
assets for the entertainment, management and services segment are not
separated from corporate. General corporate assets consist primarily of cash
and cash equivalents, receivables and property and equipment. Operating
income for each segment represents revenues less direct operating expenses
of each segment. Undistributed operating expenses are not identified by
segment.
F-22
<PAGE>
CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION
The following condensed pro forma combined balance sheet and condensed pro forma
combined statement of income, collectively, the "Pro Forma Financial Statements"
were prepared by Cavanaughs Hospitality Corporation to illustrate the estimated
effects of (i) the merger of the companies and partnerships which occurred in
November 1997, (ii) acquiring minority interests through the issuance of OP
Units and (iii) business combinations to be accounted for as purchases under
generally accepted accounting principles. The acquisitions include the property
and equipment of the following hotel properties:
. Templin's Resort (Templin's)
. Outlaw Inn (Outlaw)
. Inn on the Falls
. The Ridpath Hotel (Ridpath)
. Hallmark Inn (Hallmark)
Additionally, in October 1997, Cavanaughs Hospitality Corporation entered into a
lease with purchase option agreement for the Gateway Hotel (Gateway). Therefore,
the historical results of operations of Gateway are included in the condensed
pro forma combined financial information. Templin's, Outlaw, Inn on the Falls,
Ridpath, Gateway and Hallmark are collectively referred to as the "Acquired
Hotels." Accordingly, the financial information of Cavanaughs Hospitality
Corporation, Barbieri Investment Company and Lincoln Building Limited
Partnership (collectively, "CHC" or "the Company") and the Acquired Hotels has
been combined as if the acquisitions occurred on November 1, 1996 for purposes
of the condensed pro forma combined statement of income, and as of October 31,
1997, for purposes of the condensed pro forma combined balance sheet. There are
no differences between CHC's and the Acquired Hotel's accounting policies, which
are expected to have a material impact on the pro forma combined financial
statements. The Pro Forma Financial Statements do not purport to represent what
the combined financial position or results of operations would have been if the
acquisitions had occurred at the beginning of the period or to project the
combined financial position or results of operations for any future date or
period.
The Pro Forma Financial Statements should be read in conjunction with the
historical combined financial statements, including the notes thereto, of CHC,
which are included in this document.
The Pro Forma Financial Statements are presented utilizing the purchase method
of accounting whereby the excess of the total purchase price over the fair value
of the assets acquired of the Acquired Hotels is recorded as property and
equipment. The combined pro forma results of operations presented herein are not
necessarily indicative of the future results of operations.
F-23
<PAGE>
CONDENSED PRO FORMA COMBINED BALANCE SHEETS
AT OCTOBER 31, 1997
(in thousands, except for share data)
<TABLE>
<CAPTION>
ACQUIRED
CHC HOTELS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,440 $ -- (6,440)/(a)/ $ --
Accounts receivable 2,864 -- -- 2,864
Inventories 376 -- -- 376
Prepaid expenses and deposits 1,128 -- -- 1,128
-------- ---------- ------------- --------
Total current assets 10,808 -- (6,440) 4,368
Property and equipment, net 109,954 20,478 22,642/(b)/ 153,074
Minority interest 286 -- (286)/(c)/ --
Other assets, net 3,400 -- -- 3,400
-------- ---------- ------------- --------
Total assets $124,448 $ 20,478 $ 15,916 $160,842
======== ========== ============= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Payable to affiliates $ 1,333 $ -- $ -- $ 1,333
Accounts payable 2,263 -- -- 2,263
Accrued payroll and related benefits 843 -- -- 843
Accrued interest payable 741 -- -- 741
Other accrued expenses 3,618 -- -- 3,618
Long-term debt, due within one year 4,285 -- -- 4,285
Capital lease obligations, due within one year 499 -- -- 499
-------- ---------- ------------- --------
Total current liabilities 13,582 -- -- 13,582
Long-term debt, due after one year 93,771 -- 31,880/(d)/ 125,651
Capital lease obligations, due after one year 2,255 -- -- 2,255
Deferred income taxes 5,417 -- -- 5,417
Minority interest -- -- 4,514/(c)(e)/ 4,514
-------- ---------- ------------- --------
Total liabilities 115,025 -- 36,394 151,419
-------- ---------- ------------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
authorized; no shares issued and outstanding -- -- -- --
Common stock, $.01 par value, 50,000,000
authorized; 7,084,251 shares issued and
outstanding 71 -- -- 71
Additional paid-in capital 3,935 -- -- 3,935
Retained earnings 5,417 20,478 (20,478) 5,417
-------- ---------- ------------- --------
Total stockholders' equity 9,423 20,478 (20,478) 9,423
-------- ---------- ------------- --------
Total liabilities and stockholders' equity $124,448 $ 20,478 $ 15,916 $160,842
======== ========== ============= ========
</TABLE>
See notes to condensed pro forma combined balance sheet and statement of income.
F-24
<PAGE>
CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED OCTOBER 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
ACQUIRED
CHC HOTELS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Hotels and restaurants:
Rooms $25,147 $14,662 $ -- $ 39,809
Food and beverage 13,926 9,621 -- 23,547
Other 2,589 1,056 -- 3,645
------- ------- ----------- --------
Total hotels and restaurants 41,662 25,339 -- 67,001
Entertainment, management and services 3,842 -- -- 3,842
Rental operations 6,539 -- -- 6,539
------- ------- ----------- --------
Total revenues 52,043 25,339 -- 77,382
------- ------- ----------- --------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms 6,820 4,600 -- 11,420
Food and beverage 11,483 7,829 -- 19,312
Other 1,066 343 -- 1,409
------- ------- ----------- --------
Total hotels and restaurants 19,369 12,772 32,141
Entertainment, management and services 2,052 -- -- 2,052
Rental operations 1,506 -- -- 1,506
------- ------- ----------- --------
Total direct expenses 22,927 12,772 35,699
------- ------- --------
Undistributed operating expenses:
Selling, general and administrative 8,165 4,653 (743)/(f)/ 12,075
Property operating costs 5,518 3,353 312/(g)/ 9,183
Depreciation and amortization 4,775 1,825 (753)/(h)/ 5,847
------- ------- ----------- --------
Total undistributed operating expenses 18,458 9,831 (1,184) 27,105
------- ------- ----------- --------
Total expenses 41,385 22,603 (1,184) 62,804
------- ------- ----------- --------
Operating income 10,658 2,736 1,184 14,578
Other income (expense):
Interest expense, net of amounts capitalized (8,817) (2,555) 244/(i)/ (11,128)
Interest income 416 -- -- 416
Other income 348 -- -- 348
Minority interest in partnerships 137 -- (194)/(j)/ (57)
------- ------- ----------- --------
Income before income taxes 2,742 181 1,234 4,157
Income tax provision 932 61 459/(k)/ 1,452
------- ------- ----------- --------
Net income $ 1,810 $ 120 $ 775 $ 2,705
======= ======= =========== ========
Pro forma net income per share $ 0.26 $ 0.38
======= ========
Number of shares used in the pro forma computation 7,084 7,084
======= ========
</TABLE>
See notes to condensed pro forma combined balance sheet and statement of income.
F-25
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND
STATEMENT OF INCOME
1. BUSINESSES ACQUIRED:
Subsequent to October 31, 1997, the Company has entered into agreements to
purchase the real and personal property and equipment of the following hotel
properties:
Templin's Resort
Outlaw Inn
Inn on the Falls
The Ridpath Hotel
Hallmark Inn
Additionally, the Company has entered into a lease with purchase option
agreement with the owner of the Gateway Hotel. The purchase option cannot be
exercised by the Company until 2003 and therefore, the acquisition of the
property and equipment of the Gateway Hotel has not been assumed in the pro
forma balance sheet. However, the pro forma statement of income reflects the
lease expense associated with the Gateway Hotel along with its historical
operations. The acquisitions will be accounted for utilizing the purchase
method of accounting. The purchase price for all of the acquired hotels will
be paid in cash except for the Ridpath. The purchase price for the Ridpath
assumes that the purchase option is exercised prior to March 1998 and that
$2.0 million of the purchase price is satisfied by the issuance of OP Units
(see Note 14 to the historical financial statements of the Company).
The total purchase price and the amount in excess of the historical book value
of the property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL EXCESS
PURCHASE PURCHASE
PRICE PRICE
-------- --------
<S> <C> <C>
Templin's Resort $ 9,500 $ 5,376
Outlaw Inn 9,870 5,547
Inn on the Falls 3,800 259
The Ridpath Hotel 11,500 4,587
Hallmark Inn 5,650 4,073
------- -------
$40,320 $19,842
======= =======
</TABLE>
The purchase price has been allocated to the acquired land, building,
furniture and fixtures as follows (in thousands):
<TABLE>
<CAPTION>
DEPRECIABLE
AMOUNT LIFE
----------- --------
<S> <C> <C>
Land $13,791
Building 23,894 35 years
Furniture and fixtures 2,635 10 years
-------
$40,320
=======
</TABLE>
Assuming the acquisitions were made on November 1, 1996, historical
depreciation expense for the acquired hotels would have been reduced by
$753,000 for the year ended October 31, 1997.
F-26
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND
STATEMENT OF INCOME, CONTINUED
2. PRO FORMA ADJUSTMENTS:
The following pro forma adjustments were made to the condensed pro forma
combined balance sheet and statement of income to reflect the acquisitions
of the Acquired Hotels and the issuance of OP Units for the acquisition of
minority interests in the Lincoln Building.
(a) Represents the cash used for the purchase of the Acquired Hotels.
(b) Represents the purchase price in excess of the historical value of the
property and equipment of the Acquired Hotels and the acquired minority
interest associated with the Lincoln Building.
(c) Represents the minority interest related to the Lincoln Building.
(d) Represents the amount of the purchase price of the Acquired Hotels which
will be financed by the Company's revolving line-of-credit agreement.
(e) Assumes the purchase price of the Ridpath will be $9.5 million cash plus
OP Units equivalent to $2.0 million of the purchase price.
(f) Represents elimination of franchise fees which were based on gross room
revenues.
(g) Represents elimination of $108,000 of facility lease payments at one
hotel which is offset by $420,000 of additional facility lease payment
requirements at Gateway.
(h) Represents the net reduction in depreciation and amortization expense
from the historical amounts for the Acquired Hotels based on the
purchase price and new depreciable lives.
(i) Represents the net reduction in interest expense from the historical
amounts for the Acquired Hotels based on the amount of the purchase
price to be financed under the Company's revolving line-of-credit
agreement.
(j) Represents the minority interest share of the pro forma net income
associated with OP units for the year ended October 31, 1997.
(k) Represents estimated income taxes related to the Acquired Hotels
historical income before income taxes and the tax effects of pro forma
adjustments.
F-27
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND
STATEMENT OF INCOME, CONTINUED
3. INTEREST EXPENSE:
Assuming the acquisitions were made as of November 1, 1996, the Company
would have incurred debt to finance part of the purchase price of the
Acquired Hotels. Pro forma interest expense associated with the Company's
acquisitions has been calculated assuming borrowings were made in amounts
as presented in the pro forma condensed combined balance sheet and at
interest rates that would be charged under the Company's revolving line-
of-credit agreement. Pro forma interest expense which would have been
incurred by the Company for the year ended October 31, 1997 of $2.3
million is $244,000 less than the historical interest expense incurred by
the Acquired Hotels.
4. INSURANCE COSTS:
The Company has obtained insurance premium quotations for the Acquired
Hotels which indicate that insurance expense will be approximately
$180,000 less than the historical insurance expense which was incurred by
the Acquired Hotels. This reduction in expense has not been reflected in
the pro forma financial statements.
F-28
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in which such an 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 an offer or solicitation. Neither the delivery of this Prospectus
nor any offer or sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 11
The Company............................... 17
Use of Proceeds........................... 17
Dividend Policy........................... 17
Capitalization............................ 18
Dilution.................................. 19
Selected Combined Financial And Other
Data.................................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 23
Business and Properties................... 29
Management................................ 40
Certain Relationships and Related
Transactions............................ 47
Ownership of Common Stock................. 49
Partnership Agreement of the Operating
Partnership............................. 50
Description of Capital Stock.............. 53
Shares Eligible for Future Sale........... 55
Underwriting.............................. 56
Experts................................... 57
Legal Matters............................. 58
Additional Information.................... 58
Index to Financial Statements............. F-1
</TABLE>
Until ________, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriters
and with respect to their unsold allotments or subscriptions.
5,175,000 SHARES
CAVANAUGHS HOSPITALITY
CORPORATION
[LOGO]
COMMON STOCK
PROSPECTUS
CIBC OPPENHEIMER
NATIONSBANC MONTGOMERY SECURITIES LLC
_____________, 1998
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses, other than underwriting
discounts and commissions, paid or payable in connection with the issuance and
distribution of the Common Stock being registered hereby (all amounts are
estimated except the Securities and Exchange Commission Registration Fee, the
NASD Filing Fee and the NYSE Listing Fee):
<TABLE>
<S> <C>
SEC Registration Fee................ $ 24,600
NASD Filing Fee..................... 8,800
NYSE Listing Fee.................... 84,600
Printing and Engraving Expenses..... 50,000
Legal Fees and Expenses............. 350,000
Accounting Fees and Expenses........ 380,000
Transfer Agent and Registrar Fees... 2,000
--------
Total.......................... $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Amended and Restated By-Laws ("By-Laws") and Amended and
Restated Articles of Incorporation (the "Articles") provide that the Company
shall, to the full extent permitted by the Washington Business Corporation Act
(the "WBCA"), as amended from time to time, indemnify all directors and officers
of the Company. In addition, the Company's Articles contain a provision
eliminating the personal liability of directors to the Company or its
stockholders for monetary damage arising out of a breach of fiduciary duty.
Chapter 23B.08.510 and .570 of the WBCA authorizes a corporation to indemnify
its directors, officers, employees, or agents in terms sufficiently broad to
permit such indemnification under certain circumstances for liabilities
(including provisions permitting advances for reasonable expenses incurred)
arising under the 1933 Act.
Pursuant to Chapter 23B.08.580 of the WBCA, the Board of Directors (the
"Board") may authorize, by a vote of a majority of a quorum of the Board, the
Company to purchase and maintain insurance on behalf of any person who is or was
a director, officer, employee or agent of the Company, or is or was serving at
the request of the Company as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan 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 Company would have the power to indemnify him against such
liability under Chapter 23B.08.510 or 23B.08.520 of the WBCA. The Board intends
to authorize the Company to purchase and maintain appropriate policies of
insurance on behalf of the Company's directors and officers against liabilities
asserted against any such person arising out of his or her status as such. The
Board may authorize the Company to enter into a contract with any person who is
or was a director, officer, partner, trustee, employee or agent of the Company
or is or was serving at the request of the Company as a director, officer,
employee or agent of another partnership, joint venture, trust, employee benefit
plan or other enterprise providing for indemnification rights equivalent to or,
if the Board so determines, greater than those provided for in the By-Laws. The
Board intends to authorize the Company to enter into contracts providing for
indemnification with any person who is or was a director or officer of the
Company.
Section 6 of the Underwriting Agreement (filed as an Exhibit hereto)
provides that the Underwriters will indemnify and hold harmless the Company and
each director, officer or controlling person of the Company from and against any
liability caused by any statement or omission in the Registration Statement or
Prospectus based on certain information furnished to the Company by the
Underwriters for use in the preparation thereof.
II-1
<PAGE>
Each of the employment agreements described in "Management -- Employment
Agreements" contains provisions entitling the executive to indemnification for
losses incurred in the course of service to the Company or its subsidiaries,
under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Effective November 1, 1997, Barbieri Investment Company ("BIC"), a company
that was owned by the same group of shareholders which owned the Company prior
to such date, merged into the Company. In connection with this merger, the
Company issued an aggregate of 7,084,251 shares of Common Stock to the
shareholders of the Company and BIC. This issuance of Common Stock is exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act") pursuant to Regulation D promulgated thereunder. Each
shareholder who received Common Stock in this merger is an "accredited
investor" as defined in such regulation.
Effective November 1, 1997, the Company issued an aggregate of 150,817 OP
Units to the Barbieri Family Foundation, Inc. ("BBF"), Donald Barbieri, Richard
Barbieri and Thomas Barbieri in exchange for such persons' partnership interest
in the Lincoln Building Limited Partnership. This issuance of OP Units is
exempt from the registration requirements of the Securities Act pursuant to
Regulation D promulgated thereunder. Each of BBF, Donald Barbieri, Richard
Barbieri and Thomas Barbieri are "accredited investors" as defined in such
regulation.
On January 15, 1998, the Board adopted the 1998 Plan which provides for,
subject to the closing of the Offering, the issuance of an aggregate of 55,000
shares of Common Stock to Arthur Coffey (15,000 shares), John Taffin (10,000
shares), Lori Farnell (10,000 shares), David Peterson (10,000 shares) and
Shannon Kapek (10,000 shares) over five years. Of these 55,000 shares, 11,000
will be issued upon closing of the Offering and an additional 11,000 shares will
be issued on each anniversary thereof until such anniversary date in 2002.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
a. Exhibits
--------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
1.1* -- Form of Underwriting Agreement
3.1 -- Amended and Restated Articles of Incorporation of
the Company
3.2 -- Amended and Restated By-Laws of the Company
4.1 -- Specimen Common Stock Certificate
5.1* -- Opinion of Kaye, Scholer, Fierman, Hays &
Handler, LLP, regarding the legality
of issuance of the Common Stock being registered
5.2* -- Opinion of Dennis McLaughlin & Associates P.S.
regarding the legality of the
issuance of the Common Stock being registered.
10.1* -- Employment Agreement between the Company and
Donald Barbieri
10.2* -- Employment Agreement between the Company and
Arthur Coffey
10.3* -- Employment Agreement between the Company and
Richard Barbieri
10.4* -- Employment Agreement between the Company and
David Bell
10.5* -- Employment Agreement between the Company and
Thomas Barbieri
10.6* -- Form of Revolving Credit Facility Agreement
10.7 -- Form of Amended and Restated Agreement of Limited
Partnership of Cavanaughs Hospitality
Limited Partnership
10.8 -- Employee Stock Purchase Plan of Cavanaughs
Hospitality Corporation
10.9 -- 1998 Stock Incentive Plan of Cavanaughs
Hospitality Corporation
10.10 -- Company-Wide Stock Option Plan
10.11* -- Form of Stock Option Award Agreement
10.12 -- Form of Restricted Stock Award Agreement
10.13* -- Gateway Property Lease Agreement
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.14* -- Ridpath Property Lease Agreement
21* -- List of Subsidiaries of the Company
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Kaye, Scholer, Fierman, Hays &
Handler, LLP (included in Exhibit 5.1)
23.2(A)* -- Consent of Dennis McLaughlin & Associates P.S.
(included in Exhibit 5.2)
23.3 -- Consent of Peter F. Stanton
23.4 -- Consent of Ronald R. Taylor
23.5 -- Consent of Robert G. Templin
24.1 -- Power of Attorney (see signature pages)
27.1 -- Financial Data Schedule
</TABLE>
- --------------
* To be filed by amendment.
II-3
<PAGE>
b. Financial Statement Schedules
-----------------------------
All schedules for which provisions is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable or the information
is contained in the Financial Statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
a. To provide to 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 of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, 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 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 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 Act and will
be governed by the final adjudication of such issue;
c. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a 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 this registration
statement as of the time it was declared effective.
d. For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Spokane and State of
Washington, on the 20th day of January, 1998.
CAVANAUGHS HOSPITALITY CORPORATION
By /s/ Donald K. Barbieri
-------------------------------------------
Donald K. Barbieri
President and Chief Executive Officer
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that, the undersigned directors and officers
of Cavanaughs Hospitality Corporation, a Washington corporation, hereby
constitute and appoint Donald K. Barbieri and Richard L. Barbieri, each with
full power of substitution and resubstitution, their true and lawful attorneys
and agents to sign the names of the undersigned directors and officers in the
capacities indicated below to the registration statement to which this Power of
Attorney is filed as an exhibit, and all amendments (including post-effective
amendments) and supplements thereto, and all instruments or documents filed as a
part thereof or in connection therewith, and to file the same, with all exhibits
thereto, and all other instruments or documents in connection therewith, with
the Securities and Exchange Commission; and each of the undersigned hereby
ratifies and confirms all that said attorneys, agents, or any of them, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ Donald K. Barbieri President, Chief Executive January 20, 1998
- ------------------------------- Officer and Chairman of the
Donald K. Barbieri Board
/s/ Arthur M. Coffey Executive Vice President, January 20, 1998
- ------------------------------- Chief
Arthur M. Coffey Financial Officer and Director
/s/ Richard L. Barbieri Senior Vice President, General January 20, 1998
- ------------------------------- Counsel and Director
Richard L. Barbieri
/s/ Thomas M. Barbieri Senior Vice President and January 20, 1998
- ------------------------------- Director
Thomas M. Barbieri
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1* -- Form of Underwriting Agreement
3.1 -- Amended and Restated Articles of Incorporation of
the Company
3.2 -- Amended and Restated By-Laws of the Company
4.1 -- Specimen Common Stock Certificate
5.1* -- Opinion of Kaye, Scholer, Fierman, Hays &
Handler, LLP, regarding the legality of
issuance of the Common Stock being registered
5.2* -- Opinion of Dennis McLaughlin & Associates P.S.
regarding the legality of the
issuance of the Common Stock being registered.
10.1* -- Employment Agreement between the Company and
Donald Barbieri
10.2* -- Employment Agreement between the Company and
Arthur Coffey
10.3* -- Employment Agreement between the Company and
Richard Barbieri
10.4* -- Employment Agreement between the Company and
David Bell
10.5* -- Employment Agreement between the Company and
Thomas Barbieri
10.6* -- Form of Revolving Credit Facility Agreement
10.7 -- Form of Amended and Restated Agreement of Limited
Partnership of Cavanaughs Hospitality Limited
Partnership
10.8 -- Employee Stock Purchase Plan of Cavanaughs
Hospitality Corporation
10.9 -- 1998 Stock Incentive Plan of Cavanaughs
Hospitality Corporation
10.10 -- Company-Wide Stock Option Plan
10.11* -- Form of Stock Option Award Agreement
10.12 -- Form of Restricted Stock Award Agreement
10.13* -- Gateway Property Lease Agreement
10.14* -- Ridpath Property Lease Agreement
21* -- List of Subsidiaries of the Company
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2* -- Consent of Kaye, Scholer, Fierman, Hays &
Handler, LLP (included in Exhibit 5.1)
23.2(A)* -- Consent of Dennis McLaughlin & Associates P.S.
(included in Exhibit 5.2)
23.3 -- Consent of Peter F. Stanton
23.4 -- Consent of Ronald R. Taylor
23.5 -- Consent of Robert G. Templin
24.1 -- Power of Attorney (see signature pages)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------------
* TO BE FILED BY AMENDMENT.
II-7
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CAVANAUGHS HOSPITALITY CORPORATION
FIRST: The name of the corporation is Cavanaughs Hospitality
-----
Corporation (hereinafter called the "Corporation").
SECOND: The address of the Corporation's registered office in
------
Washington is 201 W. North River Drive Suite 100, Spokane, WA 99201. Richard
Barbieri is the corporation's registered agent at that address.
THIRD: The nature of the business and purposes to be conducted by
-----
the Corporation are to engage in, carry on and conduct any lawful act or
activity for which corporations may be organized under the Washington Business
Corporation Act, RCW Chapter 23B (hereafter "Act").
FOURTH:
------
4.1 Authorized Shares. The amount of the capital stock that the
-----------------
Corporation shall have authority to issue is fifty-five million (55,000,000)
shares, consisting of fifty million (50,000,000) shares of Common Stock, par
value $.01 per share (the "Common Stock") and five million (5,000,000) shares of
Preferred Stock, par value of $.01 per share (the "Preferred Stock"). All cross
references in each subdivision of this ARTICLE FOURTH refer to other paragraphs
in such subdivision unless otherwise indicated.
4.2 Common Stock.
------------
1. The Board of Directors may, in its discretion, out of funds
legally available for the payment of dividends and at such times and in such
manner as determined by the Board of Directors, declare and pay dividends in the
amount determined by the Board of Directors on the Common Stock.
2. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, after there shall have been paid
to or set aside for the holders of shares of Preferred Stock the full
preferential amounts to which they are entitled, the holders of outstanding
shares of Common Stock shall be entitled to receive pro rata, according to the
number of shares held by each, the remaining assets of the Corporation available
for distribution.
3. Except as otherwise provided by law and except as may be
determined by the Board of Directors with respect to the Preferred Stock
pursuant to Section 4.3 of this ARTICLE FOURTH, only the holders of shares of
Common Stock shall be entitled to
<PAGE>
vote for the election of Directors of the Corporation and for all other
corporate purposes. Upon any such vote the holders of shares of Common Stock
shall, except as otherwise provided by law, be entitled to one vote for each
share of Common Stock held by them respectively.
4. Shareholders of the Corporation shall not have cumulative
voting rights.
4.3 Preferred Stock. The Preferred Stock may be issued from time to
---------------
time in one or more series in any manner permitted by law and the provisions of
the Articles of Incorporation of the Corporation, as determined from time to
time by the Board of Directors and stated in the resolution or resolutions
providing for the issuance thereof, prior to the issuance of any shares thereof.
Unless otherwise provided in the resolution establishing a series of Preferred
Stock, prior to the issue of any shares of a series so established or to be
established, the Board of Directors may, by resolution, amend the relative
rights and preferences of the shares of such series, and, after the issue of
shares of a series whose number has been designated by the Board of Directors,
the resolution establishing the series may be amended by the Board of Directors
to increase (but not above the total authorized shares of the class) or to
decrease (but not below the number of shares of such series then outstanding)
the number of shares of that series.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of each class of stock
shall be governed by the following provisions:
1. The Board of Directors is expressly authorized at any time,
and from time to time, to provide for the issuance of shares of Preferred Stock
in one or more series, with such voting powers, full or limited, or without
voting powers and with such designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the Board of Directors
except if such resolution or resolutions conflict with the provisions of the
Articles of Incorporation of the Corporation or the Act. Said resolution or
resolutions may provide for (but not limiting the generality thereof) the
following:
a) The number of shares to constitute each such series, and
the designation of each such series.
b) The dividend rate of each such series, the conditions
and dates upon which such dividends shall be payable,
the relation which such dividends shall bear to the
dividends payable on any other class or classes or on
any other series of any class or classes of stock, and
whether such dividends shall be cumulative or
noncumulative.
c) Whether the shares of each such series shall be subject
to
2
<PAGE>
redemption by the Corporation and if made subject to
such redemption, the times, prices and other terms and
conditions of such redemption.
d) The terms and amount of any sinking fund provided for
the purchase or redemption of the shares of each such
series.
e) Whether or not the shares of each such series shall be
convertible into or exchangeable for shares of any other
class or classes or any other series of any other class
or classes of stock of the Corporation, and, if
provision be made for conversion or exchange, the times,
prices, rates of exchange, adjustments, and other terms
and conditions of such conversion or exchange.
f) The extent, if any, to which the holders of the shares
of each such series shall be entitled to vote with
respect to the election of Directors or otherwise.
g) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock.
h) The rights of the holders of the shares of each such
series upon the dissolution of, or upon the distribution
of the assets of, the Corporation.
2. Except as otherwise required by law and except for such
voting powers with respect to the election of Directors or other matters as may
be stated in the resolutions of the Board of Directors creating any series of
Preferred Stock, the holders of any such series shall have no voting powers
whatsoever. Any amendment of the Articles of Incorporation of the Corporation
which shall increase or decrease the number of authorized shares of any class or
classes of stock may be adopted by the affirmative vote of the holders of a
majority of the stock of the Corporation entitled to vote.
FIFTH: The names of the original incorporators of the Corporation
-----
are Louis L. Barbieri and Donald K. Barbieri. The address of the original
incorporators is 201 W. North River Drive Suite 100, Spokane, WA 99201.
SIXTH: The Corporation shall indemnify to the fullest extent
-----
permitted by the Act as amended from time to time, including amendments which
expand the allowable scope of indemnification, each person who is or was a
director or officer of the Corporation both as to an action in his official
capacity and as to action in another capacity while holding such office and such
indemnification shall inure to the benefit of the heirs, executors and
administrators of such a person. The indemnification provided for herein shall
not be deemed exclusive of any
3
<PAGE>
other rights to which those indemnified may be entitled under any by-law,
agreement, vote of shareholders or disinterested directors or otherwise.
SEVENTH: No director shall be personally liable to the Corporation or
-------
its shareholders for monetary damages for breach of fiduciary duty as a director
for any act or omission occurring subsequent to the date when this provision
becomes effective, except that a director may be liable (i) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (ii) under Section 23B.08.310 of the Act (liability for
unlawful distributions) or (iii) for any transaction with respect to which it
was finally adjudged that such director personally received a benefit to which
such director was not legally entitled. If the Act is amended to authorize
corporate action further eliminating or limiting personal liability of
directors, then the liability of a director of a corporation shall be eliminated
or limited to the fullest extent permitted by the Act as so amended. Any repeal
or modification of the foregoing provisions by shareholders shall not adversely
affect any right or protection which existed at the time of such repeal or
modification.
EIGHTH: The Board of Directors may from time to time make, alter or
------
repeal the by-laws of the Corporation; provided, however, that any by-laws made,
-------- -------
amended or repealed by the Board of Directors may be amended or repealed, and
any by-laws may be made, by the shareholders of the Corporation.
NINTH: The duration of the Corporation is to be perpetual.
-----
TENTH: No holder of any shares of capital stock shall be entitled as
-----
of right to subscribe for, purchase, or otherwise acquire any shares of any
capital stock of the Corporation which the Corporation proposes to issue or any
rights or options which the Corporation proposes to grant for the purchase of
shares of any class of the Corporation or for the purchase of any shares, bonds,
securities or obligations of the Corporation which are convertible into or
exchangeable for, or which carry any rights to subscribe for, purchase, or
otherwise acquire shares of any class of capital stock of the Corporation; and
any and all of such shares, bonds, securities or obligations of the Corporation,
whether now or hereafter authorized or created, may be issued, or may be
reissued or transferred if the same have been reacquired and have treasury
status, and any and all of such rights and options may be granted by the Board
of Directors to such persons, firms, corporations and associations, and for such
lawful consideration, and on such terms, as the Board of Directors in its
discretion may determine, without first offering the same, or any thereof, to
any said holder.
ELEVENTH: The headings of the various section and subsections hereof
--------
are for convenience of reference only and shall not affect the interpretation of
any of the provisions hereof.
TWELFTH: The number of Directors of the Corporation which shall
--------
constitute the entire Board of Directors shall be such as from time to time
shall be determined by a majority of the then authorized number of Directors,
but in no case shall the number be less than 3 nor
4
<PAGE>
more than 13. The Directors shall be classified with respect to the time for
which they severally hold office into classes, as nearly equal in number as
possible (but with not less than one Director in each class), as determined by
the Board of Directors, one class to be elected for a term expiring at the first
annual meeting of shareholders to be held after its election, another class to
be elected for a term expiring at the second annual meeting of shareholders to
be held after its election, and another class to be elected for a term expiring
at the third annual meeting of shareholders to be held after its election, with
the members of each class to hold office until their successors have been
elected and qualified. At each annual meeting of shareholders, the successors of
the members of the class of Directors whose term expires at that meeting shall
be elected to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their election. Except
as otherwise provided in these Articles of Incorporation, newly created
directorships resulting from any increases in the number of Directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the affirmative vote
of a majority of the remaining Directors then in office, even if such majority
is less than a quorum of the Board of Directors, and the person appointed
thereto shall serve until the next annual meeting of shareholders, at which
annual meeting the term of the position filled by vote of the Directors shall
expire and the newly created position or vacancy shall be filled by election of
the shareholders for a term corresponding to that of the vacancy being filled or
of the newly created position. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
THIRTEENTH: Except as may otherwise be specifically provided in
----------
these Articles of Incorporation, no provision of these Articles of Incorporation
is intended by the Corporation to be construed as limiting, prohibiting,
denying, or abrogating any of the general or specific powers or rights conferred
under the Act upon the Corporation, upon its shareholders, bondholders, and
security holders, and upon its Directors, officers, and other corporate
personnel, including, in particular, the power of the Corporation to furnish
indemnification to Directors and officers in the capacities defined and
prescribed by the Act and prescribed rights of said persons to indemnification
as the same are conferred by the Act.
FOURTEENTH: From time to time any of the provisions of these
----------
Articles of Incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Washington 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 shareholders of the
Corporation by these Articles of Incorporation are granted subject to the
provisions of this ARTICLE FOURTEENTH.
These Articles of Incorporation are effective November 1, 1997
/s/ Richard L. Barbieri
--- -------------------
Richard L. Barbieri
Secretary
5
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
CAVANAUGHS HOSPITALITY CORPORATION
ARTICLE 1.
OFFICES
-------
Section 1.1 Principal Executive Office. The principal executive office
--------------------------
(the "Principal Office") of the Corporation shall be located at 201 W. North
River Drive, Suite 100, Spokane, Washington 99201 or such other locations as the
Board of Directors shall determine.
Section 1.2 Other Offices. The Corporation may also have offices at such
-------------
other places both within and without the State of Washington as the Board of
Directors may determine or as the business of the Corporation may require.
ARTICLE 2.
MEETING OF SHAREHOLDERS
-----------------------
Section 2.1 Annual Meetings. The annual meeting of shareholders of the
---------------
Corporation for the election of directors and the transaction of such other
business as may be brought before the meeting in accordance with the Articles of
Incorporation and these By-Laws shall be held on the date and at the time fixed
from time to time by the Board of Directors within thirteen (13) months after
the date of the preceding annual meeting.
The annual meeting of shareholders of the Corporation shall not be called
or held otherwise than as provided in the Articles of Incorporation or in these
By-Laws.
Section 2.2 Special Meetings. Special meetings of shareholders of the
----------------
Corporation may be called only at the direction of (i) the Board of Directors by
a resolution adopted by the affirmative vote of a majority of the Board of
Directors, or (ii) the holders of not less than a majority in aggregate of the
then issued and outstanding shares of stock of the Corporation entitled to vote
thereat ("Voting Shares"), upon written request delivered to the Secretary of
the Corporation. Special meetings of shareholders of the Corporation shall not
be called or held otherwise than as provided in the Articles of Incorporation or
in these By-Laws.
Section 2.3 Place of Meeting. Meetings of the shareholders of the
----------------
Corporation shall be held at such place, either within or without the State of
Washington as the Board of Directors may determine. In the absence of any such
designation, shareholders' meetings shall be held at the principal executive
office of the corporation.
<PAGE>
Section 2.4 Notice. Except as otherwise provided by Washington Business
------
Corporation Act, RCW Chapter 23B (hereafter "Act"), or unless lapse of time
shall be waived, written notice of the time, date and place of any shareholders
meeting, and, in the case or a special meeting, the purpose or purposes for
which the meeting is called, shall be given to each shareholder at least ten
(10) nor more than sixty (60) days before the date of such a meeting. If
mailed, notice is given when deposited in the United States mail, postage
prepaid, directed to the shareholder at his address as it appears on the records
of the Corporation. An affidavit of the secretary or an assistant secretary or
of the transfer agent of the Corporation that the notice has been given shall,
in the absence of fraud, be prima facie evidence of the facts stated therein.
Section 2.5 Quorum. At any meeting of shareholders, the holders of
------
record, present in person or by proxy, of a majority of the Corporation's issued
and outstanding shares of stock entitled to vote at such meeting shall
constitute a quorum for the transaction of business, except as otherwise
provided by law. In the absence of a quorum, any officer entitled to preside at
or to act as secretary of the meeting shall have power to adjourn the meeting
from time to time until a quorum is present. Once a quorum is present,
Shareholders may continue to transact business at the meeting notwithstanding
the withdrawal of enough Shareholders to leave less than a quorum.
Section 2.6 Voting. When a quorum is present at any meeting, action on a
------
matter is approved if the votes cast favoring the action exceed the votes cast
opposing the action (taking into account those voting in person or by proxy at
the meeting and entitled to vote on the subject matter unless the question is
one upon which by express provision of law or of the Articles of Incorporation
or of these By-Laws a different vote is require, and such approved action shall
be the act of the shareholders.
Section 2.7 Adjourned Meeting. Any meeting of shareholders may be
-----------------
adjourned from time to time by the vote of a majority of the shares represented
in person or by proxy whether or not a quorum is present. When a shareholders'
meeting is adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place thereof are announced at the meeting at
which the adjournment is taken. At the adjourned meeting, the Corporation may
transact any business which might have been transacted at the original meeting ;
however, if a record date for the adjourned meeting is or must be fixed in
accordance with the Act, notice of the adjourned meeting must be given to
persons who are Shareholders as of the new record date.
Section 2.8 Proxies. Every person entitled to vote for Directors or any
-------
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the Corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy
executed by, or delivered to the Corporation stating that the proxy is revoked,
or by a subsequent proxy executed by, or attendance at the meeting and voting in
person by the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is
2
<PAGE>
received by the Corporation before the vote pursuant to that proxy is counted;
provided, however, that no proxy shall be valid after the expiration of eleven
(11) months from the date of the proxy, unless otherwise provided in the proxy.
The revocability of a proxy that states on its face that it is irrevocable shall
be governed by the applicable provisions of the Washington Business Corporation
Act (RCW Chapter 28B), referred to hereafter as the Act.
Section 2.9 Shareholder Action by Consent. Without a meeting any action
-----------------------------
required or permitted to be taken at any meeting of shareholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voting. Prompt notice of the taking of
any such action shall be given to those shareholders who did not consent in
writing. Any such consent in writing shall be filed with the minutes of
proceedings of the shareholders. If the Act requires that notice of a proposed
action be given to non-voting Shareholders and the action is to be taken by
unanimous consent of the voting Shareholders, the Corporation must give its non-
voting Shareholders written notice of the proposed action at least 10 days
before the action is taken. The notice must contain or be accompanied by the
same material that would have been required to be sent to the non-voting
Shareholders in a notice of meeting at which the proposed action would have been
submitted to such Shareholders for action.
Section 2.10 Waiver of Notice. A shareholder may waive any notice
----------------
required to be given by these By-Laws, or the Articles of Incorporation of this
Corporation, or any of the corporate laws of the State of Washington, before or
after the meeting that is the subject of such notice. A valid waiver is created
by any of the following three methods: (a) in writing, signed by the shareholder
entitled to the notice and delivered to the Corporation for inclusion in its
corporate records; (b) attendance at the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting; or (c) failure to object at the time of presentation of a matter
not within the purpose or purposes described in the meeting notice.
ARTICLE 3.
DIRECTORS
---------
Section 3.1 Powers. The Board of Directors shall be responsible for the
------
entire management of the business of this Corporation. In addition, to the
powers and authorities by these By-Laws and the Articles of Incorporation
expressly conferred upon it, the Board of Directors may exercise all such
corporate powers and do all such lawful acts and things as are not otherwise
prohibited by the Act or by the Articles of Incorporation or by these By-Laws.
The Board of Directors may delegate the management of the day-to-day operations
of the business of the Corporation to a management company or other person,
provided that the business and affairs of the Corporation shall be managed and
all corporate power shall be exercised under the ultimate direction of the Board
of Directors.
3
<PAGE>
Section 3.2 Number; Board of Directors Divided in Classes. The number of
---------------------------------------------
Directors of the Corporation which shall constitute the entire Board of
Directors shall be such as from time to time shall be determined by a majority
of the then authorized number of Directors, but in no case shall the number be
less than 3 nor more than 13. The Directors shall be classified with respect to
the time for which they severally hold office into classes, as nearly equal in
number as possible (but with not less than 1 Director in each class), as
determined by the Board of Directors, one class to be elected for a term
expiring at the first annual meeting of shareholders to be held after its
election, another class to be elected for a term expiring at the second annual
of shareholders to be held after its election, another class to be elected for a
term expiring at the second annual meeting of shareholders to be held after its
election and another class to be elected for a term expiring at the third annual
meeting of shareholders to be held after its election, with the members of each
class to hold office until their successors have been elected and qualified. At
each annual meeting of shareholders, the successors of the members of the class
of Directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of shareholders held in the third year
following the year of their election. Except as otherwise provided in these By-
Laws, newly created directorships resulting from any increases in the number of
Directors and any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining Directors then in office, even
if such majority is less than a quorum of the Board of Directors. The term of
office of any Director so elected by the shareholders to succeed a Director
elected by the other Directors (or to fill a vacancy on the Board of Directors
which had not been filled by the vote of such other Directors) shall expire at
the annual meeting of shareholders at which annual meeting the term of the
position filled by vote if the Directors shall expire and the newly created
position or vacancy shall be filled by election of the shareholders for a term
corresponding to that of the vacancy being filled or of the newly created
position. No decrease in the number of Directors constituting the Board of
Directors shall shorten the term of any incumbent Director.
Section 3.3 Nominations and Qualifications of Directors. Nominations for
-------------------------------------------
the election of Directors may be made by the Board of Directors or a committee
appointed by the Board of Directors or any shareholder entitled to vote
generally in the election of Directors. However, any shareholder entitled to
vote generally in the election of Directors may nominate one or more persons for
election as Directors at a meeting only if written notice of such shareholder's
intent to make such nominations has been given, either by personal delivery or
by United States mail, postage prepaid, to the Secretary of the Corporation not
later than (i) with respect to an election to be held at an annual meeting of
shareholders, 60 calendar days in advance of the date in the current fiscal year
of the Corporation corresponding to the date the corporation released its proxy
statement to shareholders in connection with the annual meeting for the
immediately preceding year, or (ii) with respect to an election to be held at a
special meeting of shareholders for the election of Directors, the close of
business on the seventh day following the date on which notice of such meeting
is first given to shareholders. Each such notice shall set forth:
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(1) The name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated;
(2) A representation that the shareholder is entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice;
(3) A description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder;
(4) Such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the then current proxy rules of the Securities and Exchange
Commission, if the nominee were to be nominated by the Board of Directors; and
(5) The consent of each nominee to serve as a Director of the
Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination
of any person not made in compliance with the foregoing procedure. The
Directors shall be at least twenty-one years of age. Directors need not be
shareholders or residents of the State of Washington. At each meeting of
shareholders for the election of Directors at which a quorum is present, the
persons receiving a plurality of the votes cast shall be elected Directors.
Section 3.4 Meetings.
--------
(1) Regular meetings of the Board of Directors shall be held at
such times and places as may from time to time be fixed by the Board of
Directors or as may be specified in a notice of meeting. Special meetings of the
Board of Directors may be held at any time upon the call of the Chairman of the
Board, the President, the Vice President or two or more directors. Oral or
written notice of each special meeting of the Board of Directors, stating the
time and place of the meeting, shall (i) be given to each Director not less than
two days before such meeting or (ii) be delivered to the director personally by
facsimile or by telephoning not less than one (1) day before the meeting. A
meeting of the Board of Directors may be held without notice immediately after
the annual meeting of the shareholders. Notice need not be given of regular
meetings of the Board of Directors.
(2) Members of the Board of Directors or any committee designated
by the Board of Directors may participate in a meeting through use of conference
telephone or similar communications equipment, so long as all members
participating in such meeting can hear each other. Such participation
constitutes presence in person at such meeting.
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(3) Whenever notice is required to be given to any Director
pursuant to Act, the Corporation's Articles of Incorporation or these By-Laws, a
written waiver thereof, signed by such Directors, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
Director at a meeting shall constitute a waiver of notice of such meeting except
when the Director attends the meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. All such waivers, consents and
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Section 3.5 Quorum. A majority of the total number of Directors shall
------
constitute a quorum for the transaction of business. If a quorum is not present
at any meeting of the Board of Directors, the Directors present may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until such a quorum is present. Except as otherwise provided by the
Act, the Articles of Incorporation of the Corporation, these By-Laws or any
contract or agreement to which the Corporation is a party, the act 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. A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved by at least a majority of the required quorum
for such meeting. Any meeting of the Board of Directors may be adjourned and
continued at a later time, including a meeting at which a quorum is not present.
Notwithstanding Section 4 of this Article, notice of the adjourned meeting or of
the business to be transacted therein, other than by announcement at the meeting
of which the adjournment is taken, shall not be necessary. At any adjourned
meeting at which a quorum is present, any business may be transacted which could
have been transacted at the meeting as originally called.
Section 3.6 Committees of Directors. The Board of Directors may, by
-----------------------
resolution adopted by a majority of the full Board of Directors, designate from
among its members an Executive Committee and one or more other committees, each
of which, to the extent provided in such resolution, shall have and may exercise
all the authority of the Board of Directors, except no such committee shall have
the authority to (a) authorize or approve a distribution except according to a
general formula or method prescribed by the Board of Directors; (b) approve or
propose to shareholders action which the corporate law requires to be approved
by shareholders; (c) fill vacancies on the Board of Directors or on any of its
committees; (d) amend Articles of Incorporation; (e) adopt, amend, or repeal By-
Laws; (f) approve a plan of merger not requiring shareholder approval; or (g)
authorize or approve the issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences, and limitations on a
class or series of shares, except that the Board of Directors may authorize a
committee, or a senior executive officer of the corporation, to do so within
limits specifically prescribed by the Board of Directors. At such time as the
stock of the Corporation may be publicly traded upon any exchange, there shall
be an Audit Committee of one or more independent Directors and a Compensation
Committee of one or more independent Directors.
Section 3.7 Action Without Meeting. Any action required or permitted to
----------------------
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting
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if all members of the Board of Directors or any committee, as the case may be,
consent in writing to such action and the writing or writings are filed with the
minutes or proceedings of the Board of Directors or committee, as the case may
be.
Section 3.8 Fees and Compensation. Directors and members of committees
---------------------
may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
Board of Directors. No such payment shall preclude any Director from serving
this Corporation in any other capacity and receiving compensation therefore.
Section 3.9 Vacancies. Any vacancy in the Board of Directors caused by
---------
death, resignation, retirement, disqualification or removal or any other cause
(including an increase in the number of directors) may be filled by resolution
adopted by the affirmative vote of a majority of the directors then in office,
whether or not such majority constitutes less than a quorum, or by a sole
remaining director. Any new director elected to fill a vacancy on the Board of
Directors will serve for the remainder of the full term of the director for
which the vacancy occurred. No decrease in the size of the Board of Directors
shall have the effect of shortening the term of any incumbent director.
Section 3.10 Resignation of Directors. Any director may resign at any
------------------------
time. Such resignation shall be made in writing and shall take effect at the
time specified therein, and if no time be specified, shall take effect at the
time of its receipt by the Chairman, the Chief Executive Officer or the
Secretary of the Corporation. The acceptance of a resignation shall not be
necessary to make it effective. No resignation shall discharge any accrued
obligation or duty of a director.
Section 3.11 Removal of Directors. A duly elected director of the
--------------------
Corporation may be removed from such position, with or without cause, only by
the affirmative vote of the holders of a majority of Voting Shares entitled to
vote in the election of such director as provided in the Articles of
Incorporation.
Section 3.12 Chairman. The Board of Directors may select one of its
--------
members to be Chairman. The Chairman shall have such powers and perform such
duties which are commonly associated with the office of Chairman, including,
presiding at meetings of the Board of Directors and at shareholder meetings. The
Chairman shall also have such powers and perform such duties as are set forth in
these By-Laws and as may from time to time be assigned to him by the Board of
Directors.
Section 3.13 Vice Chairman of the Board. The Vice-Chairman of the Board,
--------------------------
if there be any, shall be a member of the Board of Directors and shall have such
powers and perform such duties as may from time to time be assigned to him or
her by the Board of Directors.
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Section 3.14 Interested Directors and Officers.
---------------------------------
(1) Contracts and Transactions. No contract or transaction
--------------------------
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are also
directors or officers, or have a financial interest, shall be void or voidable
solely for such reason, or solely because the director or officer is present at
or participates in the meeting of the Board of Directors which authorizes the
contract or transaction, or solely because his or their votes are counted for
such purpose, if:
(2) Disclosure to Board. The material facts as to his interest
-------------------
and as to the contract or transaction are disclosed or known to the Board of
Directors and the Board of Directors in good faith authorizes the contract or
transaction by a vote sufficient for such purpose without counting the vote of
the interested director or directors, even though the disinterested directors be
less than a quorum; or
(a) Disclosure and Shareholders. The material facts as to his
---------------------------
interest and as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by a vote of the shareholders; or
(b) Fairness. The contract or transaction is fair as to the
--------
Corporation as of the time it is authorized, approved, or ratified, by the Board
of Directors or the shareholders.
(3) Quorum. Interested directors may be counted in determining
------
the presence of a quorum at a meeting of the Board of Directors which authorizes
a contract or transaction in the preceding section.
Section 3.15 Presumption of Assent. A director of this Corporation who is
---------------------
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless:
(a) the director objects at the beginning of the meeting, or promptly upon the
director's arrival, to the holding of the meeting or transacting business at the
meeting; (b) the director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or (c) the director shall file written
dissent or abstention with the presiding officer of the meeting before such
adjournment or to the Corporation within a reasonable time after the adjournment
of the meeting. Such right to dissent shall not apply to a director who voted
in favor of such action.
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ARTICLE 4.
OFFICERS
--------
Section 4.1 Officers. The officers of the Corporation shall consist
--------
of a President, a Secretary, a Chief Financial Officer (Treasurer) and such
other additional officers with such titles as the Board of Directors shall
determine, all of whom shall be chosen by and shall serve at the pleasure of the
Board of Directors. Any number of offices may be held by the same person. Such
officers shall have the usual powers and shall perform all the usual duties
incident to their respective offices. All officers shall be subject to the
supervision and direction of the Board of Directors. The authority, duties or
responsibilities of any officer of the Corporation may be suspended by the
President with or without cause. Any officer elected or appointed by the Board
of Directors may be removed by the Board of Directors with or without cause. No
officer need be a Shareholder of this Corporation.
Section 4.2 Other Officers. The Board of Directors, at its
--------------
discretion, may appoint, or empower the President to appoint, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
or such other officers as the business of the Corporation may require, each of
whom shall hold office for such period, have such authority and perform such
duties as the Board of Directors or the President may from time to time
determine.
Section 4.3 Removal. Any officer may be removed, either with or
-------
without cause, by the Board of Directors, at any regular or special meeting
thereof, or, except in the case of an officer chosen by the Board of Directors,
by any officer upon whom such power of removal may be conferred by the Board of
Directors (subject, in each case, to the rights, if any, of an officer under an
employment contract).
Section 4.4 Resignation. Any officer may resign at any time by
-----------
giving written notice to the Board of Directors, the President, or to the
Secretary of the Corporation without prejudice to the rights, if any, of the
Corporation under any contract to which the officer is a party. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 4.5 Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these By-Laws for regular appointments to such office.
Section 4.6 Salaries. The salaries, if any, of the officers shall be
--------
fixed from time to time by the Board of Directors or the committee of the Board
designated for that purpose. No officers shall be prevented from receiving such
salary by reason of the fact that said officer is also a Director of this
Corporation.
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ARTICLE 5.
INDEMNIFICATION
---------------
Section 5.1 Indemnification Rights. To the fullest extent permitted
----------------------
by the Act, as the same may be amended and supplemented, the Corporation shall
indemnify each current or former Director or officer of the Corporation from and
against any and all expenses, liabilities or other matters referred to in or
covered by the Act, including, without limitation, by reason of his current or
former position with the Corporation or by reason of the fact that he is or was
serving, at the request of the Corporation, as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
Section 5.2 Nonexclusivity. The indemnification provided for herein
--------------
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-Law, agreement, vote of shareholders 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 person.
Except as may otherwise be specifically provided in these By-Laws, no provision
of these By-Laws is intended by the Corporation to be construed as limiting,
prohibiting, denying or abrogating any of the general or specific powers or
rights conferred under the Act upon the Corporation, upon its shareholders,
bondholders and security holders, and upon its Directors, officers, employees or
agents, including in particular the power of the Corporation to furnish
indemnification to Directors, officers, employees and agents in the capacities
defined and prescribed by the Act and prescribed rights of said persons to
indemnification as the same are conferred by the Act.
Section 5.3 Advancement of Expenses. The rights granted herein shall
-----------------------
include the right to be paid by the Corporation the expenses incurred in
defending any proceeding in advance of its final disposition, provided, however,
that the payment of such expenses shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such Director, officer,
employee or agent, to repay all amounts so advanced if it shall ultimately be
determined that such Director, officer, employee or agent is not entitled to
indemnification.
ARTICLE 6.
SHARES AND SHAREHOLDERS
-----------------------
Section 6.1 Share Certificates.
------------------
(1) The Corporation may issue a certificate or certificates
representing shares of its stock. No shares of this Corporation shall be issued
unless authorized by the Board or a committee of the Board. Such authorization
shall include the maximum number of shares to be issued, the consideration to be
received, and a statement that the Board considers the consideration to be
adequate. Certificates for shares of the Corporation shall be in such form as
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<PAGE>
is consistent with the provisions of the Act and shall state: 1) The name of the
Corporation and that the Corporation is organized under the laws of the State of
Washington; 2)The name of the person to whom issued; and 3) The number and class
of shares and the designation of the series, if any, which such certificate
represents. Any or all of the signatures on the certificate may be a facsimile.
The Board of Directors may appoint one or more transfer agents and registrars
for its stock of any class or classes and may require stock certificates to be
countersigned and registered by one or more of the transfer agents and
registrars. 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 of registrar before such certificate is
issued, such certificate may be issued by the Corporation with the same effect
as if such person were an officer, transfer agent or registrar at the date of
issue. The Corporation shall be entitled to issue shares of its capital stock
without certificates representing such shares if the Board of Directors of the
Corporation shall so resolve.
(2) There shall be set forth on the face or back of a certificate
which the Corporation may issue to represent a class or series of stock one of
the following: (1) a statement of 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, or (2) a summary of the statement described in
subsection 1.B.(1) above. If a security of the corporation is subject to a
restriction on the transfer or registration thereof, such restriction shall be
noted, in writing, conspicuously upon the certificate representing the security.
(3) The Corporation may, but shall not be required to, issue
certificates representing a fraction of a share and, in this event, the holder
thereof shall have all the rights appurtenant to ownership of that interest in
the Corporation. If the Corporation elects not to issue certificates
representing a fraction of a share to the persons entitled thereto, it shall, at
its election, either:
(4) Arrange for disposition of the fractional interest by those
entitled thereto.
(5) Pay in cash the fair value of fractions of a share as of the time
when those entitled to receive such fractions are determined.
(6) Issue scrip or warrants in registered or bearer which entitles the
holder to receive a full share upon surrender of such scrip or warrants
aggregating one or more full shares, which scrip or warrants may, if the Board
of Directors elects, either become (i) void if not so surrendered on or before a
specified date, or (ii) subject to such other conditions or limitations as may
be designated by the Board of Directors.
Section 6.2 Transfer of Certificates. Where a certificate for shares
------------------------
is presented to the Corporation or its transfer clerk or transfer agent with a
request to register a transfer of shares, the Corporation is under a duty to
register the transfer, cancel the certificate presented, and issue a new
certificate if: (a) the certificate is endorsed or the instructions were
originated by the
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appropriate person or persons; (b) reasonable assurance is given that those
endorsements or instructions are genuine and effective; (c) the Corporation has
no duty to inquire into adverse claims or has discharged any such duty; (d) any
applicable law relating to the collection of taxes has been complied with; and
(e) reasonable assurance is given that the transfer is in fact rightful or is to
a bona fide purchaser.
Section 6.3 Lost Certificates. Where a certificate is alleged to
-----------------
have been lost, destroyed or wrongfully taken, the Corporation shall issue a new
certificate in place of the original if the owner: (a) so requests, in writing,
before the Corporation has notice that the certificate has been acquired by a
bona fide purchaser; and (b) if so requested by the Board of Directors, gives
the Corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, destruction or wrongful taking
of such certificate or the issuance of such new certificate. Except as provided
above, no new certificate for shares shall be issued in lieu of an old
certificate unless the Corporation is ordered to do so by a court judgment in an
action brought in a court of appropriate jurisdiction.
Section 6.4 Registration of Shares. The Corporation shall recognize
----------------------
the person or persons registered in its stock ledger as the exclusive owner and
holder of the shares registered in his name and as the "shareholder" for all
purposes herein with the exclusive rights inter alia to vote the shares, to
----- ----
receive dividends declared with respect to the shares, to transfer the shares to
others, and to exercise any other rights of shareholders. The Corporation shall
have no obligation to recognize any equitable or other claim or interest in any
shares on the part of any person or persons other than the registered owner, as
set forth in the stock ledger, whether or not the Corporation shall have any
notice thereof, except as may otherwise be provided by the laws of the State of
Washington. "Shares" for the purposes hereof, shall mean shares of the
Corporation's stock authorized by its Articles of Incorporation and registered
in the stock ledger as issued and outstanding, including any one or more classes
of stock so authorized and whether or not such share is deemed to have voting or
other privileges. It is the duty of every shareholder to notify this
corporation of the shareholder's post office address.
Section 6.5 Record Date. For the purpose of determining shareholders
-----------
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive payment of any dividend, or in order
to make a determination of shareholders for any other proper purpose, the Board
of Directors may fix in advance a record date for any such determination of
shareholders, such date in any case to be not more than seventy (70) days and,
in case of a meeting of shareholders, not less than ten (10) days prior to the
date on which the particular action, requiring such determination of
shareholders, is to be taken. If no record date is fixed for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders,
or shareholders entitled to receive payment of a dividend, the date on which
notice of the meeting is mailed or the date on which the resolution of the Board
of Directors declaring such dividend is adopted, as the case may be, shall be
the record date for such determination of
12
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shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment thereof unless the Board of
Directors fixes a new record date for the adjourned meeting.
Section 6.6 Voting Record. The officer or agent having charge of the
-------------
stock transfer books for shares of this Corporation shall make at least ten (10)
days before each meeting of shareholders a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
Such record shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof.
ARTICLE 7.
GENERAL PROVISIONS
------------------
Section 7.1 Notices. Whenever any statute, the Articles of
-------
Incorporation or these By-Laws requires notice to be given to any Director or
shareholder, such notice may be given in writing by mail, addressed to such
Director or shareholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid. Such notices shall be deemed to have
been given when it is deposited in the United States mail. Notice to Directors
may also be given by facsimile or telephone.
Section 7.2 Dividends and Reserves. The Board of Directors, from
----------------------
time to time, may determine whether any, and, if any, what part, of its net
assets in excess of its capital available therefor pursuant to applicable law
and the Articles of Incorporation shall be declared by it as dividends on the
stock of the Corporation. The Board of Directors, in its discretion, in lieu of
declaring any such dividend, may use and apply any of such net profits or net
assets as a reserve for working capital, to meet contingencies, for the purpose
of maintaining or increasing the property or business of the Corporation or for
any other lawful purpose which it may think conducive to the best interests of
the Corporation.
Section 7.3 Seal. The corporate seal of the Corporation shall be in
----
the form of a circle and shall bear the name of the Corporation and the year and
state of its incorporation.
Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be
-----------
fixed by the Board of Directors.
Section 7.5 Record Date; Books and Records.
------------------------------
(1) The Board of Directors may fix, in advance, a record date for
the determination of the shareholders entitled to notice of and to vote at any
meeting of shareholders,
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to receive any report, to receive any dividend or distribution, or any allotment
of rights, or to exercise rights in respect to any change, conversion, or
exchange of shares.
(2) The Corporation shall keep adequate and correct books and
records of account and shall keep minutes of the proceedings of its
shareholders, Board of Directors and committees of the Board of Directors and
shall keep at its principal executive office or at the office of its transfer
agent or registrar, a record of its shareholders, giving the names and addresses
of all shareholders and the number and class of shares held by each. Such
minutes shall be kept in written form. Such other books and records shall be
kept either in written form or in any other form capable of being converted into
written form.
Section 7.6 Check, Drafts, Etc. All checks, drafts or other orders
-------------------
for payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board of Directors.
Section 7.7 Authority to Execute Contracts. The Board of Directors
------------------------------
may authorize any officer or officers, agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation, subject to the applicable laws of the State of Washington. Such
authority may be general or confined to specific instances and, unless so
authorized by the Board of Directors, no officer, agent or employee shall have
any power or authority to bind the Corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or to any amount.
Section 7.8 Representation of Shares of Other Corporations. The
----------------------------------------------
President or any Vice President and the Secretary or any Assistant Secretary of
this Corporation are authorized to vote, represent and exercise on behalf of
this Corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this Corporation. The
authority herein granted to said officers to vote or represent on behalf of this
Corporation any and all shares held by this Corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
other person authorized so to do by proxy or power of attorney duly executed by
said officers.
Section 7.9 Construction and Definitions. Unless the context
----------------------------
otherwise requires, the general provisions, rules of construction and
definitions contained in the Act shall govern the construction of these By-Laws.
Without limiting the generality of the foregoing, the masculine gender includes
the feminine and neuter, the singular number includes the plural and the plural
number includes the singular, and the term "person" includes a corporation as
well as a natural person.
Section 7.10 Books and Records. The Corporation shall keep as
-----------------
permanent records minutes of all meetings of its shareholders and Board of
Directors, a record of all actions taken by the shareholders or Board of
Directors without a meeting, and a record of all actions taken by a committee of
the Board of Directors exercising the authority of the Board of Directors on
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behalf of the Corporation; shall maintain appropriate accounting records; and
the Corporation or its agent shall maintain a record of its shareholders, in a
form that permits preparation of a list of the names and addresses of all
shareholders, in alphabetical order by class of shares showing the number and
class of shares held by each; and shall keep a copy of the following records at
its principal office:
(1) The Articles or Restated Articles of Incorporation and all
amendments to them currently in effect;
(2) The By-Laws or Restated By-Laws and all amendments to them
currently in effect;
(3) The minutes of all shareholders' meetings, and records of all
actions taken by shareholders without a meeting, for the past three (3) years;
(4) Its financial statements for the past three (3) years, including
balance sheets showing in reasonable detail the financial condition of the
Corporation as of the close of each fiscal year, and an income statement showing
the results of its operations during each fiscal year prepared on the basis of
generally accepted accounting principles or, if not, prepared on a basis
explained therein;
(5) All written communications to shareholders generally within the
past three (3) years;
(6) A list of the names and business addresses of its current
directors and officers; and
(7) Its most recent annual report delivered to the Corporations
Division of the State of Washington.
Section 7.11 Financial Statements. Not later than four (4) months
--------------------
after the close of its fiscal year, and in any event prior to the annual meeting
of shareholders, the corporation shall prepare a balance sheet and income
statement as of the close of the fiscal year. Upon written request, the
Corporation shall mail to any shareholder a copy of the most recent balance
sheet and income statement. If the annual financial statements are reported
upon by a public accountant, the accountant's report must accompany them. If
not, the statements must be accompanied by the statement required by Washington
law, which is signed by the President or a person responsible for the
Corporation's accounting records.
15
<PAGE>
ARTICLE 8.
AMENDMENTS
----------
Subject to any limitations imposed by law or the Articles of
Incorporation these By-Laws may be altered, amended, supplemented or repealed,
or new By-Laws may be adopted, (a) at any annual or special meeting of the
shareholders by affirmative vote of all shareholders or (b) at any regular or
special meeting of the Board of Directors by affirmative vote of a majority of
the Board of Directors. In either case, notice of the proposed amendment must
be given in the Notice of the meeting.
The undersigned, being the Secretary of Cavanaughs Hospitality
Corporation, hereby certifies that the foregoing By-Laws were adopted as the
restated By-Laws of said corporation by its Board of Directors effective January
1, 1998.
/s/ Richard Barbieri
---------------------------
Richard Barbieri, Secretary
16
<PAGE>
EXHIBIT 4.1
Common Stock Common Stock
Incorporated Under the Laws of See Reverse for Statements
the State of Washington Relating to Rights Preferences,
Privileges and Restrictions,
If Any
This Certifies that
is the Record Holder of
Fully paid and nonassessable shares of the Common Stock, par value $.01 per
share, of
CAVANAUGHS HOSPITALITY CORPORATION
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signature
of its duly authorized officers.
Dated:__________________________
Cavanaughs Hospitality Corporation
WASHINGTON
Richard L. Barbieri Donald K. Barbieri
Secretary President and Chief Executive Officer
Countersigned and Registered:
American Stock Transfer & Trust Company
Trust Agent and Registrant
By:
---------------------------
Authorized Signature
<PAGE>
The Corporation is authorized to issue two classes of stock, Common Stock
and Preferred Stock. The Board of Directors of the Corporation has the
authority to fix the number of shares and the designation of any series of
Preferred Stock and to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any unissued series of Preferred
Stock.
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established by the Articles of Incorporation of the
Corporation and by any certificate of determination, and the number of shares
constituting each class or series and the designations thereof, may be obtained
by any shareholder of the Corporation upon written request and without charge
from the Secretary of the Corporation at its corporate headquarters.
The following abbreviation, when used in the incorporation on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entries
JT TEN -- as joint tenants with right of survivorship and not
as tenants in common
UNIF GIFT MIN ACT _________________________________
Custodian Minor
under Uniform Gifts to Minors Act
_________________________________
(State)
UNIF TRF MIN ACT _________________________________
Custodian until age _____
Custodian under Uniform Transfers
to Minors Act
_________________________________
State
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________ hereby sell, assign and transfer unto
2
<PAGE>
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:__________
X ________________________________________
X ________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
____________ Guaranteed
____________________________________
SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS), STOCKHOLDERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO A.S.C.
RULE 17ad15.
3
<PAGE>
EXHIBIT 10.7
FORM OF
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CAVANAUGHS HOSPITALITY LIMITED PARTNERSHIP
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as
of___________, 1998, is entered into by and among Cavanaughs Hospitality
Corporation, a Washington corporation ("CHC" or "General Partner"), as the
General Partner and the Persons whose names are set forth on Exhibit D attached
hereto, as the Limited Partners, together with any Persons who become Partners
in the Partnership as provided herein.
WHEREAS, the Partners desire to amend and restate the Original
Partnership Agreement in its entirety;
WHEREAS, the General Partner proposes to cause the Partnership to
acquire direct and indirect interests in real estate and other assets, to cause
the Partnership to enter into certain mortgage financing transactions and, in
the event of any public offering of CHC Stock, to contribute the remaining net
proceeds from the public offering to the Partnership in accordance with this
Agreement; and
WHEREAS, the Partnership will issue Partnership Interests to the
General Partner and other persons in accordance with this Agreement;
NOW, THEREFORE, that for good and adequate consideration, the receipt
of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Act" means the Delaware Revised Uniform Limited Partnership Act, as
---
it may be amended from time to time, and any successor to such statute.
"Additional Limited Partner" means a Person admitted to the
--------------------------
Partnership as a Limited Partner pursuant to Section 4.1 hereof and who is shown
as such on the books and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for
------------------------
each Partner as of the end of each Partnership Year (i) increased by any amounts
which such Partner is obligated to restore pursuant to any provision of this
Agreement, or is treated as being obligated
<PAGE>
to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c), or is deemed to
be obligated to restore pursuant to the penultimate sentences of Regulations
Sections 1.704-2(g)(1), 1.704-2(i)(5), and (ii) decreased by the items described
in Regulations Sections 1.704-1(b)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and
1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account
is intended to comply with the provisions of Regulations Section 1.704-
1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
"Adjusted Capital Account Deficit" means, with respect to any Partner,
--------------------------------
the deficit balance, if any, in such Partner' s Adjusted Capital Account as of
the end of the relevant Partnership Year.
"Adjusted Property" means any property the Carrying Value of which has
-----------------
been adjusted pursuant to Exhibit A hereof.
---------
"Affiliate" means, with respect to any Person, (i) any Person directly
---------
or indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests, or
(iv) any officer, director, general partner or trustee of such Person or of any
Person referred to in clauses (i), (ii), and (iii) above. For the purposes of
this definition, "control" when used with respect to any Person, means the power
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreement" means this Amended and Restated Agreement of Limited
---------
Partnership, as it may be amended, supplemented or restated from time to time.
"Assignee" means a Person to whom one or more Partnership Units have
--------
been transferred in a manner permitted under this Agreement, but who has not
become a Substituted Limited Partner, and who has the rights set forth in
Section 11.5.
"Book-Tax Disparities" means, with respect to any item of Contributed
--------------------
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or Adjusted
Property and the adjusted basis thereof for federal income tax purposes as of
such date. A Partner's share of the Partnership's Book-Tax Disparities in all of
its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained pursuant
to Exhibit A and the hypothetical balance of such Partner's Capital Account
---------
computed as if it had been maintained strictly in accordance with federal income
tax accounting principles.
"Business Day" means any day except a Saturday, Sunday or other day on
------------
which commercial banks in New York, New York are authorized or required by law
to close.
2
<PAGE>
"Capital Account" means the Capital Account maintained for a Partner
---------------
pursuant to Exhibit A hereof.
---------
"Capital Contribution" means, with respect to any partner, any cash,
--------------------
cash equivalents or the 704(c) Value of Contributed Property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to Section
4.1 or 4.2 hereof (reduced by any indebtedness either assumed by the Partnership
or to which such property is subject at the time of the contribution as
determined under Section 752 of the Code and the Regulations thereunder). The
principal amount of a promissory note which is not readily traded on an
established securities market and which is contributed by a Partner as the maker
of the note shall not be considered a capital contribution until the Partnership
makes a taxable disposition of the note or until (and to the extent) principal
payments are made on the note, all in accordance with Treasury Regulation
Section 1.704-1(b)(2)(iv)(d)(2).
"Carrying Value" means (i) with respect to a Contributed Property or
--------------
Adjusted Property, the 704(c) Value of such property, reduced (but not below
zero) by all Depreciation with respect to such Property charged to the Partners'
Capital Accounts following the contribution of or adjustment with respect to
such Property, and (ii) with respect to any other Partnership property, the
adjusted basis of such property for federal income tax purposes, all as of the
time of determination. The Carrying Value of any property shall be adjusted
from time to time in accordance with Exhibit A hereof, and to reflect changes,
---------
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cash Amount" means an amount of cash per Partnership Unit equal to
-----------
the Value on the Valuation Date of the CHC Shares Amount.
"Certificate" means the Certificate of Limited Partnership relating to
-----------
the Partnership filed in the office of the Delaware Secretary of State, as
amended from time to time in accordance with the terms hereof and the Act.
"CHC" means Cavanaughs Hospitality Corporation, a Washington
---
Corporation.
"CHC Shares Amount" means a whole number of CHC Shares equal to the
-----------------
product of the number of Partnership Units offered for redemption by a Redeeming
Partner, multiplied by the Conversion Factor (rounded down to the nearest whole
number in the event such product is not a whole number); provided that in the
-------------
event the General Partner at any time issues to all holders of CHC Shares
rights, options, warrants or convertible or exchangeable securities entitling
the shareholders to subscribe for or purchase CHC Shares, or any other
securities or property (collectively, the "rights"), which rights have not
expired pursuant to their terms, then the CHC Shares Amount thereafter shall
also include such rights that a holder of that number of CHC Shares would be
entitled to receive.
3
<PAGE>
"CHC Share" means a share of common stock, par value $.01 per share,
---------
of the General Partner.
"Code" means the Internal Revenue Code of 1986, as amended and in
----
effect from time to time, as interpreted by the applicable regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"Consent" means the consent or approval of a proposed action by a
-------
Partner given in accordance with Section 14.2 hereof.
"Contributed Property" means each property or other asset contributed
--------------------
to the Partnership, in such form as may be permitted by the Act, but excluding
cash contributed or deemed contributed to the Partnership. Once the Carrying
Value of a Contributed Property is adjusted pursuant to Section 1.D of Exhibit A
---------
hereof, such property shall no longer constitute a Contributed Property for
purposes of Exhibit A hereof, but shall be deemed an Adjusted Property for such
---------
purposes.
"Conversion Factor" means 1.0, provided that in the event that the
----------------- -------------
General Partner (i) declares or pays a dividend on its outstanding CHC Shares in
CHC Shares or makes a distribution to all holders of its outstanding CHC Shares
in CHC Shares; (ii) subdivides its outstanding CHC Shares; or (iii) combines its
outstanding CHC Shares into a smaller number of CHC Shares, the Conversion
Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the
numerator of which shall be the number of CHC Shares issued and outstanding on
the record date for such dividend, distribution, subdivision or combination
(assuming for such purposes that such dividend, distribution, subdivision or
combination has occurred as of such time), and the denominator of which shall be
the actual number of CHC Shares (determined without the above assumption) issued
and outstanding on the record date for such dividend, distribution, subdivision
or combination. Any adjustment to the Conversion Factor shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
"Debt" means, as to any Person, as of any date of determination, (i)
----
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services; (ii) all amounts owed by such Person to banks or
other Persons in respect of reimbursement obligations under letters of credit,
surety bonds and other similar instruments guaranteeing payment or other
performance of obligations by such Person; (iii) all indebtedness for borrowed
money or for the deferred purchase price of property or services secured by any
lien on any property owned by such Person, to the extent attributable to such
Person's interest in such property, even though such Person has not assumed or
become liable for the payment thereof; and (iv) lease obligations of such Person
which, in accordance with generally accepted accounting principles, should be
capitalized.
4
<PAGE>
"Depreciation" means, for each Partnership year, an amount equal to
------------
the federal income tax depreciation, amortization, or other cost recovery
deduction allowable with respect to an asset for such year, except that if the
Carrying Value of an asset differs from its adjusted basis for federal income
tax purposes at the beginning of such year or other period, Depreciation shall
be an amount which bears the same ratio to such beginning Carrying Value as the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year bears to such beginning adjusted tax basis; provided, however,
-------- -------
that if the federal income tax depreciation, amortization, or other cost
recovery deduction for such year is zero, Depreciation shall be determined with
reference to such beginning Carrying Value using any reasonable method selected
by the General Partner.
"Distribution Amount" means, with respect to any period for which
-------------------
there is a Distribution Event, an amount equal to the amount that the
Partnership would have paid in federal (but not state) income taxes, calculated
at the highest marginal individual federal income tax rate set forth in Section
1 of the Code for the taxable year in which the distribution is made, on the Net
Income for the taxable year through the calendar quarter to which the
distribution relates, minus all General Partner Distribution Amounts and all
Limited Partner Distribution Amounts previously distributed during the taxable
year.
"Distribution Event" means any calendar quarter in which the General
------------------
Partner determines that the Partnership has generated Net Income for such
quarter, after taking into consideration the Net Income and Net Losses for all
previous calendar quarters for the taxable year.
"Effective Date" means November 1, 1997.
--------------
"General Partner" means Cavanaughs Hospitality Corporation, a
---------------
Washington corporation, or its predecessors or successors as general partner of
the Partnership.
"General Partner Distribution Amount" means the Distribution Amount,
-----------------------------------
multiplied by a fraction, the numerator of which is the Net Income allocable to
the General Partner for the taxable year through the quarter to which the
distribution relates, and the denominator is Net Income for the taxable year
through the quarter to which the distribution relates.
"General Partner Interest" means a Partnership Interest held by the
------------------------
General Partner that is a general partnership interest. A General Partner
Interest may be expressed as a number of Partnership Units.
"IRS" means the Internal Revenue Service, which administers the
---
internal revenue laws of the United States.
5
<PAGE>
"Immediate Family" means, with respect to any natural Person, such
----------------
natural Person's spouse and such natural Person's natural or adoptive parents,
descendants, nephews, nieces, brothers, and sisters.
"Incapacity" or "Incapacitated" means, (i) as to any individual
---------- -------------
Partner, death, total physical disability or entry by a court of competent
jurisdiction adjudicating him incompetent to manage his Person or his estate;
(ii) as to any corporation which is a Partner, the filing of a certificate of
dissolution, or its equivalent, for the corporation or the revocation of its
charter; (iii) as to any partnership which is a Partner, the dissolution and
commencement of winding up of the partnership; (iv) as to any estate which is a
Partner, the distribution by the fiduciary of the estate's entire interest in
the partnership; (v) as to any trustee of a trust which is a Partner, the
termination of the trust (but not the substitution of a new trustee); or (vi) as
to any Partner, bankruptcy of such Partner. For purposes of this definition,
bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner
commences a voluntary proceeding seeking liquidation, reorganization or other
relief under any bankruptcy, insolvency or other similar law now or hereafter in
effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and
nonappealable order for relief under any bankruptcy, insolvency or similar law
now or hereafter in effect has been entered against the Partner, (c) the Partner
executes and delivers a general assignment for the benefit of the Partner's
creditors, (d) the Partner files an answer or other pleading admitting or
failing to contest the material allegations of a petition filed against the
Partner in any proceeding of the nature described in clause (b) above, (e) the
Partner seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator for the Partner or for all or any substantial part of the
Partner's properties, (f) any proceeding seeking liquidation, reorganization or
other relief of or against such Partner under any bankruptcy, insolvency or
other similar law now or hereafter in effect has not been dismissed within one
hundred twenty (120) days after the commencement thereof, (g) the appointment
without the Partner's consent or acquiescence of a trustee, receiver or
liquidator has not been vacated or stayed within ninety (90) days of such
appointment, or (h) an appointment referred to in clause (g) which has been
stayed is not vacated within ninety (90) days after the expiration of any such
stay.
"Indemnitee" means (i) any Person made a party to a proceeding by
----------
reason of his status as (A) the General Partner or (B) a director or officer of
the Partnership or the General Partner, or (C) his or its liability, pursuant to
a loan guarantee or otherwise, for any indebtedness of the Partnership or any
Subsidiary of the Partnership (including, without limitation, any indebtedness
which the Partnership or any Subsidiary of the Partnership has assumed or taken
assets subject to), and (ii) such other Persons (including Affiliates of the
General Partner or the Partnership) as the General Partner may designate from
time to time (whether before or after the event giving rise to potential
liability), in its sole and absolute discretion.
"initial public offering" means the first sale of CHC Shares by the
-----------------------
General Partner pursuant to a registration under the Securities Act of 1933, as
amended.
"Limited Partner" means any person named as a Limited Partner in
---------------
Exhibit A attached hereto, as such Exhibit may be amended from time to time, or
any Substituted Limited
6
<PAGE>
Partner or Additional Limited Partner, in such Person's capacity as a Limited
Partner in the Partnership.
"Limited Partner Distribution Amount" means the Distribution Amount
-----------------------------------
less the General Partner Distribution Amount.
"Limited Partner Interest" means a Partnership Interest of a Limited
------------------------
Partner in the Partnership representing a fractional part of the Partnership
Interests of all Partners and includes any and all benefits to which the holder
of such Partnership Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement. A Limited Partner Interest may be expressed as a
number of Partnership Units.
"Liquidator" has the meaning set forth in Section 13.2.
----------
"Net Income" means, for any taxable period, the excess, if any, of the
----------
Partnership's items of income and gain for such taxable period over the
Partnership's items of loss and deduction for such taxable period. The items
included in the calculation of Net Income shall be determined in accordance with
federal income tax accounting principles, subject to the specific adjustments
provided for in Exhibit A. Once an item of income, gain, loss or deduction that
---------
has been included in the initial computation of Net Income is subjected to the
special allocation rules in Exhibit B, Net Income or the resulting Net Loss,
---------
whichever the case may be, shall be recomputed without regard to such item.
"Net Loss" means, for any taxable period, the excess, if any, of the
--------
Partnership's items of loss and deduction for such taxable period over the
Partnership's items of income and gain for such taxable period. The items
included in the calculation of Net Loss shall be determined in accordance with
federal income tax accounting principles, subject to the specific adjustments
provided for in Exhibit A. Once an item of income, gain, loss or deduction that
---------
has been included in the initial computation of Net Loss is subjected to the
special allocation rules in Exhibit B, Net Loss or the resulting Net Income,
---------
whichever the case may be, shall be recomputed without regard to such item.
"Nonrecourse Built-in Gain" means, with respect to any Contributed
-------------------------
Properties or Adjusted Properties that are subject to a mortgage or negative
pledge securing a Nonrecourse Liability, the amount of any taxable gain that
would be allocated to the Partners pursuant to Section 2.B of Exhibit B if such
---------
properties were disposed of in a taxable transaction in full satisfaction of
such liabilities and for not other consideration.
"Nonrecourse Deductions" has the meaning set forth in Regulations
----------------------
Section 1.704-2(b)(1), and the amount of Nonrecourse Deduction for a Partnership
Year shall be determined in accordance with the rules of Regulations Section
1.704-2(c).
7
<PAGE>
"Nonrecourse Liability" has the meaning set forth in Regulations
---------------------
Section 1.752-1(a)(2).
"Notice of Redemption" means the Notice of Redemption substantially in
--------------------
the form of Exhibit C to this Agreement.
---------
"Original Limited Partner" means a Limited Partner who is or becomes a
------------------------
Partner on the Effective Date.
"Original Limited Partnership Unit" means a Partnership Unit held by
---------------------------------
an Original Limited Partner on the Effective Date.
"Partner" means a General Partner or a Limited Partner, and "Partners"
------- --------
means the General Partner and the Limited Partners.
"Partner Minimum Gain" means an amount, with respect to each Partner
--------------------
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" has the meaning set forth in Regulations
------------------------
Section 1.704-2(b)(4).
"Partner Nonrecourse Deductions" has the meaning set forth in
------------------------------
Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for a Partnership Year
shall be determined in accordance with the rules of Regulations Section 1.704-
2(i)(2).
"Partnership" means the limited partnership formed under the Act and
-----------
pursuant to the Original Partnership Agreement and any successor thereto.
"Partnership Interest" means an ownership interest in the Partnership
--------------------
and includes any and all benefits to which the holder of such a Partnership
Interest may be entitled as provided in this Agreement, together with all
obligations of such Person to comply with the terms and provisions of this
Agreement. A Partnership Interest may be expressed as a number of Partnership
Units.
"Partnership Minimum Gain" has the meaning set forth in Regulations
------------------------
Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as
any net increase or decrease in Partnership Minimum Gain, for a Partnership Year
shall be determined in accordance with the rules of Regulations Section 1.704-
2(d).
"Partnership Record Date" means the record date established by the
-----------------------
General Partner for any distribution pursuant to Section 5.1 hereof.
8
<PAGE>
"Partnership Unit" means a fractional, undivided share of the
----------------
Partnership interests of all Partners issued pursuant to Section 4.1 or 4.2. As
of the Effective Date, there shall be considered to be 10,504,422 Partnership
Units outstanding, representing 100% of the Percentage Interests in the
Partnership. The ownership of Partnership Units may be evidenced by such form
of certificate for units as the General Partner adopts from time to time.
"Partnership Year" means the fiscal year of the Partnership, which
----------------
shall end on October 31, 1997.
"Percentage Interest" means, as to a Partner, its interest in the
-------------------
Partnership as determined by dividing the Partnership Units owned by such
Partner by the total number of Partnership Units then outstanding. In the event
differing classes of Partnership Interests are issued, Percentage Interests
shall be calculated on a class by class basis.
"Person" means an individual or a corporation, partnership, trust,
------
unincorporated organization, association or other entity.
"Recapture Income" means any gain recognized by the Partnership upon
----------------
the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Redeeming Partner" has the meaning set forth in Section 8.6 hereof.
-----------------
"Redemption Right" shall have the meaning set forth in Section 8.6
----------------
hereof.
"Regulations" means the Income Tax Regulations promulgated under the
-----------
Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as
------------- -------------
the case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of Contributed Property or
Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit B to eliminate Book-Tax
---------
Disparities.
"704(c) Value" of any Contributed Property means the fair market value
------------
of such property or other consideration at the time of contribution as
determined by the General Partner using such reasonable method of valuation as
it may adopt. The General Partner shall, in its sole and absolute discretion,
use such method as it deems reasonable and appropriate to allocate the aggregate
of the 704(c) Values of contributed Properties in a single or integrated
transactions among the separate properties on a basis proportional to their
respective fair market values.
9
<PAGE>
"Specified Redemption Date" means the tenth (10th) Business Day after
-------------------------
receipt by the General Partner of a Notice of Redemption; provided that no
-------- ----
Specified Redemption Date shall occur before the later of one (1) year from the
Effective Date or the date the Redemption Right arises under Section 8.6;
provided further that if the General Partner combines its outstanding CHC
Shares, no Specified Redemption Date shall occur after the record date and prior
to the effective date of such combination.
"Subsidiary" means, with respect to any Person, any corporation,
----------
partnership, or other entity of which a majority of (i) the voting power of the
voting equity securities or (ii) the outstanding equity interests is owned,
directly or indirectly, by such Person.
"Substituted Limited Partner" means a Person who is admitted as a
---------------------------
Limited Partner to the Partnership pursuant to Section 11.4.
"Terminating Capital Transaction" means any sale or other disposition
-------------------------------
of all or substantially all of the assets of the Partnership or a related series
of transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Partnership.
"Unrealized Gain" attributable to any item of Partnership Property
---------------
means, as of any date of determination, the excess, if any, of (i) the fair
market value of such property (as determined under Exhibit A hereof) as of such
---------
date, over (ii) the Carrying Value of such property (prior to any adjustment to
be made pursuant to Exhibit A hereof) as of such date.
---------
"Unrealized Loss" attributable to any item of Partnership property
---------------
means, as of any date of determination, the excess, if any, of (i) the Carrying
Value of such property (prior to any adjustment to be made pursuant to Exhibit A
---------
hereof) as of such date, over (ii) the fair market value of such property (as
determined under Exhibit A hereof) as of such date.
---------
"Valuation Date" means the date of receipt by the General Partner of a
--------------
Notice of Redemption or, if such date is not a Business Day, the first Business
Day thereafter.
"Value" means, with respect to a CHC Share, the average of the daily
-----
market price for the ten (10) consecutive trading days immediately preceding the
Valuation Date. The market price for each such trading day shall be: (i) if
the CHC Shares are listed or admitted to trading on any securities exchange or
the NASDAQ-National Market System, the closing price, regular way, on such day,
or if no such sale takes place on such day, the average of the closing bid and
asked prices on such day; (ii) if the CHC Shares are not listed or admitted to
trading on any securities exchange or the NASDAQ-National Market System, the
last reported sale price on such day or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as reported by a
reliable quotation source designated by the General Partner; or (iii) if the CHC
Shares are not listed or admitted to trading on any securities exchange or the
NASDAQ National Market System and no such last reported sale price or closing
bid and asked prices are available, the average of the reported high bid and low
asked prices on such day, as reported by a
10
<PAGE>
reliable quotation source designated by the General Partner, or if there shall
be no bid and asked prices on such day, the average of the high bid and low
asked prices, as so reported, on the most recent day (not more than ten (10)
days prior to the date in question) for which prices have been so reported;
provided that if there are no bid and asked prices reported during the ten (10)
- -------- ----
days prior to the date in question, the Value of the CHC Shares shall be
determined by the General Partner acting in good faith on the basis of such
quotations and other information as it considers, in its reasonable judgment,
appropriate. In the event the CHC Shares Amount includes rights that a holder
of CHC Shares would be entitled to receive, and the General Partner acting in
good faith determines that the value of such rights is not reflected in the
Value of the CHC Shares determined as aforesaid, then the Value of such rights
shall be determined by the General Partner acting in good faith on the basis of
such quotations and other information as it considers, in its reasonable
judgment, appropriate.
ARTICLE 2
ORGANIZATIONAL MATTERS
Section 2.1 Organization
------------
The Partnership is a limited partnership organized pursuant to the
provisions of the Act and upon the terms and conditions set forth herein.
Except as expressly provided herein to the contrary, the rights and obligations
of the Partners and the administration and termination of the Partnership shall
be governed by the Act. The Partnership Interest of each Partner shall be
personal property for all purposes.
Section 2.2 Name
----
The name of the Partnership shall be Cavanaughs Hospitality Limited
Partnership. The Partnership's business may be conducted under any other name
or names deemed advisable by the General Partner, including the name of the
General Partner, any Affiliate or such other business names as the General
Partner shall determine. The words "Limited Partnership," "L.P.," "Ltd." or
similar words or letters shall be included in the Partnership's name where
necessary for the purposes of complying with the laws of any jurisdiction that
so requires. The General Partner in its sole and absolute discretion may change
the name of the Partnership at any time and from time to time and shall notify
the Limited Partners of such change in the next regular communication to the
Limited Partners.
Section 2.3 Registered Office and Agent; Principal Office
---------------------------------------------
The address of the registered office of the Partnership in the State of
Delaware is 1013 Centre Road, Wilmington, New Castle County, Delaware, 19805,
and the registered agent for service of process on the Partnership in the State
of Delaware at such registered office shall be Prentice Hall. The principal
office of the Partnership shall be 201 W. North River Drive, Suite 100,
Spokane, Washington 99201, or such other place as the General Partner may from
time to time designate by notice to the Limited Partners. The Partnership may
maintain offices at such
11
<PAGE>
other place or places within or outside the State of Delaware as the General
Partner deems advisable.
Section 2.4 Power of Attorney
-----------------
A. Each Limited Partner and each Assignee who accepts Partnership Units
(or any rights, benefits or privileges associated therewith) is deemed to
irrevocably constitute and appoint the General Partner, any Liquidator, and
authorized officers and attorneys-in-fact of each, and each of those acting
singly, in each case with full power of substitution, as its true and lawful
agent and attorney-in-fact, with full power and authority in its name, place and
stead to:
(1) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other instruments
(including, without limitation, this Agreement and the Certificate and all
amendments or restatements thereof) that the General Partner or the Liquidator
deems appropriate or necessary to form, qualify or continue the existence or
qualification of the Partnership as a limited partnership (or a partnership in
which the limited partners have limited liability) in the State of Delaware and
in all jurisdictions in which the Partnership may or plans to conduct business
or own property; (b) all instruments that the General Partner or the Liquidator
deems appropriate or necessary to reflect any amendment, change, modification or
restatement of this Agreement in accordance with its terms; (c) all conveyances
and other instruments or documents that the General Partner deems appropriate or
necessary to reflect the dissolution and liquidation of the Partnership pursuant
to the terms of this Agreement, including, without limitation, a certificate of
cancellation; (d) all instruments relating to the admission, withdrawal, removal
or substitution of any partner pursuant to, or other events described in,
Article 11, 12 or 13 hereof or the Capital Contribution of any Partner; and (e)
all certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of Partnership Interests; and
(2) execute, swear to, seal, acknowledge and file all ballots,
consents, approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner or any
Liquidator, to make, evidence, give, confirm or ratify any vote, consent,
approval, agreement or other action which is made or given by the Partners
hereunder or is consistent with the terms of this Agreement or appropriate or
necessary, in the sole discretion of the General Partner or any Liquidator, to
effectuate the terms or intent of this Agreement.
Nothing contained herein shall be construed as authorizing the General Partner
or any Liquidator to amend this Agreement except in accordance with Article 14
hereof or as may be otherwise expressly provided for in this Agreement.
B. The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, in recognition of the fact that each of
the Partners will be relying upon the power of the General Partner and any
Liquidator to act as contemplated by this Agreement in any filing or other
action by it on behalf of the Partnership, and it shall survive and not be
12
<PAGE>
affected by the subsequent Incapacity of any Limited Partner or Assignee and the
transfer of all or any portion of such Limited Partner's or Assignee's
Partnership Units and shall extend to such Limited Partner's or Assignee's
heirs, successors, assigns and personal representatives. Each such Limited
Partner or Assignee hereby agrees to be bound by any representation made by the
General Partner or any Liquidator, acting in good faith pursuant to such power
of attorney, and each such Limited Partner or Assignee hereby waives any and all
defenses which may be available to contest, negate or disaffirm the action of
the General Partner or any Liquidator, taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within fifteen (15) days after receipt of the
General Partner's or Liquidator's request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator, as the case may be, deems necessary to effectuate this Agreement and
the purposes of the Partnership.
Section 2.5 Term
----
The term of the Partnership commenced on October 21, 1997, the date the
Certificate was filed in the office of the Secretary of State of Delaware in
accordance with the Act and shall continue until October 31, 2097, unless the
Partnership is dissolved (sooner) pursuant to the provisions of Article 13 or as
otherwise provided by law.
ARTICLE 3
PURPOSE
Section 3.1 Purpose and Business
--------------------
The purpose and nature of the business to be conducted by the Partnership,
directly and indirectly through Subsidiaries (including, without limitation,
partnerships for which the Partnership is a general partner) is to carry out all
activities which may be permitted by the Act, including without limitation
invest in, acquire, purchase, lease, own and operate hotels and similar
properties and businesses (including interests therein), to engage in all phases
of the hotel business, and to pursue such other purposes as may be incidental or
related thereto, including disposing of its interests in any or all of its
hotels or properties and reinvesting the proceeds thereof in furtherance of its
business.
Section 3.2 Powers
------
The Partnership is empowered to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to or convenient for the furtherance
and accomplishment of the purposes and business described herein and for the
protection and benefit of the Partner, including, without limitation, full power
and authority, directly or through its ownership interest in other entities, to
enter into, perform and carry out contracts of any kind, borrow money and issue
evidences of indebtedness, whether or not secured by mortgage, deed of trust,
pledge or other lien, acquire and develop real property, and lease, sell,
transfer and dispose of real property.
13
<PAGE>
ARTICLE 4
CAPITAL CONTRIBUTIONS
Section 4.1 Issuances of Additional Interests
---------------------------------
A. The General Partner may, at any time and from time to time, determine
that the Partnership requires additional funds, which funds may consist of cash
or property ("Additional Funds") for any Partnership purposes as the General
Partner may determine. The General Partner may raise all or any portion of the
Additional Funds by accepting additional Capital Contributions (of cash or
property) in exchange for Partnership Units or other Partnership Interests, and
is hereby authorized to cause the Partnership from time to time to issue to the
Partners or other Persons (including, without limitation, admitting Persons to
the Partnership as additional Limited Partners ("Additional Limited Partners"))
in connection with the contribution of cash or property to the Partnership,
additional Partnership Units or other Partnership Interests in one or more
classes, with such designations, preferences and relative, participating,
optional or other special rights, powers and duties, including rights, powers
and duties senior to Limited Partnership Interests, all as shall be determined
by the General Partner in its sole and absolute discretion subject to Delaware
law, including, without limitation, (i) the allocations of items of Partnership
income, gain, loss, deduction and credit to each such class or series of
Partnership Interests; (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (iii) the
rights of each such class or series of Partnership Interests upon dissolution
and liquidation of the Partnership; provided that no such additional Partnership
-------- ----
Units or other Partnership Interests shall be issued to the General Partner
unless either (a)(1) the additional Partnership Interests are issued in
connection with the grant, award, or issuance of shares of the General Partner,
which shares have designations, preferences and other rights (except for voting
rights) such that the economic interests attributable to such shares are
substantially similar to the designations, preferences and other rights of the
additional Partnership Interests issued to the General Partner in accordance
with this Section 4.1.A, and (2) the General Partner shall make a Capital
Contribution to the Partnership in an amount equal to the proceeds, if any,
raised in connection with the issuance of such shares of the General Partner, or
(b) the additional Partnership Interests are issued to all Partners in
proportion to their respective Percentage Interests.
B. After the Effective Date, the General Partner shall not grant, award,
or issue any additional CHC Shares (other than CHC Shares issued pursuant to
Section 8.6), or rights, options, warrants or convertible or exchangeable
securities containing the right to subscribe for or purchase CHC Shares
(collective "New Securities"), other than to all holders of CHC Shares unless
--------------
(i) the General Partner shall cause the Partnership to issue to the General
Partner Partnership Interests or rights, options, warrants or convertible or
exchangeable securities of the Partnership having designations, preferences and
other rights, all such that the economic interests are substantially the same as
those of the grant, award or issuance of such New Securities, and (ii) the
General Partner contributes the net proceeds from the grant, award or issuance
of such New Securities and from the exercise of rights contained in such New
Securities to the Partnership. Without limiting the foregoing, the General
Partner is expressly authorized to issue
14
<PAGE>
New Securities for less than fair market value, and to cause the Partnership to
issue to the General Partner corresponding Partnership Interests, so long as (x)
the General Partner concludes in good faith that such issuance is in the
interests of the General Partner and the Partnership (for example, and not by
way of limitation, the issuance of CHC Shares and corresponding Units pursuant
to an employee stock purchase plan providing for employee purchases of CHC
Shares at a discount from fair market value or employee stock options that have
an exercise price that is less than the fair market value of the CHC Shares,
either at the time of issuance or at the time of exercise), and (y) the General
Partner contributes all proceeds from such issuance and exercise to the
Partnership.
C. Upon the acceptance of additional Capital Contributions in exchange
for Partnership Units, the Percentage Interest related thereto shall be equal to
a fraction, the numerator of which is equal to the amount of cash and the
Carrying Value of the property contributed as of the Business Day immediately
preceding the date on which the additional Capital Contributions are made (an
"Adjustment Date") and the denominator of which is equal to the sum of (i) the
Value of a CHC Share (computed as of the Business Day immediately preceding the
Adjustment Date) multiplied by the CHC Shares Amount (assuming all outstanding
Partnership Units are being "offered for redemption") (the "Outstanding Value")
plus (ii) the aggregate amount of additional Capital Contributions contributed
to the Partnership on such Adjustment Date in respect of such Partnership Units.
The Percentage Interest of each other Partner holding Partnership Units shall be
adjusted downward accordingly. Notwithstanding the foregoing, solely for
purposes of calculating a Partner's Percentage Interest pursuant to this Section
4.1.C, (i) in the case of cash Capital Contributions by the General Partner,
such Capital Contributions will be deemed to equal the cash contributed by the
General Partner plus, in the case of cash contributions funded by an offering of
CHC Shares or other shares of capital stock of the General Partner, the offering
costs attributable to the cash contributed to the Partnership, and (ii) in the
case of the contribution of properties (or any portion thereof) by the General
Partner which were acquired by the General Partner in exchange for CHC Shares
immediately prior to such contribution, the General Partner shall be issued a
number of Partnership Units equal to the number of CHC Shares issued by the
General Partner in exchange for such properties, the Partnership Units held by
the other Partners shall not be adjusted, and the Partners' Percentage Interests
shall be adjusted accordingly. The General Partner shall promptly give each
Partner written notice of its Percentage Interest, as adjusted.
Section 4.2 Contributions of Proceeds of Issuance of CHC Shares
---------------------------------------------------
In connection with the initial public offering, and any other grant, award,
or issuance of CHC Shares or rights, options, warrants, or convertible or
exchangeable securities pursuant to Section 4.1, the General Partner shall make
a Capital Contribution to the Partnership of the proceeds raised in connection
with such grant, award, or issuance; provided that if the proceeds actually
-------- ----
received by the General Partner are less than the gross proceeds of such grant,
award, or issuance as a result of any underwriter's discount, commission, or fee
or other expenses paid or incurred in connection with such grant, award, or
issuance, then the General Partner shall be deemed to have made a Capital
Contribution to the Partnership in the amount of the gross
15
<PAGE>
proceeds of such issuance and the Partnership shall be deemed simultaneously to
have reimbursed the General Partner pursuant to Section 7.4.C for the amount of
such underwriter's discount or other expenses.
Section 4.3 No Preemptive Rights
--------------------
No existing Limited Partner shall have any preemptive, preferential or
other similar right with respect to (i) additional Capital Contributions or
loans to the Partnership; or (ii) issuance or sale of any Partnership Units or
other Partnership Interests.
Section 4.4 No Interest on Capital
----------------------
No Partner shall be entitled to interest on its Capital Contribution or its
Capital Account.
Section 4.5 Partnership Units for Initial Capital Contributions
---------------------------------------------------
In consideration for the Capital Contributions made by CHC and the Original
Limited Partner, the initial ownership of Partnership Units shall be as follows:
CHC:
_____ Partnership Units as a General Partner Interest
_____ Partnership Units as a Limited Partner Interest
Original Limited Partner:
_____ Partnership Units as a Limited Partner Interest
ARTICLE 5
DISTRIBUTIONS
Section 5.1 Requirement and Characterization of Distributions
-------------------------------------------------
The General Partner shall make distributions to the Partners when the
General Partner so determines in its sole and absolute discretion, in accordance
with the Partners' respective Percentage Interests on a "Partnership Record
Date" determined by the General Partner in its sole and absolute discretion;
provided, however, that if there is a Distribution Event, then the General
- -------- -------
Partner shall distribute (i) an amount equal to the General Partner Distribution
Amount to the General Partner and (ii) an amount equal to the Limited Partner
Distribution Amount to the Limited Partners in accordance with the Limited
Partners' respective Percentage Interests as soon as practicable after the end
of the calendar quarter to which the Distribution Event relates. Further, it is
understood by the Partners that the General Partner shall generally not make any
distributions other than distributions in connection with a Distribution Event,
it being the intent of the Partners that the earnings of the Partnership
generally be reinvested in the business.
16
<PAGE>
Section 5.2 Amounts Withheld
----------------
All amounts withheld pursuant to the Code or any provisions of any state or
local tax law and Section 10.5 hereof with respect to any allocation, payment or
distribution to the General Partner, the Limited Partners or Assignees shall be
treated as amounts distributed to the General Partner, Limited Partners, or
Assignees pursuant to Section 5.1 for all purposes under this Agreement.
Section 5.3 Distributions Upon Liquidation
------------------------------
Proceeds from a Terminating Capital Transaction and any other cash received
or reductions in reserves made after commencement of the liquidation of the
Partnership, shall be distributed to the Partners in accordance with Section
13.2.
Section 5.4 Revisions to Reflect Issuance of Additional Partnership
-------------------------------------------------------
Interests
---------
In the event that the Partnership issues additional Partnership Interests
to the General Partner or any Limited Partner or other Person under Article 4,
the General Partner shall make such revisions to this Article 5 as it determines
are necessary to reflect the issuance of such additional Partnership Interests.
ARTICLE 6
ALLOCATIONS
Section 6.1 Allocations For Capital Account Purposes
----------------------------------------
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Exhibit A hereof) shall be
---------
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
A. Net Income. After giving effect to the special allocations set forth
----------
in Section 1 of Exhibit B, Net Income shall be allocated (i) first, to the
---------
General Partner to the extent that Net Losses previously allocated to the
General Partner pursuant to the last sentence of Section 6.1.B exceed Net Income
previously allocated to the General Partner pursuant to this clause (i) of
Section 6.1.A, and (ii) thereafter, Net Income shall be allocated to the
Partners in accordance with their respective Percentage Interests.
B. Net Losses. After giving effect to the special allocations set forth
----------
in Section 1 of Exhibit B, Net Losses shall be allocated to the Partners in
---------
accordance with their respective Percentage Interests; provided that Net Losses
-------- ----
shall not be allocated to any Limited Partner pursuant to this Section 6.1.B to
the extent that such allocation would cause such Limited Partner to have an
Adjusted Capital Account Deficit at the end of such taxable year (or increase
any
17
<PAGE>
existing Adjusted Capital Account Deficit). All Net Losses in excess of the
limitations set forth in this Section 6.1.B shall be allocated to the General
Partner.
C. Allocation of Nonrecourse Debt. For purposes of Regulations Section
------------------------------
1.752-3(a), the Partners agree that Nonrecourse Liabilities of the Partnership
in excess of the sum of (i) the amount of Partnership Minimum Gain and (ii) the
total amount of Nonrecourse Built-in Gain shall be allocated among the Partners
in accordance with their respective Percentage Interests.
D. Recapture Income. Any gain allocated to the Partners upon the sale or
----------------
other taxable disposition of any Partnership asset shall to the extent possible,
after taking into account other required allocations of gain pursuant to Exhibit
-------
B, be characterized as Recapture Income in the same proportions and to the same
- -
extent as such Partners have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as Recapture Income
(including deductions taken by any Partner with respect to Contributed Property
prior to the time such Property was contributed to the Partnership).
E. Revisions to Reflect Issuance of Additional Partnership Interests. In
-----------------------------------------------------------------
the event that the Partnership issues additional Partnership Interests to the
General Partner or any Limited Partner or other Person under Article 4, the
General Partner shall make such revisions to this Article 6 as it determines are
necessary to reflect the issuance of such additional Partnership Interests.
ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.1 Management
----------
A. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership are and shall
be exclusively vested in the General Partner, and no Limited Partner shall have
any right to participate in or exercise control or management power over the
business and affairs of the Partnership. The General Partner may not be removed
by the Limited Partners with or without cause, except with the consent of the
General Partner. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 7.3 hereof, shall have full power and authority to
do all things deemed necessary or desirable by it to conduct the business of the
Partnership, to exercise all powers set forth in Section 3.2 hereof and to
effectuate the purposes set forth in Section 3.1 hereof, including, without
limitation:
(1) the making of any expenditures, the lending or borrowing of money
(including, without limitation, making prepayments on loans), the assumption or
guarantee of, or other contracting for, indebtedness and other liabilities, the
issuance of evidences of indebtedness (including the securing of same by deed to
secure debt, mortgage, deed of trust or other lien or
18
<PAGE>
encumbrance on the Partnership's assets) and the incurring of any obligations it
deems necessary for the conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having jurisdiction
over the business or assets of the Partnership;
(3) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any assets of the Partnership (including the
exercise or grant of any conversion, option, privilege, or subscription right or
other right available in connection with any assets at any time held by the
Partnership) or the merger or other combination of the Partnership with or into
another entity;
(4) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of this
Agreement and on any terms it sees fit, including, without limitation, the
financing of the conduct of the operations of the General Partner, the
Partnership or any of the Partnership's Subsidiaries, the lending of funds to
other Persons (including, without limitation, the Partnership's Subsidiaries)
and the repayment of obligations of the Partnership and its Subsidiaries and any
other Person in which it has an equity investment and the making of capital
contributions to its Subsidiaries;
(5) the management, operation, leasing, landscaping, repair,
alteration, demolition or improvement of any real property or improvements owned
by the General Partner, the Partnership of any of the Partnership's
Subsidiaries;
(6) the negotiation, execution, and the performance of any contracts,
conveyances or other instruments that the General Partner considers useful or
necessary to the conduct of the Partnership's operations or the implementation
of the General Partner's powers under this Agreement, including contracting with
contractors, developers, consultants, accountants, legal counsel, other
professional advisors and other agents and the payment of their expenses and
compensation out of the Partnership's assets;
(7) the distribution of Partnership cash or other Partnership assets
in accordance with this Agreement;
(8) holding, managing, investing and reinvesting cash and other assets
of the Partnership;
(9) the collection and receipt of revenues and income of the
Partnership;
(10) the establishment of one or more divisions of the Partnership,
the selection and dismissal of employees of the Partnership, any division of the
Partnership, or the General Partner (including, without limitation, employees
having titles such as "president," "vice president," "secretary" and "treasurer"
of the Partnership, any division of the Partnership, or the
19
<PAGE>
General Partner), and agents, outside attorneys, accountants, consultants and
contractors of the General Partner, the Partnership or any division of the
Partnership, and the determination of their compensation and other terms of
employment or hiring;
(11) the maintenance of such insurance for the benefit of the
Partnership and the Partners as it deems necessary or appropriate;
(12) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general partnerships, joint
ventures or other relationships that it deems desirable (including, without
limitation, the acquisition of interests in, and the contributions of property
to, its Subsidiaries and any other Person in which it has an equity investment
from time to time);
(13) the control of any matters affecting the rights and obligations
of the Partnership, including the settlement, compromise, submission to
arbitration or any other form of dispute resolution, or abandonment of any
claim, cause of action, liability, debt or damages due or owing to or from the
Partnership, the commencement or defense of suits, legal proceedings,
administrative proceedings, arbitrations or other forms of dispute resolution,
and the representation of the Partnership in all suits or legal proceedings,
administrative proceedings, arbitrations or other forms of dispute resolution,
the incurring of legal expense, and the indemnification of any Person against
liabilities and contingencies to the extent permitted by law;
(14) the undertaking of any action in connection with the
Partnership's direct or indirect investment in its Subsidiaries or any other
Person (including, without limitation, the contribution or loan of funds by the
Partnership to such Persons);
(15) the determination of the fair market value of any Partnership
property distributed in kind using such reasonable method of valuation as it may
adopt;
(16) the exercise, directly or indirectly through any attorney-in-fact
acting under a general or limited power of attorney, of any right, including the
right to vote, appurtenant to any asset or investment held by the Partnership;
(17) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of or in connection with any Subsidiary
of the Partnership or any other Person in which the Partnership has a direct or
indirect interest, or jointly with any such Subsidiary or other Person;
(18) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of any Person in which the Partnership
does not have an interest pursuant to contractual or other arrangements with
such Person;
20
<PAGE>
(19) the making, execution and delivery of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security agreements,
conveyances, contracts, guarantees, warranties, indemnities, waivers, releases
or legal instruments or agreements in writing necessary or appropriate in the
judgment of the General Partner for the accomplishment of any of the powers of
the General Partner; and
(20) the distribution of cash to acquire Partnership Units held by a
Limited Partner in connection with a Limited Partner's exercise of its
Redemption Right under Section 8.6.
B. Each of the Limited Partners agrees that the General Partner is
authorized to execute, deliver and perform the above-mentioned agreements and
transactions on behalf of the Partnership without any further act, approval or
vote of the Partners, notwithstanding any other provision of this Agreement, the
Act or any applicable law, rule or regulation, to the fullest extent permitted
under the Act or other applicable law. The execution, delivery or performance
by the General Partner or the Partnership of any agreement authorized or
permitted under this Agreement shall not constitute a breach by the General
Partner of any duty that the General Partner may owe the Partnership or the
Limited Partners or an other Persons under this Agreement or of any duty stated
or implied by law or equity.
C. At all times from and after the date hereof, the General Partner at
the expense of the Partnership, may or may not, cause the Partnership to obtain
and maintain (i) casualty, liability and other insurance on the properties of
the Partnership and (ii) liability insurance for the Indemnitees hereunder.
D. At all times from and after the date hereof, the General Partner may
cause the Partnership to establish and maintain at any and all times working
capital accounts and other cash or similar balances in such amounts as the
General Partner, in its sole and absolute discretion, deems appropriate and
reasonable from time to time.
E. The General Partner shall have the full power and authority in the
name and on behalf of the Partnership in its capacity as the General Partner, to
take all such actions and to execute, deliver, and file all such agreements,
instruments, reports and documents as may be necessary or advisable in
connection with the formation of the General Partner, the issuance of Units in
connection with a proposed transaction or any transactions described in or
contemplated by the General Partner's Registration Statement on Form S-1 as may
be filed with the Securities and Exchange Commission.
F. Notwithstanding anything to the contrary contained in this Agreement,
any agreement of merger or consolidation of the Partnership entered into in
accordance with the provisions of this Agreement may, as provided in Section 17-
211(g) of the Delaware Revised Uniform Limited Partnership Act, (1) effect any
amendment to this Agreement or (2) effect the adoption of a new partnership
agreement for the Partnership if it is the surviving or resulting limited
partnership in the merger or consolidation (provided that no such amendment
shall be so
21
<PAGE>
effected if it would, under Section 7.3 hereof, require the consent of the
Limited Partners (unless the requisite consent or consents shall be obtained),
and no provision shall be included in any such new partnership agreement if such
provision would, under Section 7.3 hereof, require the consent of the Limited
Partners if it were being incorporated in this Agreement by amendment (unless
the requisite consent shall be obtained).
Section 7.2 Certificate of Limited Partnership
----------------------------------
The Partnership has filed the Certificate with the Secretary of State of
Delaware as required by the Act. The General Partner shall use all reasonable
efforts to cause to be filed such other certificates or documents as may be
reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of Delaware and any
other state, or the District of Columbia, in which the Partnership may elect to
do business or own property. To the extent that such action is determined by
the General Partner to be reasonable and necessary or appropriate, the General
Partner shall file amendments to and restatements of the Certificate and do all
the things to maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited liability) under the laws
of the State of Delaware and each other state or the District of Columbia, in
which the Partnership may elect to do business or own property. Subject to the
terms of Section 8.5.A(4) hereof, the General Partner shall not be required,
before or after filing, to deliver or mail a copy of the certificate or any
amendment thereto to any Limited Partner.
Section 7.3 Restrictions on General Partner's Authority
-------------------------------------------
The General Partner may not take an action in contravention of an express
prohibition or limitation of this Agreement without the written Consent of a
majority of the Partnership Units held by the Limited Partners (including
Limited Partnership Interests held by the General Partner or an Affiliate, or
such lower percentage of the Limited Partners as may be specifically provided
for under a provision of this Agreement or the Act). When there is a provision
in this Agreement that the General Partner may take a specific action or the
Agreement is silent with respect to a specific action, and there is provided no
restrictive qualifications, the General Partner may so act without the Consent
of the Limited Partners.
Section 7.4 Reimbursement of the General Partner
------------------------------------
A. Except as provided in this Section 7.4 and elsewhere in this Agreement
(including the provisions of Articles 5 and 6 regarding distributions, payments,
and allocations to which it may be entitled), the General Partner shall not be
compensated for its services as general partner of the Partnership.
B. The General Partner shall be reimbursed on a monthly basis, or such
other basis as the General Partner may determine in its sole and absolute
discretion, for all expenses it incurs relating to the ownership and operation
of, or for the benefit of, the Partnership; provided that the
-------- ----
22
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amount of any such reimbursement shall be reduced by any interest earned by the
General Partner with respect to bank accounts or other instruments or accounts
held by it on behalf of the Partnership as permitted in Section 7.5.A. The
Limited Partners acknowledge that, for purposes of this Section 7.4.B, all of
the General Partner's expenses (including without limitation, costs and expenses
associated with compliance with the periodic reporting requirements and all
other rules and regulations of the Securities and Exchange Commission or any
other federal, state or local regulatory body, salaries payable to officers and
employees of the General Partner, fees and expenses payable to directors of the
General Partner, and all other operating of administrative costs of the General
Partner) are deemed incurred for the benefit of the Partnership and shall be
paid by or reimbursed by the Partnership as provided in this Section 7.4.B.
Such reimbursement shall be in addition to any reimbursement to the General
Partner as a result of indemnification pursuant to Section 7.7 hereof. All
payments and reimbursements hereunder will be characterized for federal income
tax purposes as expenses of the Partnership incurred on its behalf, and not
expenses of the General Partner.
C. The General Partner shall also be reimbursed for all expenses it
incurs relating to the organization and/or reorganization of the Partnership and
the General Partner, the initial public offering and any other issuance of
additional Partnership Interests, CHC Shares or rights, options, warrants, or
convertible or exchangeable securities pursuant to Section 4.1 hereof
(including, without limitation, all costs, expenses, damages, and other payments
resulting from or arising in connection with litigation related to any of the
foregoing).
D. In the event that the General Partner shall elect to purchase from its
shareholders CHC Shares for the purpose of delivering such shares to satisfy an
obligation under any dividend reinvestment program adopted by the General
Partner, any employee stock purchase plan adopted by the General Partner, or any
similar obligation or arrangement undertaken by the General Partner in the
future, the purchase price paid by the General Partner for such CHC Shares and
any other expenses incurred by the General Partner in connection with such
purchase shall be considered expenses of the Partnership and shall be reimbursed
to the General Partner, subject to the condition that: (i) if such CHC Shares
subsequently are to be sold by the General Partner, the General Partner shall
pay to the Partnership any proceeds received by the General Partner for such CHC
Shares (provided that a transfer of CHC Shares for Units pursuant to Section 8.6
would not be considered a sale for such purposes); and (ii) if such CHC Shares
are not retransferred by the General Partner within 30 days after the purchase
thereof, the General Partner shall cause the Partnership to cancel a number of
Partnership Units (rounded to the nearest whole Unit) held by the General
Partner equal to the product obtained by multiplying the number of such CHC
Shares by a fraction, the numerator of which is one and the denominator of which
is the Conversion Factor.
Section 7.5 Outside Activities of the General Partner
-----------------------------------------
A. Subject to Section 7.5.C below, the General Partner shall not directly
or indirectly enter into or conduct any business, other than in connection with
the ownership, acquisition and disposition of Partnership Interests as a General
Partner, and the management of the businesses
23
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of the Partnership, and such activities as are incidental thereto. The General
Partner shall not incur any debts other than (i) debt of the Partnership for
which it may be liable in its capacity as General Partner of the Partnership,
and (ii) indebtedness for borrowed money the proceeds from which borrowing are
loaned to the Partnership on the same terms and conditions as the borrowing by
the General Partner. The General Partner shall not hold any assets other than
Partnership Interests as a General Partner and stock of CHC (and indirectly
there through, Partnership Interests as a Limited Partner), other than such bank
accounts or similar instruments or accounts as it deems necessary to carry out
its responsibilities contemplated under this Agreement and the Articles of
Incorporation. Notwithstanding the foregoing, the General Partner may acquire
property in exchange for CHC Shares, to the extent such properties are
immediately contributed by the General Partner to the Partnership, pursuant to
the terms described in Article 4. The General Partner and any Affiliates of the
General Partner may acquire Limited Partner Interests and shall be entitled to
exercise all rights of a Limited Partner relating to such Limited Partner
Interests.
B. Subject to the next sentence, the General Partner may, from time to
time, purchase and/or redeem CHC Shares (including, without limitation, in
connection with a stock repurchase or similar program), if the General Partner
determines that it is in the interest of the Partnership for the General Partner
to purchase and/or redeem CHC Shares. In the event that the General Partner
purchases and/or redeems CHC Shares, then the General Partner shall cause the
Partnership to purchase from the General Partner, concurrently with the CHC
Share purchase, a number of Partnership Units as determined based on the
application of the Conversion Factor for the same consideration (including any
fees, commissions, and expenses payable by the General Partner in connection
therewith) and on the same terms as the General Partner purchases such CHC
Shares.
C. Notwithstanding Section 7.5.A above, the General Partner shall have
the right to hold assets, conduct business and incur indebtedness in connection
therewith, with respect to certain assets that the General Partner believes, in
its sole and absolute discretion, cannot or should not be held by or
transferred to the Partnership. All benefits and burdens of any activities
conducted in this fashion shall inure to the Partnership; all income, gain,
loss, deduction, credit, cash flow and indebtedness shall be considered
Partnership income, gain, loss, deduction, credit, cash flow and indebtedness.
Without limiting the foregoing, for all purposes of this Agreement, the General
Partner shall be considered the mere holder of legal title and the Partnership
shall be considered the beneficial owner.
Section 7.6 Contracts with Affiliates
-------------------------
A. The Partnership may lend or contribute funds or other assets to its
Subsidiaries or other Persons in which it has an equity investment, and such
Persons may borrow funds from the Partnership, on terms and conditions
established in the sole and absolute discretion of the General Partner. The
foregoing authority shall not create any right or benefit in favor of any
Subsidiary or any other Person.
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B. Except as provided in Section 7.5, the Partnership may transfer assets
to joint ventures, other partnerships, corporations or other business entities
in which it is or thereby becomes a participant upon such terms and subject to
such conditions consistent with this Agreement and applicable law as the General
Partner, in its sole and absolute discretion, believes are advisable.
C. Except as expressly permitted by this Agreement, neither the General
Partner nor any of its Affiliates shall sell, transfer or convey any property
to, or purchase any property from, the Partnership, directly or indirectly,
except pursuant to transactions that are determined by the General Partner in
good faith to be fair and reasonable and no less favor to the Partnership than
would be obtained from an unaffiliated third party.
D. The General Partner, in its sole and absolute discretion and without
the approval of the Limited Partners, may propose and adopt on behalf of the
Partnership employee benefit plans, stock option plans, and similar plans funded
by the Partnership for the benefit of employees of the General Partner, the
Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in
respect of services performed, directly or indirectly, for the benefit of the
Partnership, the General Partner, or any of the Partnership's Subsidiaries.
E. The General Partner is expressly authorized to enter into, in the name
and on behalf of the Partnership, a right of first opportunity arrangement and
other conflict avoidance agreements with various Affiliates of the Partnership
and the General Partner, on such terms as the General Partner, in its sole and
absolute discretion, believes are advisable.
Section 7.7 Indemnification
---------------
A. The Partnership shall indemnify each Indemnitee from and against any
and all losses, claims, damages, liabilities, joint or several, expenses
(including, without limitation, attorneys fees and other legal fees and
expenses), judgments, fines, settlements, and other amounts arising from any and
all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, that relate to the Partnership in which such
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, unless it is established that: (i) the act or omission of the
Indemnitee was material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal benefit
in money, property or services; or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. Without limitation, the foregoing indemnity shall extend to any
liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any
indebtedness of the Partnership or any Subsidiary of the Partnership (including,
without limitation, any indebtedness which the Partnership or any Subsidiary of
the Partnership has assumed or taken subject to), and the General Partner is
hereby authorized and empowered, on behalf of the Partnership, to enter into one
or more indemnity agreements consistent with the provisions of this Section 7.7
in favor of any Indemnitee having or potentially having liability for any such
indebtedness. The termination of any proceeding, by judgment, order or
settlement does not
25
<PAGE>
create a presumption that the Indemnitee did not meet the requisite standard of
conduct set forth in this Section 7.7.A. The termination of any proceeding by
conviction of an Indemnitee or upon a plea of nolo contendere or its equivalent
by an Indemnitee, or an entry of an order of probation against an Indemnitee
prior to judgment, creates a rebuttable presumption that such Indemnitee acted
in a manner contrary to that specified in this Section 7.7.A with respect to the
subject matter of such proceeding. Any indemnification pursuant to this Section
7.7 shall be made only out of the assets of the Partnership, and neither the
General Partner nor any Limited Partner shall have any obligation to contribute
to the capital of the Partnership or otherwise provide funds to enable the
Partnership to fund its obligations under this Section 7.7.
B. Reasonable expenses incurred by an Indemnitee who is a party to a
proceeding may be paid or reimbursed by the Partnership in advance of the final
disposition of the proceeding upon receipt by the Partnership of (i) a written
affirmation by the Indemnitee of the Indemnitee's good faith belief that the
standard of conduct necessary for indemnification by the Partnership as
authorized in this Section 7.7.A has been met, and (ii) a written undertaking by
or on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.
C. The indemnification provided by this Section 7.7 shall be in addition
to any other rights to which an Indemnitee or any other Person may be entitled
under any agreement, pursuant to any vote of the Partners, as a matter of law or
otherwise, and shall continue as to an Indemnitee who has ceased to serve in
such capacity unless otherwise provided in a written agreement pursuant to which
such Indemnitee is indemnified.
D. The Partnership may, but shall not be obligated to, purchase and
maintain insurance, on behalf of the Indemnitees and such other Persons as the
General Partner shall determine, against any liability that may be asserted
against or expenses that may be incurred by such Person in connection with the
Partnership's activities, regardless of whether the Partnership would have the
power to indemnify such Person against such liability under the provisions of
this Agreement.
E. For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute fines
within the meaning of Section 7.7; and actions taken or omitted by the
Indemnitee with respect to an employee benefit plan in the performance of its
duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the Partnership.
F. In no event may an Indemnitee subject any of the Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
26
<PAGE>
G. An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
H. The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons. Any
amendment, modification or repeal of this Section 7.7 or any provision hereof
shall be prospective only and shall not in any way affect the limitations on the
Partnership's liability to any Indemnitee under this Section 7.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
Section 7.8 Liability of the General Partner
--------------------------------
A. Notwithstanding anything to the contrary set forth in this Agreement,
the General Partner shall not be liable for monetary damages to the Partnership,
any Partners or any Assignees for losses sustained or liabilities incurred as a
result of errors in judgment or of any act or omission if the General Partner
acted in good faith.
B. The Limited Partners expressly acknowledge that the General Partner is
acting on behalf of the Partnership and the General Partner's shareholders
collectively, that the General Partner is under no obligation to consider the
separate interests of the Limited Partners (including, without limitation, the
tax consequences to Limited Partners or Assignees) in deciding whether to cause
the Partnership to take (or decline to take) any actions, and that the General
Partner shall not be liable to the Partnership or to any Partner for monetary
damages for losses sustained, liabilities incurred, or benefits not derived by
Limited Partners in connection with such decisions, provided that the General
Partner has acted in good faith.
C. Subject to its obligations and duties as General Partner set forth in
Section 7.1.A hereof, the General Partner may exercise any of the powers granted
to it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents. The General Partner shall not be
responsible for any misconduct or negligence on the part of any such agent
appointed by it in good faith.
D. Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
27
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Section 7.9 Other Matters Concerning the General Partner
--------------------------------------------
A. The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture, or other
paper or document believed by it in good faith to be genuine and to have been
signed or presented by the proper party or parties.
B. The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers, architects, engineers,
environmental consultants and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the opinion of such
Persons as to matters which such General Partner reasonably believes to be
within such Person's professional or expert competence shall be conclusively
presumed to have been done or omitted in good faith and in accordance with such
opinion.
C. The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers and a duly appointed attorney or attorneys-in-fact. Each such attorney
shall, to the extent provided by the General Partner in the power of attorney,
have full power and authority to do and perform all and every act and duty which
is permitted or required to be done by the General Partner hereunder.
Section 7.10 Title to Partnership Assets
---------------------------
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner, individually or collectively, shall have any ownership
interest in such Partnership assets or any portion thereof. Title to any or all
of the Partnership assets may be held in the name of the Partnership, the
General Partner or one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner. The General Partner hereby
declares and warrants that any Partnership assets for which legal title is held
in the name of the General Partner or any nominee or Affiliate of the General
Partner shall be held by the General Partner for the use and benefit of the
Partnership in accordance with the provisions of this Agreement; provided,
--------
however, that the General Partner shall use its best efforts to cause beneficial
- -------
and record title to such assets to be vested in the Partnership as soon as
reasonably practicable. All Partnership assets shall be recorded as the
property of the Partnership in its books and records, irrespective of the name
in which legal title to such Property assets is held.
Section 7.11 Reliance by Third Parties
-------------------------
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner has full power and authority, without consent or approval of any other
Partner or Person, to encumber, sell or otherwise use in any manner any and all
assets of the Partnership and to enter into any contracts on behalf of the
Partnership, and take any and all actions on behalf of the Partnership and such
Person shall be
28
<PAGE>
entitled to deal with the General Partner as if the General Partner were the
Partnership's sole party in interest, both legally and beneficially. Each
Limited Partner hereby waives any and all defenses or other remedies which may
be available against such Person to contest, negate or disaffirm any action of
the General Partner in connection with any such dealing. In no event shall any
Person dealing with the General Partner or its representatives be obligated to
ascertain that the terms of this Agreement have been complied with or to inquire
into the necessity or expedience of any act or action of the General Partner or
its representatives. Each and every certificate, document or other instrument
executed on behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (i) at the time of the execution and
delivery of such certificate, document or instrument, this Agreement was in full
force and effect, (ii) the Person executing and delivering such certificate,
document or instrument was duly authorized and empowered to do so for and on
behalf of the Partnership and (iii) such certificate, document or instrument was
duly executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
The indemnification provision set forth in this Section 7.7 and the liability
provision set forth in Section 7.8 are for the benefit of the Partners hereto.
Any standard used therein is not intended to apply to any matter other than
those two Sections; such standards shall specifically not apply to transactions
between the Partnership and third parties.
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 8.1 Limitation of Liability
-----------------------
The Limited Partners shall have no liability under this Agreement except as
expressly provided in this Agreement, including Section 10.5 hereof, or under
the Act.
Section 8.2 Management of Business
----------------------
No Limited Partner or Assignee (other than the General Partner, any of its
Affiliates or any officer, director, employee, partner, agent or trustee of the
General Partner, the Partnership or any of their Affiliates, in their capacity
as such) shall take part in the operation, management or control (within the
meaning of the Act) of the Partnership's business, transact any business in the
Partnership's name or have the power to sign documents for or otherwise bind the
Partnership. The transaction of any such business by the General Partner, any of
its Affiliates or any officer, director, employee, partner, agent or trustee of
the General Partner, the Partnership or any of their Affiliates, in their
capacity as such, shall not affect, impair or eliminate the limitations on the
liability of the Limited Partners or Assignees under this Agreement.
29
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Section 8.3 Outside Activities of Limited Partners
--------------------------------------
Subject to Section 7.5 hereof and any other agreements entered into by a
Limited Partner or its Affiliates with the Partnership or a Subsidiary, any
Limited Partner and any officer, director, employee, agent, trustee, Affiliate
or shareholder of any Limited Partner shall be entitled to and may have business
interests and engage in business activities in addition to those relating to the
Partnership, including business interests and activities that are in direct
competition with the Partnership or that are enhanced by the activities of the
Partnership. Neither the Partnership nor any Partners shall have any rights by
virtue of this Agreement in any business ventures of any Limited Partner or
Assignee. None of the Limited Partners nor any other Person shall have any
rights by virtue of this Agreement or the Partnership relationship established
hereby in any business ventures of any other Person (other than the General
Partner to the extent expressly provided herein) and such Person shall have no
obligation pursuant to this Agreement to offer any interest in any such business
ventures to the Partnership, any Limited Partner or any such other Person, even
if such opportunity is of a character which, if presented to the Partnership,
any Limited Partner or such other Person, could be taken by such Person.
Section 8.4 Return of Capital
-----------------
Except pursuant to the right of redemption set forth in Section 8.6, no
Limited Partner shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent of distributions made pursuant to this
Agreement or upon termination of the Partnership as provided herein. Nothing in
this Section 8.4 shall be interpreted as limiting the Partnership's right to
redeem all or a portion of the Partnership Units held by a Limited Partner, with
the consent of such Limited Partner, on such terms and for such consideration as
determined by the General Partner to be in the interests of the Partnership.
Except to the extent provided by Exhibit B hereof or as permitted by Section 4.1
---------
(relating to preferred interests issued subsequent to the date hereof), or
otherwise expressly provided in this Agreement, no Limited Partner or Assignee
shall have priority over any other Limited Partner or Assignee either as to the
return of Capital Contributions or as to profits, losses or distributions.
Section 8.5 Rights of Limited Partners Relating to the Partnership
------------------------------------------------------
A. In addition to other rights provided by this Agreement or by the Act,
and except as limited by Section 8.5.C hereof, each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon written demand with a statement of
the purpose of such demand and at such Limited Partner's own expense (including
such copying and administrative charges as the General Partner may establish
from time to time):
(1) to obtain a copy of the most recent annual and quarterly reports
filed with the Securities and Exchange Commission by the General Partner
pursuant to the Securities Exchange Act of 1934;
30
<PAGE>
(2) to obtain a copy of the Partnership's federal, state and local
income tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and all
amendments thereto, together with executed copies of all powers of attorney
pursuant to which this Agreement, the Certificate and all amendments thereto
have been executed; and
(5) to obtain true and full information regarding the amount of cash
and a description and statement of any other property or services contributed by
each Partner and which each Partner has agreed to contribute in the future, and
the date on which each became a Partner.
B. The Partnership shall notify each Limited Partner, upon request, of
the then current Conversion Factor and any change therein.
C. Notwithstanding any other provision of this Section 8.5, the General
Partner may keep confidential from the Limited Partners, for such period of time
as the General Partner determines in its sole and absolute discretion to be
reasonable, any information that (i) the General Partner reasonably believes to
be in the nature of trade secrets or other information the disclosure of which
the General Partner in good faith believes is not in the best interests of the
Partnership or could damage the Partnership or its business or (ii) the
Partnership is required by law or by agreements with an unaffiliated third party
to keep confidential.
Section 8.6 Redemption Right
----------------
A. Subject to Section 8.6.B, each Limited Partner shall have the right
(the "Redemption Right"), on or after the first anniversary of the date on which
such Limited Partner acquires its Partnership Units (or such later or earlier
date as shall be determined in the sole and absolute discretion of the General
Partner at the time of issuance of the Partnership Units), to require the
Partnership to redeem on a Specified Redemption Date all or a portion of the
Partnership Units held by such Limited Partner at a redemption price equal to
and in the form of the Cash Amount to be paid by the Partnership. The
Redemption Right shall be exercised pursuant to a Notice of Redemption delivered
to the Partnership (with a copy to the General Partner) by the Limited Partner
who is exercising the redemption right (the "Redeeming Partner"). A Limited
Partner may not exercise the Redemption Right for less than one thousand (1,000)
Partnership Units, or, if such Limited Partner holds less than one thousand
(1,000) Partnership Units, all of the Partnership Units held by such Partner.
The Assignee of any Limited Partner may exercise the rights of such Limited
Partner pursuant to this Section 8.6, and such Limited Partner shall be deemed
to have assigned such rights to such Assignee and shall be bound by the exercise
of such rights by such Limited Partner's Assignee. In connection with any
31
<PAGE>
exercise of such rights by such Assignee on behalf of such Limited Partner, the
Cash Amount shall be paid by the Partnership directly to such Assignee and not
to such Limited Partner. Neither the Redeeming Partner nor any Assignee of any
Limited Partner shall have any right, with respect to any Partnership Units so
redeemed, to receive any distributions paid after the Specified Redemption Date.
B. Notwithstanding the provisions of Section 8.6.A, in the event a
Limited Partner elects to exercise the Redemption Right, the General Partner
may, in its sole and absolute discretion, elect to assume directly and satisfy
all or a portion of a Redemption Right by electing to buy some or all of the
Partnership Units from the Redeeming Partner for either the Cash Amount, the CHC
Shares Amount, or a combination thereof, relating to the Partnership Units
being purchased by the General Partner (in its sole and absolute discretion) on
the Specified Redemption Date, whereupon the General Partner shall acquire such
Partnership Units offered for redemption by the Redeeming Partner and shall be
treated for all purposes of this Agreement as the owner of such Partnership
Units. Unless the General Partner (in its sole and absolute discretion) shall
exercise its right to assume directly and satisfy all or a portion of a
Redemption Right, the General Partner itself shall have no obligation to the
Redeeming Partner or to the Partnership with respect to the Redeeming Partner's
exercise of the Redemption Right. In the event the General Partner shall
exercise its right to satisfy all or a portion of a Redemption Right in the
manner described in the first sentence of this Section 8.6.B, the Partnership
shall have no obligation to pay any amount to the Redeeming Partner with respect
to such Redeeming Partner's exercise of the Redemption Right to which the
General Partner's election relates, and each of the Redeeming Partner, the
Partnership, and the General Partner shall treat the transaction between the
General Partner and the Redeeming Partner for federal income tax purposes as a
sale of such Redeeming Partner's Partnership Units to the General Partner. Each
Redeeming Partner agrees to execute such documents as the General Partner may
reasonably require in connection with the issuance of CHC Shares upon exercise
of the Redemption Right. If the Redemption Right is satisfied by the delivery of
CHC Shares, the Redeeming Partner shall be deemed to become a holder of CHC
Shares as of the close of business on the Specified Redemption Date.
C. Each Limited Partner covenants and agrees with General Partner that
all Partnership Units delivered for redemption shall be delivered to the
Partnership or the General Partner, as the case may be, free and clear of all
liens and, notwithstanding anything herein contained to the contrary, neither
the General Partner nor the Partnership shall be under any obligation to acquire
Partnership Units which are or may be subject to any liens. Each Limited
Partner further agrees that, in the event any state or local property transfer
tax is payable as a result of the transfer of its Partnership Units to the
Partnership or the General Partner, such Limited Partner shall assume and pay
such transfer tax.
D. Notwithstanding anything herein to the contrary in this Agreement,
with respect to any Redemption Right or exchange for CHC Shares pursuant to this
Section 8.6:
32
<PAGE>
(1) All Partnership Units acquired by the General Partner pursuant
thereto shall automatically, and without further action required, be converted
into and deemed to be Limited Partner Interests comprised of the same number and
class of Partnership Units.
(2) Without the consent of the General Partner, each Limited Partner
may not effect a Redemption Right during the period after the Partnership Record
Date with respect to a distribution and before the record date established by
the General Partner for a distribution to its stockholders of some or all of its
portion of such distribution.
(3) The consummation of any Redemption Right or exchange for CHC
Shares shall be subject to the expiration or termination of the applicable
waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
(4) Each Redeeming Partner shall continue to own all Partnership Units
subject to any Redemption Right or exchange for CHC Shares, and be treated as a
Limited Partner with respect to such Partnership Units for all purposes of this
Agreement, until such Partnership Units are transferred to the General Partner
and paid for or exchanged on the Specified Redemption Date. Until a Specified
Redemption Date, the Redeeming Partner shall have no rights as a stockholder of
the General Partner with respect to such Redeeming Partner's Partnership Units.
E. In the event that the Partnership issues additional Partnership
Interests to any Additional Limited Partner pursuant to Section 4.1 hereof, the
General Partner shall make such revisions to this Section 8.6 as it determines
are necessary to reflect the issuance of such additional Partnership Interests.
F. Any Cash Amount to be paid to a Redeeming Partner pursuant to this
Section 8.06 shall be paid within 60 days after the Specified Redemption Date
relating to the Partnership Units to be redeemed or purchased; provided,
--------
however, that such 60-day period may be extended for up to an additional 180-day
- -------
period to the extent required for the Company to cause additional CHC Shares to
be issued to provide financing to be used to make such payment of the Cash
Amount. Notwithstanding the foregoing, the Company and the General Partner
agree to use their best efforts to cause the closing of the acquisition of
redeemed Partnership Units hereunder to occur as quickly as reasonably possible.
SECTION 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1 Records and Accounting
----------------------
The General Partner shall keep or cause to be kept at the principal office
of the Partnership those records and documents required to be maintained by the
Act and other books and records deemed by the General Partner to be appropriate
with respect to the Partnership's
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business, including, without limitation, all books and records necessary to
provide to the Limited Partners any information, lists and copies of documents
required to be provided pursuant to Section 9.3 hereof. Any records maintained
by or on behalf of the Partnership in the regular course of its business may be
kept on, or be in the form of, punch cards, magnetic tape, photographs, micro
graphics or any other information storage device, provided that the records so
-------- ----
maintained are convertible into clearly legible written form within a reasonable
period of time. The books of the Partnership shall be maintained, for financial
and tax reporting purposes, on an accrual basis in accordance with generally
accepted accounting principles, or other such basis as the General Partner
determines to be necessary or appropriate.
Section 9.2 Fiscal Year
-----------
The fiscal year of the Partnership shall end on October 31 of each calendar
year.
Section 9.3 Reports
-------
A. As soon as practicable, but in no event later than one hundred five
(105) days after the close of each Partnership Year, the General Partner shall
cause to be mailed to each Limited Partner as of the close of the Partnership
Year, an annual report containing financial statements of the Partnership, or of
the General Partner if such statements are prepared solely on a consolidated
basis with the General Partner, for such Partnership Year, presented in
accordance with generally accepted accounting principles, such statements to be
audited by a nationally recognized firm of independent public accountants
selected by the General Partner.
B. As soon as practicable, but in no event later than one hundred five
(105) days after the close of each calendar quarter (except the last calendar
quarter of each year), the General Partner shall cause to be mailed to each
Limited Partner as of the last day of the calendar quarter, a report containing
unaudited financial statements of the Partnership, or of the General Partner, if
such statements are prepared solely on a consolidated basis with the General
Partner, and such other information as may be required by applicable law or
regulation, or as the General Partner determines to be appropriate.
ARTICLE 10
TAX MATTERS
Section 10.1 Preparation of Tax Returns
--------------------------
The General Partner shall arrange for the preparation and timely filing of
all returns of Partnership income, gains, deductions, losses and other items
required of the Partnership for federal and state income tax purposes and shall
use all reasonable efforts to furnish, within the time period for filing such
returns (without extensions), the tax information reasonably required by Limited
Partners for federal and state income tax reporting purposes.
34
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Section 10.2 Tax Elections
-------------
Except as otherwise provided herein, the General Partner shall, in its sole
and absolute discretion, determine whether to make any available election
pursuant to the Code; provided, however, that the General Partner shall make the
--------
election under Section 754 of the Code in accordance with the applicable
regulations thereunder effective for the first calendar year following the
Effective Date. The General Partner shall have the right to seek to revoke any
such election (including, without limitation, the election under Section 754 of
the Code) upon the General Partner's determination in its sole and absolute
discretion that such revocation is in the best interests of the Partners.
Section 10.3 Tax Matters Partner
-------------------
A. The General Partner shall be the "tax matters partner" of the
Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the
Code, upon receipt of notice from the IRS of the beginning of an administrative
proceeding with respect to the Partnership, the tax matters partner shall
furnish the IRS with the name, address, taxpayer identification number, and
profit interest of each of the Limited Partners and the Assignees; provided,
--------
however, that such information is provided to the Partnership by the Limited
- -------
Partners and the Assignees.
B. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with respect to any
administrative or judicial proceedings for the adjustment of the Partnership
items required to be taken into account by a Partner for income tax purposes
(such administrative proceedings being referred to as a "tax audit" and such
judicial proceedings being referred to as "judicial review"), and in the
settlement agreement the tax matters partner may expressly state that such
agreement shall bind all Partners, except that such settlement agreement shall
not bind any Partner (i) who (within the time prescribed pursuant to the Code
and Regulations) files a statement with the IRS providing that the tax matters
partner shall not have the authority to enter into a settlement agreement on
behalf of such Partner or (ii) who is a "notice partner" (as defined in Section
6231(a)(8) of the Code) or a member of a "notice group" (as defined in Section
6223(b)(2) of the Code);
(2) in the event that a notice of a final administrative adjustment at
the Partnership level of any item required to be taken into account by a Partner
for tax purposes (a "final adjustment") is mailed to the tax matters partner, to
seek judicial review of such final adjustment, including the filing of a
petition for readjustment with the Tax Court or the filing of a complaint for
refund with the United States Claims Court or the District Court of the United
States for the district in which the Partnership's principal place of business
is located;
(3) to intervene in any action brought by any other Partner for
judicial review of a final adjustment;
35
<PAGE>
(4) to file a request for an administrative adjustment with the IRS
and, if any part of such request is not allowed by the IRS, to file an
appropriate pleading (petition or complaint) for judicial review with respect to
such request;
(5) to enter into an agreement with the IRS to extend the period for
assessing any tax which is attributable to any item required to be taken into
account by a Partner for tax purposes, or an item affected by such item; and
(6) to take any other action on behalf of the Partners of the
Partnership in connection with any tax audit or judicial review proceeding to
the extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the tax
matters partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole and absolute discretion of the tax
matters partner and the provisions relating to indemnification of the General
Partner set forth in Section 7.7 of this Agreement shall be fully applicable to
the tax matters partner in its capacity as such.
C. The tax matters partner shall receive no compensation for its
services. All third party costs and expenses incurred by the tax matters
partner in performing its duties as such (including legal and accounting fees
and expenses) shall be borne by the Partnership. Nothing herein shall be
construed to restrict the Partnership from engaging an accounting or legal firm
to assist the tax matters partner in discharging its duties hereunder, so long
as the compensation paid by the Partnership for such services is reasonable.
Section 10.4 Organizational Expenses
-----------------------
The Partnership shall elect to deduct expenses, if any, incurred by it in
organizing the Partnership ratably over a sixty (60) month period as provided in
Section 709 of the Code.
Section 10.5 Withholding
-----------
Each Limited Partner hereby authorizes the Partnership to withhold from or
pay on behalf of or with respect to such Limited Partner any amount of federal,
state, local, or foreign taxes that the General Partner determines that the
Partnership is required to withhold or pay with respect to any amount
distributable or allocable to such Limited Partner pursuant to this Agreement,
including, without limitation, any taxes required to be withheld or paid by the
Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any
amount paid on behalf of or with respect to a Limited Partner shall constitute a
loan by the Partnership to such Limited Partner, which loan shall be repaid by
such Limited Partner within fifteen (15) days after notice from the General
Partner that such payment must be made unless (i) the Partnership withholds such
payment from a distribution which would otherwise be made to the Limited Partner
or (ii) the General Partner determines, in its sole and absolute discretion,
that such payment may be satisfied out of the available funds of the Partnership
which would, but for such payment, be
36
<PAGE>
distributed to the Limited Partner. Any amounts withheld pursuant to the
foregoing clauses (i) or (ii) shall be treated as having been distributed to
such Limited Partner. Each Limited Partner hereby unconditionally and
irrevocably grants to the Partnership a security interest in such Limited
Partner's Partnership Interest to secure such Limited Partner's obligation to
pay to the Partnership any amounts required to be paid pursuant to this Section
10.5. In the event that a Limited Partner fails to pay any amounts owed to the
Partnership pursuant to this Section 10.5 when due, the General Partner may, in
its sole and absolute discretion, elect to make the payment to the Partnership
on behalf of such defaulting Limited Partner, and in such event shall be deemed
to have loaned such amount to such defaulting Limited Partner and shall succeed
to all rights and remedies of the Partnership as against such defaulting Limited
Partner. Without limitation, in such event the General Partner shall have the
right to receive distributions that would otherwise be distributable to such
defaulting Limited Partner until such time as such loan, together with all
interest thereon, has been paid in full, and any such distributions so received
by the General Partner shall be treated as having been distributed to the
defaulting Limited Partner and immediately paid by the defaulting Limited
Partner to the General Partner in repayment of such loan. Any amounts payable
by a Limited Partner hereunder shall bear interest at the lesser of (A) the base
rate on corporate loans at large United States money center commercial banks, as
published from time to time in the Wall Street Journal, plus four (4) percentage
-------------------
points, or (B) the maximum lawful rate of interest on such obligation, such
interest to accrue from the date such amount is due (i.e., fifteen (15) days
after demand) until such amount is paid in full. Each Limited Partner shall
take such actions as the Partnership or the General Partner shall request in
order to perfect or enforce the security interest created hereunder.
ARTICLE 11
TRANSFERS AND WITHDRAWALS
Section 11.1 Transfer
--------
A. The term "transfer," when used in this Article 11 with respect to a
Partnership Interest or Partnership Unit, shall be deemed to refer to a
transaction by which the General Partner purports to assign all or any part of
its General Partner Interest to another Person or by which a Limited Partner
purports to assign all or any part of its Limited Partner Interest to another
Person, and includes a sale, assignment, gift, pledge, encumbrance,
hypothecation, mortgage, exchange or any other disposition by law or otherwise.
The term "transfer" when used in this Article 11 does not include any redemption
of Partnership Units by a Limited Partner or acquisition of Partnership Units
from a Limited Partner by the General Partner pursuant to Section 8.6.
B. No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article 11.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article 11 shall be null and void.
37
<PAGE>
Section 11.2 Transfer of General Partner's Partnership Interest
--------------------------------------------------
A. The General Partner may not transfer any of its General Partner
Interest or withdraw as General Partner except in connection with a transaction
described in Section 11.2.B or 11.2.C.
B. Except as otherwise provided in Section 11.2.C, the General Partner
shall not engage in any merger, consolidation or other combination with or into
another Person or sale of all or substantially all of its assets, or any
reclassification, or recapitalization or change of outstanding CHC Shares (other
than a change in par value, or from par value to no par value, or as a result of
a subdivision or combination as described in the definition of "Conversion
Factor") ("Transaction"), unless the Transaction also includes a merger of the
Partnership or sale of substantially all of the assets of the Partnership or
sale of substantially all of the assets of the Partnership which has been
approved by the requisite Consent of the Partners pursuant to Section 7.3 and as
a result of which all Limited Partners will receive for each Partnership Unit an
amount of cash, securities, or other property equal to the product of the
Conversion Factor and the greatest amount of cash, securities or other property
paid to a holder of one CHC Share in consideration of one CHC Share at any time
during the period from and after the date on which the Transaction is
consummated.
C. Notwithstanding Section 11.2.B, the General Partner may merge with
another entity if immediately after such merger substantially all of the assets
of the surviving entity, other than Partnership Units held by the General
Partner (whether such Partnership Units constitute the General Partnership
Interest or a Limited Partnership Interest), are contributed to the Partnership
as a Capital Contribution in exchange for Partnership Units with a fair market
value, as reasonably determined by the General Partner, equal to the 704(c)
Value of the assets so contributed.
Section 11.3 Limited Partners' Rights to Transfer
------------------------------------
A. Subject to the provisions of Section 11.3.F, no Limited Partner shall
have the right to transfer all or any portion of his Partnership Interest, or
any of such Limited Partner's rights as a Limited Partner, without the prior
written consent of the General Partner, which consent may be given or withheld
by the General Partner in its sole and absolute discretion. Any purported
transfer of a Partnership Interest by a Limited Partner in violation of this
Section 11.3.A shall be void ab initio and shall not be given effect for any
-- ------
purpose by the Partnership.
B. If a Limited Partner is subject to Incapacity, the executor,
administrator, trustee, committee, guardian, conservator or receiver of such
Limited Partner's estate shall have all the rights of a Limited Partner, but not
more rights than those enjoyed by other Limited Partners, for the purpose of
settling or managing the estate and such power as the Incapacitated Limited
Partner possessed to transfer all or any part of his or its interest in the
Partnership. The Incapacity of a Limited Partner, in and of itself, shall not
dissolve or terminate the Partnership.
38
<PAGE>
C. The General Partner may prohibit any transfer by a Limited Partner of
his Partnership Units if, in the opinion of legal counsel to the Partnership,
such transfer would require filing of a registration statement under the
Securities Act of 1933 or would otherwise violate any federal, state or foreign
securities laws or regulations applicable to the Partnership or the Partnership
Unit.
D. No transfer by a Limited Partner of his Partnership Units may be made
to any Person if (i) in the opinion of legal counsel for the Partnership, it
would result in the Partnership being treated as an association taxable as a
corporation for federal income tax purposes, or would result in a termination of
the partnership for federal income tax purposes or (ii) such transfer is
effectuated through an "established securities market" or a "secondary market
(or the substantial equivalent thereof)" within the meaning of Section 7704 of
the Code.
E. No transfer of any Partnership Units may be made to a lender to the
Partnership or any person who is related (within the meaning of Section 1.752-
4(b) of the Regulations) to any lender to the Partnership whose loan constitutes
a Nonrecourse Liability, without the consent of the General Partner, which
consent may be given or withheld by the General Partner in its sole and absolute
discretion, provided that as a condition to such consent being granted the
-------- ----
lender will be required to enter into an arrangement with the Partnership and
the General Partner to exchange or redeem for the CHC Shares Amount any
Partnership Units in which a security interest is held simultaneously with the
time at which such lender would be deemed to be a partner in the Partnership for
purposes of allocating liabilities to such lender under Section 752 of the Code.
F. Prior to the first anniversary of the Effective Date, no Limited
Partner shall transfer all or any portion of its Partnership Interest to any
transferee without the consent of the General Partner, which consent may be
withheld in its sole and absolute discretion; provided, however, that any
-------- -------
Limited Partner may, at any time (whether prior to or after such first
anniversary), without the consent of the General Partner, (i) transfer all or
any portion of its Partnership Interest to the General Partner, (ii) transfer
all or an portion of its Partnership Interest to an Affiliate, another Original
Limited Partner or to an Immediate Family member, subject to the provisions of
Section 11.6, or in the case of an Original Limited Partner, to such Original
Limited Partner's shareholders, members, partners or beneficiaries, as the case
may be, (iii) transfer all or any portion of its Partnership Interest to a trust
for the benefit of a charitable beneficiary or to a charitable foundation,
subject to the provisions of Section 11.6 and (iv) subject to the provisions of
Section 11.6, pledge (a "Pledge") all or any portion of its Partnership Interest
to a lending institution, which is not an Affiliate or such Limited Partner, as
collateral or security for a bona fide loan or other extension of credit, and
transfer such pledged Partnership Interest to such lending institution in
connection with the exercise of remedies under such loan or extension or credit.
39
<PAGE>
Section 11.4 Substituted Limited Partners
----------------------------
A. No Limited Partner shall have the right to substitute a transferee as
a Limited Partner in his place. The General Partner shall, however, have the
right to consent to the admission of a transferee of the interest of a Limited
Partner pursuant to this Section 11.4 as a Substituted Limited partner, which
consent may be given or withheld by the General Partner in its sole and absolute
discretion. The General Partner's failure or refusal to permit a transferee of
any such interests to become a Substituted Limited Partner shall not give rise
to any cause of action against the Partnership or any Partner.
B. A transferee who has been admitted as a Substituted Limited Partner in
accordance with this Article 11 shall have all the rights and powers and be
subject to all the restrictions and liabilities of a Limited Partner under this
Agreement. The admission of any transferee as a substituted Limited Partner
shall be subject to the transferee executing and delivering to the Partnership
an acceptance of all of the terms and conditions of this Agreement (including,
without limitation, the provisions of Section 2.4) and such other documents or
instruments as may be required to effect the admission.
Section 11.5 Assignees
---------
If the General Partner, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 as a
Substituted Limited Partner, as described in Section 11.4, such transferee shall
be considered an Assignee for purposes of this Agreement. An Assignee shall be
deemed to have had assigned to it, and shall be entitled to receive
distributions from the Partnership and the share of Net Income, Net Losses,
Recapture Income, and any other items of gain, loss, deduction and credit of the
Partnership attributable to the Partnership Units assigned to such transferee,
and shall be entitled to exercise Redemption Rights to the extent granted in
Section 8.6, but shall not be deemed to be a holder of Partnership Units for any
other purpose under this Agreement, and shall not be entitled to vote such
Partnership Units in any matter presented to the Limited Partners for a vote
(such Partnership Units being deemed to have been voted on such matter in the
same proportion as all other Partnership Units held by Limited Partners are
voted). In the event any such transferee desires to make a further assignment
of any such Partnership Units, such transferee shall be subject to all the
provisions of this Article 11 to the same extent and in the same manner as any
Limited Partner desiring to make an assignment of Partnership Units.
Section 11.6 General Provisions
------------------
A. No Limited Partner may withdraw from the Partnership other than as a
result of a permitted transfer of all of such Limited Partner's Partnership
Units in accordance with this Article 11 or pursuant to redemption of all of its
Partnership Units under Section 8.6.
B. Any Limited Partner who shall transfer all of his Partnership Units in
a transfer permitted pursuant to this Article 11 shall cease to be a Limited
Partner upon the admission of all
40
<PAGE>
Assignees of such Partnership Units as Substitute Limited Partners. Similarly,
any Limited Partner who shall transfer all of his Partnership Units pursuant to
a redemption of all of his Partnership Units under Section 8.6 shall cease to be
a Limited Partner.
C. Transfers pursuant to this Article 11 may only be made on the first
day of a fiscal quarter of the Partnership, unless the General Partner otherwise
agrees.
D. If any Partnership Interest is transferred or assigned in compliance
with the provisions of this Article 11 or redeemed or transferred pursuant to
Section 8.6, on any day other than the first day of a Partnership Year, then Net
Income, Net Losses, each item thereof and all other items attributable to such
interest for such Partnership Year shall be divided and allocated between the
transferor Partner and the transferee Partner by taking into account their
varying interests during the fiscal year in accordance with Section 706(d) of
the Code, using the interim closing of the books method (unless the General
Partner, in its sole and absolute discretion, elects to adopt a daily, weekly or
monthly proration method, in which event Net Income, Net Losses and each item
thereof for such Partnership Year shall be prorated based upon the applicable
period selected by the General Partner). Solely for purposes of making such
allocations, each of such items for the calendar month in which the transfer or
assignment occurs shall be allocated to the transferee Partner, and none of such
items for the calendar month in which a redemption occurs shall be allocated to
the Redeeming Partner. All distributions of the Partner Distribution Amount
attributable to such Partnership Unit with respect to which the Partnership
Record Date is before the date of such transfer, assignment or redemption shall
be made to the transferor Partner or the Redeeming Partner, as the case may be,
and, in the case of a transfer or assignment other than a redemption, all
distributions of the Partner Distribution Amount thereafter attributable to such
Partnership Unit shall be made to the transferee Partner.
ARTICLE 12
ADMISSION OF PARTNERS
Section 12.1 Admission of Successor General Partner
--------------------------------------
A successor to all of the General Partner Interest pursuant to Section
11.2.C hereof who is proposed to be admitted as a successor General Partner
shall be admitted to the Partnership as the General Partner, effective upon such
transfer. Any such transferee shall carry on the business of the Partnership
without dissolution. In each case, the admission shall be subject to the
successor General Partner executing and delivering to the Partnership an
acceptance of all of the terms and conditions of this Agreement and such other
documents or instruments as may be required to effect the admission. In the
case of such admission on any day other than the first day of a Partnership
Year, all items attributable to the General Partner Interest for such
Partnership Year shall be allocated between the transferring General Partner and
such successor as provided in Section 11.6.D hereof.
41
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Section 12.2 Admission of Additional Limited Partners
----------------------------------------
A. A Person who makes a Capital Contribution to the Partnership in
accordance with this Agreement (or who exercises an option to receive
Partnership Units) shall be admitted to the Partnership as an Additional Limited
Partner only upon furnishing to the General Partner (i) evidence of acceptance
in form satisfactory to the General Partner of all of the terms and conditions
of this Agreement, including, without limitation, the power of attorney granted
in Section 2.4 hereof and (ii) such other documents or instruments as may be
required in the discretion of the General Partner in order to effect such
Person's admission as an Additional Limited Partner.
B. Notwithstanding anything to the contrary in this Section 12.2, no
Person shall be admitted as an Additional Limited Partner without the consent of
the General Partner, which consent may be given or withheld in the General
Partner's sole and absolute discretion. The admission of any Person as an
Additional Limited Partner shall become effective on the date upon which the
name of such Person is recorded on the books and records of the Partnership,
following the consent of the General Partner to such admission.
C. If any Additional Limited partner is admitted to the Partnership on
any day other than the first day of a Partnership Year, then Net Income, Net
Losses, each item thereof and all other items allocable among Partners and
Assignees for such Partnership Year shall be allocated among such Additional
Limited Partner and all other Partners and Assignees by taking into account
their varying interests during the Partnership Year in accordance with Section
706(d) of the Code, using the interim closing of the books method. Solely for
purposes of making such allocations, each of such items for the calendar month
in which an admission of any Additional Limited Partner occurs shall be
allocated among all the Partners and Assignees including such Additional Limited
Partner. All distributions of the Partner Distribution Amount with respect to
which the Partnership Record Date is before the date of such admission shall be
made solely to Partners and Assignees other than the Additional Limited Partner,
and all distributions of the Partner Distribution Amount thereafter shall be
made to all the Partners and Assignees including such Additional Limited
Partner.
Section 12.3 Amendment of Agreement and Certificate of Limited Partnership
-------------------------------------------------------------
For the admission to the Partnership of any Partner, the General Partner
shall take all steps necessary and appropriate under the Act to amend the
records of the Partnership and, if necessary, to prepare as soon as practical an
amendment of this Agreement and, if required by law, shall prepare and file an
amendment to the Certificate and may for this purpose exercise the power of
attorney granted pursuant to Section 2.4 hereof.
42
<PAGE>
ARTICLE 13
DISSOLUTION, LIQUIDATION AND TERMINATION
Section 13.1 Dissolution
-----------
Except as set forth in this Article 13, no Partner shall have the right to
dissolve the Partnership. The Partnership shall not be dissolved by the
admission of Substituted Limited Partners or Additional Limited Partners or by
the admission of a successor General Partner in accordance with the terms of
this Agreement. Upon the withdrawal of the General Partner, any successor
General Partner shall continue the business of the Partnership. The Partnership
shall dissolve, and its affairs shall be wound up, upon the first to occur of
any of the following ("Liquidating Events"):
A. the expiration of its term as provided in Section 2.5 hereof;
B. (i) a final and non-appealable judgment is entered by a court of
competent jurisdiction ruling that the General Partner is bankrupt or insolvent,
or a final and non-appealable order for relief is entered by a court with
appropriate jurisdiction against the General Partner, in each case under any
federal or state bankruptcy or insolvency laws as now or hereafter in effect,
unless prior to the entry of such order or judgment all of the remaining
Partners agree in writing to continue the business of the Partnership and to the
appointment, effective as of a date prior to the date of such order or judgment,
of a substitute General partner, or (ii) any other event of withdrawal of the
General Partner, as defined in the Act (other than an event of bankruptcy),
unless, within ninety (90) days after such event of withdrawal a majority of the
Partnership Units held by the remaining Partners agree in writing to continue
the business of the Partnership and to the appointment, effective as of the date
of withdrawal, of a successor General Partner;
C. an election to dissolve the Partnership made by the General Partner,
in its sole and absolute discretion;
D. entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Act; or
E. the sale of all or substantially all of the assets and properties of
the Partnership.
Section 13.2 Winding Up
----------
A. Upon the occurrence of a Liquidating Event, the Partnership shall
continue solely for the purposes of winding up its affairs in an orderly manner,
liquidating its assets, and satisfying the claims of its creditors and Partners.
No Partner shall take any action that is inconsistent with, or not necessary to
or appropriate for, the winding up of the Partnership's business and affairs.
The General Partner, or, in the event there is no remaining General Partner, any
Person elected by a majority in interest of the Limited Partners (the General
Partner or such other Person being referred to herein as the "Liquidator") shall
be responsible for overseeing the
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<PAGE>
winding up and dissolution of the Partnership and shall take full account of the
Partnership's liabilities and property and the Partnership property shall be
liquidated as promptly as is consistent with obtaining the fair value thereof,
and the proceeds therefrom (which may, to the extent determined by the General
Partner, include shares of stock in the General Partner) shall be applied and
distributed in the following order:
(1) First, to the payment and discharge of all of the Partnership's debts
and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of all of the Partnership's debts
and liabilities to the General Partner;
(3) Third, to the payment and discharge of all of the Partnership's debts
and liabilities to the other Partners; and
(4) The balance, if any, to the General Partner and Limited Partners in
accordance with their Capital Accounts, after giving effect to all
contributions, distributions, and allocations for all periods.
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article 13.
B. Notwithstanding the provisions of Section 13.2.A hereof which require
liquidation of the assets of the Partnership, but subject to the order of
priorities set forth therein, if prior to or upon dissolution of the Partnership
the Liquidator determines that an immediate sale of part or all of the
Partnership's assets would be impractical or would cause undue loss to the
Partners, the Liquidator may, in its sole and absolute discretion, defer for a
reasonable time the liquidation of any assets except those necessary to satisfy
liabilities of the Partnership (including to those Partners as creditors) and/or
distribute to the Partners, in lieu of cash, as tenants in common and in
accordance with the provisions of Section 13.2.A hereof, undivided interests in
such Partnership assets as the Liquidator deems not suitable for liquidation.
Any such distributions in kind shall be made only if, in the good faith judgment
of the Liquidator, such distributions in kind are in the best interest of the
Partners, and shall be subject to such conditions relating to the disposition
and management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties at
such time. The Liquidator shall determine the fair market value of any property
distributed in kind using such reasonable method of valuation as it may adopt.
C. In the discretion of the Liquidator, a pro rata portion of the
distributions that would otherwise be made to the General Partner and Limited
Partners pursuant to this Article 13 may be:
(1) distributed to a trust established for the benefit of the General
Partner and Limited Partners for the purposes of liquidating Partnership assets,
collecting amounts owed to
44
<PAGE>
the Partnership, and paying any contingent or unforeseen liabilities or
obligations of the Partnership or of the General Partner arising out of or in
connection with the Partnership. The assets of any such trust shall be
distributed to the General Partner and Limited Partners from time to time, in
the reasonable discretion of Liquidator, in the same proportions as the amount
distributed to such trust by the Partnership would otherwise have been
distributed to the General Partner and Limited Partners pursuant to this
Agreement; or
(2) withheld or escrowed to provide a reasonable reserve for
Partnership liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the partnership, provided that
such withheld or escrowed amounts shall be distributed to the General Partner
and Limited Partners in the manner and order of priority set forth in Section
13.2.A as soon as practicable.
Section 13.3 Compliance with Timing Requirements of Regulations
--------------------------------------------------
In the event the Partnership is "liquidated" within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant
to this Article 13 to the General Partner and Limited Partners who have positive
Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2).
If any Partner has a deficit balance in his Capital Account (after giving effect
to all contributions, distributions and allocations for all taxable years,
including the year during which such liquidation occurs), such Partner shall
have no obligation to make any contribution to the capital of the Partnership
with respect to such deficit, and such deficit shall not be considered a debt
owed to the Partnership or to any other Person for any purpose whatsoever.
Section 13.4 Deemed Distribution and Recontribution
--------------------------------------
Notwithstanding any other provision of this Article 13, in the event the
Partnership is considered liquidated within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership's
property shall not be liquidated, the Partnership's liabilities shall not be
paid or discharged, and the Partnership's affairs shall not be wound up.
Instead, for federal income tax purposes and purposes of maintaining Capital
Accounts pursuant to Exhibit A hereto, the Partnership shall be deemed to have
---------
distributed the property in kind to the General Partner and Limited Partners,
who shall be deemed to have assumed and taken such property subject to all
Partnership liabilities, all in accordance with their respective Capital
Accounts. Immediately thereafter, the General Partner and Limited Partners
shall be deemed to have recontributed the Partnership property in kind to the
Partnership, which shall be deemed to have assumed and taken such property
subject to all such liabilities.
Section 13.5 Rights of Limited Partners
--------------------------
Except as otherwise provided in this Agreement, each Limited Partner shall
look solely to the assets of the Partnership for the return of its Capital
Contributions and shall have no right or power to demand or receive property
other than cash from the Partnership. Except as otherwise
45
<PAGE>
provided in this Agreement, no Limited Partner shall have priority over any
other Partner as to the return of its Capital Contributions, distributions, or
allocations.
Section 13.6 Notice of Dissolution
---------------------
In the event a Liquidating Event occurs or an event occurs that would, but
provisions of an election or objection by one or more Partners pursuant to
Section 13.1, result in a dissolution of the Partnership, the General Partner
shall, within thirty (30) days thereafter, provide written notice thereof to
each of the Partners.
Section 13.7 Termination of Partnership and Cancellation of Certificate of
-------------------------------------------------------------
Limited Partnership
-------------------
Upon the completion of the liquidation of the Partnership cash and property
as provided in Section 13.2 hereof, the Partnership shall be terminated, a
certificate of cancellation shall be filed, and all qualifications of the
Partnership as a foreign limited partnership in jurisdictions other than the
State of Delaware shall be cancelled and such other actions as may be necessary
to terminate the Partnership shall be taken.
Section 13.8 Reasonable Time for Winding-Up
------------------------------
A reasonable time shall be allowed for the orderly winding-up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 13.2 hereof, in order to minimize any losses otherwise
attendant upon such winding-up, and the provisions of this Agreement shall
remain in effect between the Partners during the period of liquidation.
Section 13.9 Waiver of Partition
-------------------
Each Partner hereby waives any right to partition of the Partnership
property.
Section 13.10 Liability of the Liquidator
---------------------------
The Liquidator shall be indemnified and held harmless by the Partnership
from and against any and all claims, demands, liabilities, costs, damages and
cause of action of any nature whatsoever arising out of or incidental to the
Liquidator's taking of an action authorized under or within the scope of this
Agreement; provided, however, that the Liquidator shall not be entitled to
-------- -------
indemnification, and shall not be held harmless, where the claim, demand,
liability, cost, damage or cause of action at issue arises out of:
(i) a matter entirely unrelated to the Liquidator's action or
conduct pursuant to the provisions of this Agreement; or
(ii) the proven willful misconduct or gross negligence of the
Liquidator.
46
<PAGE>
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
Section 14.1 Amendments
----------
A. Amendments to this Agreement may be proposed by the General Partner or
by any Limited Partners holding twenty-five percent (25%) or more of the
Partnership Interests. Following such proposal, the General Partner shall submit
any proposed amendment to the Limited Partners. Subject to Section 14.2.B, the
General Partner shall seek the written vote of the Partners on the proposed
amendment or shall call a meeting to vote thereon and to transact any other
business that it may deem appropriate. For purposes of obtaining a written
vote, the General Partner may require a response within a reasonable specified
time, but not less than fifteen (15) days, and failure to respond in such time
period shall constitute a vote which is consistent with the General Partner's
recommendation with respect to the proposal. Except as provided in Section
14.1.B, 14.1.C or 14.1.D, a proposed amendment shall be adopted and be effective
as an amendment hereto if it is approved by the General Partner and it receives
the Consent of Partners holding a majority of the Percentage Interests of the
Limited Partners (including Limited Partner Interests held by the General
Partner).
B. Notwithstanding Section 14.1.A, the General Partner shall have the
power, without the consent of the Limited Partners, to amend this Agreement as
may be required to facilitate or implement any of the following purposes:
(1) to add to the obligations of the General Partner or surrender any
right or power granted to the General Partner or any Affiliate of the General
Partner for the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination, or withdrawal
of Partners in accordance with this Agreement;
(3) to set forth the designations, rights, powers, duties, and
preferences of the holders of any additional Partnership Interests issued
pursuant to Section 4.1 hereof;
(4) to reflect a change that does not adversely affect any of the
Limited Partners in any material respect, or to cure any ambiguity, correct or
supplement any provision in this Agreement not inconsistent with law or with
other provisions, or make other changes with respect to matters arising under
this Agreement that will not be inconsistent with law or with the provisions of
this Agreement; and
(5) to satisfy any requirements, conditions, or guidelines contained
in any order, directive, opinion, ruling or regulation of a federal or state
agency or contained in federal or state law.
47
<PAGE>
The General Partner shall provide notice to the Limited Partners when any action
under this Section 14.1.B is taken.
C. Notwithstanding Section 14.1.A and 14.1.B hereof, this Agreement shall
not be amended without the Consent of each Partner adversely affected if such
amendment would (i) convert a Limited Partner's interest in the Partnership into
a general partner interest, (ii) modify the limited liability of a Limited
Partner in a manner adverse to such Limited Partner, (iii) alter the rights of
the Partner to receive distributions pursuant to Article 5, or the allocations
specified in Article 6 (except as permitted pursuant to Section 4.1 and Section
14.1.B(3) hereof) in a manner adverse to such Partner, (iv) alter or modify the
Redemption Right and CHC Shares Amount as set forth in Sections 8.6, and related
definitions hereof, (v) cause the termination of the Partnership prior to the
time set forth in Sections 2.5 or 13.1, or (vi) amend this Section 14.1.C.
Further, no amendment may alter the restrictions on the General Partner's
authority set forth in Section 7.3 without the Consent specified in that
section.
D. Notwithstanding Section 14.1.A or Section 14.1.B hereof, the General
Partner shall not amend Sections 4.1.A, 7.5, 7.6, 11.2 or 14.2 without the
Consent of a majority of the Percentage Interests of the Limited Partners
including Limited Partnership Interests held directly or indirectly by the
General Partner.
Section 14.2 Meetings of the Partners
------------------------
A. Meetings of the Partners may be called by the General Partner and
shall be called upon the receipt by the General Partner of a request by Limited
Partners holding twenty-five percent (25%) or more of the Partnership Interests.
The call shall state the nature of the business to be transacted. Notice of any
such meeting shall be given to all Partners not less than seven (7) days nor
more than thirty (30) days prior to the date of such meeting. Partners may vote
in person or by proxy at such meeting. Whenever the vote or Consent of the
Partners is permitted or required under this Agreement, such vote or Consent may
be given at a meeting of the Partners or may be given in accordance with the
procedure prescribed in Section 14.1.A hereof. Except as otherwise expressly
provided in this Agreement, the Consent of holders of a majority of the
Percentage Interests shall be that Consent required to obtain approval by the
Partnership on all Partnership votes.
B. Any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth the
action so taken is signed by a majority of the Percentage Interests of the
Partners (or such other percentage as is expressly required by this Agreement
such consent may be in one instrument or in several instruments, and shall have
the same force and effect as a vote of a majority of the Percentage Interests of
the Partners (or such other percentage as is expressly required by this
Agreement). Such consent shall be filed with the General Partner. An action so
taken shall be deemed to have been taken at a meeting held on the effective date
so certified.
48
<PAGE>
C. Each Limited Partner may authorize any Person or Persons to act for
him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or participating
at a meeting. Every proxy must be signed by the Limited Partner or his
attorney-in-fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the Limited Partner executing it,
such revocation to be effective upon the Partnership's receipt of written notice
of such revocation form the Limited Partner executing such proxy.
D. Each meeting of Partners shall be conducted by the General Partner or
such other Person as the General Partner may appoint pursuant to such rules for
the conduct of the meeting as the General Partner or such other Person deems
appropriate in its sole discretion. Without limitation, meetings of Partners
may be conducted in the same manner as meetings of the shareholders of the
General Partner and may be held at the same time as, and as part of, meetings of
the shareholders of the General Partner.
ARTICLE 15
GENERAL PROVISIONS
Section 15.1 Addresses and Notice
--------------------
Any notice, demand, request or report required or permitted to be given or
made to a Partner or Assignee under this Agreement shall be in writing and shall
be deemed given or made when delivered in person or when sent by first class
United States mail or by other means of written communication to the Partner or
Assignee. Such communications shall be deemed sufficiently given, served, sent
or received for all purposes at such time as delivered to the addressee (with
the return receipt or delivery receipt being deemed conclusive evidence of such
delivery) or at such time as delivery is refused by the addressee upon
presentation.
Section 15.2 Titles and Captions
-------------------
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 15.3 Pronouns and Plurals
--------------------
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
49
<PAGE>
Section 15.4 Further Action
--------------
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
Section 15.5 Binding Effect
--------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 15.6 Creditors
---------
Other than as expressly set forth herein with respect to the Indemnitees,
none of the provisions of this Agreement shall be for the benefit of, or shall
be enforceable by, any creditor of the Partnership.
Section 15.7 Waiver
------
No failure by any partner to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
Section 15.8 Counterparts
------------
This Agreement may be executed in counterparts, all of which together shall
constitute one agreement binding on an the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto.
Section 15.9 Applicable Law
--------------
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the principles
of conflicts of law.
Section 15.10 Invalidity of Provisions
------------------------
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
50
<PAGE>
Section 15.11 Entire Agreement
----------------
This Agreement contains the entire understanding and agreement among the
Partners with respect to the subject matter hereof and supersedes any other
prior written or oral understandings or agreements among them with respect
thereto.
Section 15.12 No Rights as Shareholders
-------------------------
Nothing contained in this Agreement shall be construed as conferring upon
the holders of the Partnership Units any rights whatsoever as shareholders of
the General Partner, including without limitation any right to receive dividends
or other distributions made to shareholders of the General Partner or to vote or
to consent or to receive notice as shareholders in respect of any meeting of
shareholders for the election of directors of the General Partner or any other
matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first written above.
AS GENERAL PARTNER:
CAVANAUGHS HOSPITALITY CORPORATION, a Washington
corporation
By _______________________________________
Donald K. Barbieri, President
LIMITED PARTNERS:
NORTH RIVER DRIVE COMPANY, a Washington
corporation
By _______________________________________
Richard L. Barbieri, Vice President
51
<PAGE>
EXHIBIT A
CAPITAL ACCOUNT MAINTENANCE
1. Capital Accounts of the Partners.
--------------------------------
A. The Partnership shall maintain for each Partner a separate Capital
Account in accordance with the rules of Regulations Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions and any other deemed contributions made by such Partner to the
Partnership pursuant to this Agreement and (ii) all items of Partnership income
and gain (including income and gain exempt from tax) computed in accordance with
Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.A of
the Agreement and Exhibit B hereof, and decreased by (x) the amount of cash or
---------
the Carrying Value of all actual and deemed distributions of cash or property
made to such partner pursuant to this Agreement (reduced by any indebtedness
either assumed by such Partner upon such distribution or to which such property
is subject at the time of distribution as determined under Section 752 of the
Code and the Regulations thereunder) and (y) all items of Partnership deduction
and loss computed in accordance with Section 1.B hereof and allocated to such
Partner pursuant to Section 6.1.B of the Agreement and Exhibit B hereof.
---------
B. For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, unless
otherwise specified in this Agreement, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes determined in
accordance with Section 703(a)(1) of the Code (for this purpose all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss), with
the following adjustments:
(1) Except as otherwise provided in Regulations Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership, provided that
the amounts of any adjustments to the adjusted bases of the assets of
the Partnership made pursuant to Section 734 of the Code as a result
of the distribution of property by the Partnership to a Partner (to
the extent that such adjustments have not previously been reflected in
the Partners' Capital Accounts) shall be reflected in the Capital
Accounts of the Partners in the manner and subject to the limitations
prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4).
(2) The computation of all items of income, gain, and deduction shall be
made without regard to the fact that items described in Sections
705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable gross
income or are neither currently deductible nor capitalized for federal
income tax purposes.
1
<PAGE>
(3) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis
of such property as of such date of disposition were equal in amount
to the Partnership's Carrying Value with respect to such property as
of such date.
(4) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such fiscal
year.
(5) In the event the Carrying Value of any Partnership Asset is adjusted
pursuant to Section 1.D hereof, the amount of any such adjustment
shall be taken into account as gain or loss from the disposition of
such asset.
(6) Any items specifically allocated under Section 2 of Exhibit B hereof
---------
shall not be taken into account.
C. Generally, a transferee (including an Assignee) of a Partnership Unit
shall succeed to a pro rata portion of the Capital Account of the transferor;
provided, however, that, if the transfer causes a termination of the Partnership
- -------- -------
under Section 708(b)(1)(B) of the Code, the Partnership's properties shall be
deemed solely for federal income tax purposes, to have been contributed to a new
partnership in exchange for interests therein and then liquidated. In such
event, the Carrying Values of the Partnership properties shall be adjusted, if
appropriate, in accordance with Section 1.D(2) hereof. The Capital Account of
such reconstituted Partnership shall be maintained in accordance with principles
of this Exhibit A.
---------
D. (1) Consistent with the provisions of Regulations Section 1.704-
1(b)(2)(iv)(f), and as provided in Section 1.D(2), the Carrying
Values of all Partnership assets shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as of the times of the
adjustments provided in Section 1.D(2) hereof, as if such
Unrealized Gain or Unrealized Loss had been recognized on an
actual sale of each such property and allocated pursuant to
Section 6.1 of the Agreement.
(2) Such adjustments shall be made as of the following times: (a)
immediately prior to the acquisition of an additional interest in
the Partnership by any new or existing Partner in exchange for
more than a de minimis Capital Contribution; (b) immediately
prior to the distribution by the Partnership to a Partner of more
than a de minimis amount of property as consideration for an
interest in the Partnership; and (c) immediately prior to the
liquidation of the Partnership within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments
-------- -------
pursuant to clauses (a) and (b) above shall be made only if the
General Partner determines that such adjustments are necessary or
2
<PAGE>
appropriate to reflect the relative economic interests of the
Partners in the Partnership.
(3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the
Carrying Value of Partnership assets distributed in kind shall be
adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as of
the time any such asset is distributed.
(4) In determining Unrealized Gain or Unrealized Loss for purposes of
this Exhibit A, the aggregate cash amount and fair market value
---------
of all Partnership assets (including cash or cash equivalents)
shall be determined by the General Partner using such reasonable
method of valuation as it may adopt, or in the case of a
liquidating distribution pursuant to Article 13 of the Agreement,
shall be determined and allocated by the Liquidator using such
reasonable methods of valuation as it may adopt. The General
Partner, or the Liquidator, as the case may be, shall allocate
such aggregate value among the assets of the Partnership (in such
manner as it determines in its sole and absolute discretion to
arrive at a fair market value for individual properties).
E. The provisions of this Agreement (including this Exhibit A and the
---------
other Exhibits to this Agreement) relating to the maintenance of Capital
Accounts are intended to comply with Regulations Section 1.704-1(b), and shall
be interpreted and applied in a manner consistent with such Regulations. In the
event the General Partner shall determine that it is prudent to modify the
manner in which the Capital Accounts, or any debits or credits thereto
(including, without limitation, debits or credits relating to liabilities which
are secured by contributed or distributed property or which are assumed by the
Partnership, the General Partner, or the Limited Partners) are computed in order
to comply with such Regulations, the General Partner may make such modification
without regard to Article 14 of the Agreement, provided that it is not likely to
have a material effect on the amounts distributable to any Person pursuant to
Article 13 of the Agreement upon the dissolution of the Partnership. The
General Partner also shall (i) make any adjustments that are necessary or
appropriate to maintain equality between the Capital Accounts of the Partners
and the amount of the Partnership capital reflected on the Partnership's balance
sheet, as computed for book purposes, in accordance with Regulation's balance
sheet, as computed for book purposes, in accordance with Regulations Section
1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event
unanticipated events might otherwise cause this Agreement not to comply with
Regulations Section 1.704-1(b).
2. No Withdrawal.
-------------
No Partner shall be entitled to withdraw any part of his Capital
Contribution or his Capital Account or to receive any distribution from the
Partnership, except as provided in Articles 5, 7 and 13 of the Agreement.
3
<PAGE>
EXHIBIT B
SPECIAL ALLOCATION RULES
1. Special Allocation Rules.
------------------------
Notwithstanding any other provision of the Agreement or this Exhibit B, the
---------
following special allocations shall be made in the following order:
A. Minimum Gain Chargeback. Notwithstanding the provisions of Section
-----------------------
6.1 of the Agreement or any other provisions of this Exhibit B, if there is a
---------
net decrease in the Partnership Minimum Gain during any Partnership Year, each
Partner shall be specially allocated items of Partnership income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partnership Minimum Gain, as determined
under Regulations Section 1.704-2(g). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated shall
be determined in accordance with Regulations Section 1.704-2(f)(6). This
Section 1.A is intended to comply with the minimum gain chargeback requirements
in Regulations Section 1.704-2(f) and for purposes of this Section 1.A only,
each Partner's Adjusted Capital Account Deficit shall be determined prior to any
other allocations pursuant to Section 6.1 of this Agreement with respect to such
Partnership Year and without regard to any decrease in Partner Minimum Gain
during such Partnership Year.
B. Partnership Minimum Gain Chargeback. Notwithstanding any other
-----------------------------------
provision of Section 6.1 of this Agreement or any other provisions of this
Exhibit B (except Section 1.A hereof), if there is a net decrease in Partner
- ---------
Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership
Year, each Partner who has a share of the Partner Minimum Gain attributable to
such Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5), shall be specifically allocated items of Partnership income and
gain for such year (and, if necessary, subsequent years) in an amount equal to
such Partner's share of the net decrease in Partner Minimum Gain attributable to
such Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each General
Partner and Limited Partner pursuant thereto. The items to be so allocated
shall be determined in accordance with Regulations Section 1.704-2(i)(4). This
Section 1.B is intended to comply with the minimum gain chargeback requirement
in such Section of the Regulations and shall be interpreted consistently
therewith. Solely for purposes of this Section 1.B, each Partner's Adjusted
Capital Account Deficit shall be determined prior to any other allocations
pursuant to Section 6.1 of the Agreement or this Exhibit with respect to such
Partnership Year, other than allocations pursuant to Section 1.A hereof.
C. Qualified Income Offset. In the event any Partner unexpectedly
-----------------------
receives any adjustments, allocations or distributions described in Regulations
Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-
1(b)(2)(ii)(d)(6), and after giving effect to the allocations
1
<PAGE>
required under Section 1.A and 1.B hereof, such Partner has an Adjusted Capital
Account Deficit, items of Partnership income and gain (consisting of a pro rata
portion of each item of Partnership income, including gross income and gain for
the Partnership Year) and shall be specifically allocated to such Partner in an
amount and manner sufficient to eliminate, to the extent required by the
Regulations, its Adjusted Capital Account Deficit created by such adjustments,
allocations or distributions as quickly as possible. This Section 1.C is
intended to constitute a "qualified income offset" under Regulations Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership
----------------------
Year shall be allocated to the Partners in accordance with their respective
Percentage Interests. If the General Partner determines in its good faith
discretion that the Partnership's Nonrecourse Deductions must be allocated in a
different ratio to satisfy the safe harbor requirements of the Regulations
promulgated under Section 704(b) of the Code, the General Partner is authorized,
upon notice to the Limited Partners, to revise the prescribed ratio for such
Partnership Year to the numerically closest ratio which would satisfy such
requirements.
E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions
------------------------------
for any Partnership Year shall be specifically allocated to the Partner who
bears the economic risk of loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance with
Regulations Section 1.704-2(b)(4) and 1.704-2(i).
F. Code Section 754 Adjustments. To the extent an adjustment to the
----------------------------
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b)
of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such item of gain or loss shall be specifically
allocated to the Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.
2. Allocations for Tax Purposes.
----------------------------
A. Except as otherwise provided in this Section 2, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated among
the Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 6.1 of the Agreement and
Section 1 of this Exhibit B.
---------
B. In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss and
deduction shall be allocated for federal income tax purposes among the Partners
as follows:
(i) (a) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners consistent with the
principles of
2
<PAGE>
Section 704(c) of the Code to take into account the variation
between the 704(c) Value of such property and its adjusted basis
at the time of contribution (taking into account Section 2.C of
this Exhibit B), and
---------
(b) any item of residual Gain or Residual Loss attributable to a
Contributed Property shall be allocated among the Partners in the
same manner as its correlative item of "Book" gain or loss is
allocated pursuant to Section 6.1 of the Agreement and Section 1
of this Exhibit B.
---------
(ii) (a) In the case of an Adjusted Property, such items shall
(1) first, be allocated among the Partners in a manner consistent
with the principles of Section 704(c) of the Code to take into
account the Unrealized Gain or Unrealized Loss attributable to
such property and the allocations thereof pursuant to Exhibit A,
---------
and
(2) second, in the event such property was originally a
Contributed Property, be allocated among the Partners in a manner
consistent with Section 2.B(1) of this Exhibit B; and
---------
(b) any item of Residual Gain or Residual Loss attributable to an
Adjusted Property shall be allocated among the Partners in the
same manner its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1 of the Agreement and Section 1
of the Exhibit B.
---------
(iii) all other items of income, gain, loss and deduction shall be
allocated among the Partner the same manner as their correlative item
of "book" gain or loss is allocated pursuant to Section 6.1 of the
Agreement and Section 1 of the Exhibit B.
---------
C. To the extent Treasury Regulations promulgated pursuant to Section
704(c) of the Code permit a Partnership to utilize alternative methods to
eliminate the disparities between the Carrying Value of property and its
adjusted basis, the General Partner shall, subject to the following, have the
authority to elect the method to be used by the Partnership and such election
shall be binding on all Partners. With respect to the Contributed Property
transferred to the Partnership on or about the Effective date, the Partnership
shall elect to use the "traditional method" set forth in Treasury Regulations
Section 1.704-3(b).
3
<PAGE>
EXHIBIT C
FORM OF NOTICE OF REDEMPTION
The undersigned hereby irrevocably (i) redeems ______ Partnership Units in
Cavanaughs Hospitality Limited Partnership in accordance with the terms of the
Limited Partnership Agreement of Cavanaughs Hospitality Limited Partnership and
the Redemption Right referred to therein, (ii) surrenders such Limited
Partnership Units and all right, title and interest therein, and (iii) directs
that the Cash Amount or CHC Shares Amount (as determined by the General Partner)
deliverable upon exercise of the Redemption Right be delivered to the addresses
specified below, and if CHC Shares are to be delivered, such CHC Shares be
registered or placed in the name(s) and at the address(es) specified below. The
undersigned hereby represents, warrants and certifies, that the undersigned (a)
has marketable and unencumbered title to such Partnership Units, free and clear
of the rights of or interests of any other person or entity, (b) has the full
right, power and authority to redeem and surrender such Partnership Units as
provided herein, and (c) has obtained the consent or approval of all persons or
entities, if any, having the right to consult or approve such redemption and
surrender.
Dated:
Name of Limited Partner:
________________________________
(Signature of Limited Partner)
________________________________
(Street Address)
________________________________
(City, State, Zip Code)
Signature Guaranteed by:
________________________________
If CHC Shares are to be issued, issue to:
Name:
Please insert social security or identifying number:
1
<PAGE>
EXHIBIT D
LIST OF LIMITED PARTNERS
1. North River Drive Company, a Washington corporation, 201 W. North River
Drive, Spokane, Washington, 99201.
1
<PAGE>
EXHIBIT 10.8
CAVANAUGHS HOSPITALITY CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
Section 1. Establishment and Purpose
1.1 Establishment. Cavanaughs Hospitality Corporation, a Washington
corporation ("Cavanaughs" or the "Company"), hereby establishes a stock purchase
plan for employees as described herein, which shall be known as the Cavanaughs
Hospitality Corporation 1998 EMPLOYEE STOCK PURCHASE PLAN (the "Plan").
1.2 Purpose. The purpose of the Plan is to provide eligible employees the
opportunity to purchase the Company's common stock at a favorable price by means
of payroll deductions. It is intended that the Plan qualify as an employee
stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code") and all provisions hereof shall be construed in a manner to
so comply.
Section 2. Definitions
2.1 Definitions. Whenever used hereinafter, the following terms shall have
the meanings set forth below:
(a) "Affiliate" means any corporation, which (i) is a "subsidiary
corporation" of the Company, within the meaning of Section 424 of the
Code, now or in the future and (ii) has been authorized by the Board to
participate in the Plan.
(b) "Base Earnings" means a Participant's regular rate of pay and does
not include overtime pay, shift premium,bonuses and other special
payments, or amounts payable under employee benefit plans.
(c) "Board" means the Board of Directors of Cavanaughs.
(d) "Committee" means the Compensation Committee of the Board.
(e) "Eligible Employee", with respect to any PlanYear, means an
employee (including officers and directors who are also employees) of the
Company or any Affiliate who has been employed by the Company or an
Affiliate for the first two weeks of the month preceding the first day of
such Plan Year, other than those employees whose customary employment is
30 hours or less per week or not more than five months during any
calendar year.
(f) "Fair Market Value" of a share of Stock as of a given date shall
be (i) the mean between the highest and lowest selling price of a share
of Common Stock on the principal exchange on which shares of Stock are
then trading, if any, on such date, or if shares were
<PAGE>
not traded on such date, then on the closest preceding date on which a
trade occurred, or (ii) if the Stock is not traded on an exchange, the
mean between the closing representative bid and asked prices for the
Stock on such date as reported by NASDAQ or, if NASDAQ is not then in
existence, by its successor quotation system; or (iii) if Stock is not
publicly traded, the Fair Market Value of a share of Stock as established
by the Committee acting in good faith.
(g) "Participant" means an Eligible Employee who has elected to
participate in the Plan pursuant to Section 4.1.
(h) "Plan Year" means the twelve-month period beginning each January
1, provided that the first Plan Year shall be a short year beginning July
1, 1998 and ending December 31, 1998.
(i) "Stock" means the Common Stock of the Company, par value $.01 per
share.
Section 3. Stock Subject to the Plan
3.1 Number. The total number of shares of Stock to be reserved for sale
under this Plan shall be 300,000 shares in the aggregate. These shares may
consist, in whole or in part, of authorized but unissued Stock or treasury Stock
not reserved for any other purpose.
3.2 Adjustment in Capitalization. In the event of any merger,
reorganization, consolidation, recapitalization, stock dividend, stock split,
extraordinary distribution with respect to Stock or other change in corporate
structure affecting the Stock, the Committee may make such substitution or
adjustments in the aggregate number and kind of shares reserved for issuance
under the Plan and the price payable therefor and/or such other substitution or
adjustments in the shares reserved for issuance under the Plan as it may
determine to be appropriate in its sole discretion; provided, however that the
number of shares of Stock issuable under the Plan shall always be a whole
number.
Section 4. Participation
4.1 Participation. Any employee who is an Eligible Employee on June 15,
1998 may elect to become a Participant. Any employee who is an Eligible
Employee on December 1 of any year (including 1998), may elect to become a
Participant as of the first day of the next Plan Year. Any election to
participate shall be made in the form and at the time provided in rules adopted
by the Committee from time to time. Notwithstanding anything herein to the
contrary, in no event shall an Eligible Employee be granted an option to
purchase Stock under the Plan if after the purchase such Eligible Employee would
own capital stock of Cavanaughs possessing 5% or more of the total combined
voting power or value of all classes of capital stock of Cavanaughs. Also, an
Eligible Employee may not become or remain a Participant at any time when such
Eligible Employee owns capital stock possessing 5% or more of the total combined
voting power or value of all classes of capital stock of Cavanaughs. For
purposes of this subsection, the rules of Section 424(d) of the Code shall apply
in determining the stock ownership of an individual,
2
<PAGE>
and capital stock which an employee may purchase under outstanding options shall
be treated as capital stock owned by the employee.
Section 5. Purchase of Stock
5.1 Contributions for Purchase of Stock. At the time an Eligible Employee
elects to become a Participant in the Plan, such Eligible Employee shall elect
to contribute to the Plan by authorizing payroll deductions in an amount (in
increments of 1%) not less than 0%, and not more than 10%, of Base Earnings.
Unless otherwise elected by the Participant, the rate of withholding such
Participant has elected will remain in effect for subsequent Plan Years. A
Participant at any time may reduce the rate of withholding or discontinue
withholding entirely. A Participant may not increase the rate of withholding
except in connection with an election with respect to a subsequent Plan Year. If
a Participant elects to discontinue withholding, he or she may resume
withholding only as of the first day of any subsequent Plan Year. Any election
or direction under this section shall be made in writing in the form and
pursuant to rules adopted by the Committee from time to time, and shall become
effective at a time specified by the Committee.
5.2 Grant of Option. As of the first day of each Plan Year, each
Participant shall be granted an option, which shall entitle him or her to
purchase shares of Stock in accordance with the terms of the Plan. Subject to
Section 5.5 and any additional limitations established by the Committee, in its
sole discretion, for such Plan Year, the maximum number of shares of Stock that
a Participant may purchase pursuant to such option for the Plan Year shall equal
the number of whole shares determined by (a) multiplying the percentage of Base
Earnings the Participant elected to have withheld for such Plan Year by such
Base Earnings, and (b) dividing the result by 85% of the Fair Market Value of a
share of Stock on the first business day of such Plan Year (which shall be the
"option price.").
5.3 Disposition of Contributions. Amounts withheld pursuant to Section 5.1
shall be held by a Participant's employer until used to purchase Stock, except
that:
(a) A Participant who elects to discontinue withholding may elect at
any time to withdraw all or any part of the amounts previously withheld.
Any such withdrawal shall be paid to the Participant by his or her
employer in cash, with interest (at the annual rate determined by the
Committee prior to the beginning of each Plan Year), if any, on such
amounts.
(b) Any portion of the amounts withheld which is not paid to the
Participant in cash pursuant to this Section shall be automatically
applied to purchase Stock under Section 5.4.
(c) Any withdrawal election under this Section shall be made in
writing in the form and pursuant to rules adopted by the Committee from
time to time.
3
<PAGE>
5.4 Purchases of Stock. As of the last day of each Plan Year, each
Participant who has not withdrawn the entire amount withheld during such year
shall be deemed to have exercised his or her option to purchase the number of
whole shares of Stock determined by dividing the remaining amount by the option
price. Fractional shares will not be issued under the Plan, and any accumulated
payroll deductions that would have been used to purchase fractional shares will
be carried over in the Participant's account for the purchase of shares in the
next Plan Year.
5.5 Privileges of a Stockholder. A Participant shall not have stockholder
privileges with respect to any Stock until the date of issuance of such Stock.
5.6 Limitation on Stock Purchases. As required by Section 423 of the Code,
no Participant may purchase Stock under the Plan and all other employee stock
purchase plans of Cavanaughs (including any parent or subsidiary corporation, to
the extent provided in Section 423) at a rate in excess of $25,000 in Fair
Market Value of such Stock (determined as of the first business day of the Plan
Year with respect to which Stock is granted) for each calendar year in which any
such right to purchase Stock granted to such Participant is outstanding at any
time. If a Participant is not entitled to purchase Stock under any other such
plan during a Plan Year, the total number of shares purchased under this Plan
for the Participant with respect to that Plan Year may not exceed $25,000
divided by the Fair Market Value of a share of Stock on the first day of such
Plan Year.
5.7 Exhaustion of Shares. If at any time the shares of Stock available
under the Plan are over subscribed, the number of shares subject to options for
such Plan Year shall be reduced proportionately (or in such other
nondiscriminatory manner chosen by the Committee, in its sole discretion) to
eliminate the over subscription, and the amounts, if any, that cannot be applied
to the purchase of shares shall be refunded to the Participants, without
interest.
Section 6. Termination of Employment
6.1 Termination of Employment. No shares of Stock may be purchased by a
Participant pursuant to this Plan with respect to a Plan Year if his or her
employment terminates for any reason prior to the end of such Plan Year. Any
amount withheld from the pay of a Participant during the Plan Year in which his
or her employment terminates shall be paid to such Participant in cash, with
interest (at the annual rate determined by the Committee prior to the beginning
of each Plan Year), if any, on such amount promptly after such Participant's
termination of employment. If a Participant's death occurs at any time during a
Plan Year, any amount withheld from the pay of such Participant shall be paid to
the Participant's personal representative in cash, with interest (at the annual
rate determined by the Committee prior to the beginning of each Plan Year), if
any, on such amount and no portion thereof shall be applied to purchase Stock
under the Plan.
4
<PAGE>
Section 7. Rights of Employees; Participants
7.1 Employment. Nothing in this Plan shall interfere with or limit in any
way the right of Cavanaughs or any Affiliate to terminate any employee's,
Eligible Employee's, or Participant's employment at any time, nor confer upon
any such person any right to continue in the employ of Cavanaughs or any of its
Affiliates.
7.2 Nontransferability. No right or interest of any Participant in the Plan
shall be assignable or transferable, or subject to any lien, directly or
indirectly, by operation of law, or otherwise, including execution, levy,
garnishment, attachment, pledge, or bankruptcy. Any attempted assignment,
transfer, pledge or other disposition of any rights under the Plan shall be null
and void, and shall automatically terminate all rights of a participant under
the Plan.
Section 8. Administration
8.1 The Committee. (a) The Plan shall be administered by the Committee.
(b) The Committee is vested with full authority to make, administer, and
interpret such equitable rules and regulations regarding the Plan as it may deem
advisable. The Committee's determination as to the interpretation and operation
of the Plan, or any right granted under it, shall be final and conclusive,
unless otherwise determined by the Board. No member of the Board or the
Committee shall be liable for any action or determination made in good faith by
such member with respect to the Plan or any option granted under it.
(c) Prior to the commencement of any Plan Year, the Committee may prescribe
rules to apply to such Plan Year including, but not limited to, setting forth a
limit on the number of shares of Stock which may be purchased under the Plan
during the Plan Year in the aggregate or by any Participant, and the method for
reducing Participants' elections if such a limit would otherwise be exceeded.
(d) The Committee may act by a majority vote at a meeting of the Committee or
by a document signed by all of the members of the Committee.
Section 9. Amendment, Modification and Termination of Plan
9.1 Amendment, Modification, and Termination of the Plan. The Board or the
Committee, at any time may terminate, and at any time and from time to time and
in any respect, may amend or modify the Plan, provided, however, that no such
action of the Board, or the Committee, without approval of the shareholders of
Cavanaughs, may: (a) increase the total amount of Stock which may be offered
under the Plan, except as provided in Section 3.2 of the Plan; or (b) permit any
person, while a member of the Committee, to be eligible to participate in the
Plan.
5
<PAGE>
Section 10. Requirements of Law
10.1 Requirements of Law. The issuance of Stock and the payroll deductions
pursuant to this Plan shall be subject to all applicable laws, rules, and
regulations, and shares of Stock shall not be issued nor cash payments made
except upon approval of proper government agencies of stock exchanges as may be
required.
10.2 Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of
Washington, without regard to the conflicts of law provisions thereof.
Section 11. Effective Date of the Plan
11.1 Effective Date. The Plan shall be effective as of the date on which
the initial public offering of the Stock shall be consummated (it being
understood that the shareholders of the Company approved the Plan on January __,
1998.
11.2 Duration of the Plan. Unless the Board terminates the Plan earlier,
the Plan shall remain in effect until the earlier of the date upon which all
Stock subject to it shall be issued pursuant to the Plan and January 1, 2008.
6
<PAGE>
EXHIBIT 10.9
1998 STOCK INCENTIVE PLAN
OF
CAVANAUGHS HOSPITALITY CORPORATION
Cavanaughs Hospitality Corporation, a Washington corporation, has adopted
the 1998 Stock Incentive Plan (the "Plan"), effective January __, 1998, for the
benefit of its eligible employees, consultants, and directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees, and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees, and consultants considered essential to the long range success of
the Company by offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE I
DEFINITIONS
1.1 General. Wherever the following terms are used in this Plan they
-------
shall have the meaning specified below, unless the context clearly indicates
otherwise.
1.2 Award Limit. "Award Limit" shall mean five hundred thousand
-----------
(500,000) shares of Common Stock.
1.3 Board. "Board" shall mean the Board of Directors of the Company.
-----
1.4 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
1.5 Committee. "Committee" shall mean the Compensation Committee of the
---------
Board, or a subcommittee of the Board, appointed as provided in Section 9.1.
1.6 Common Stock. "Common Stock" shall mean the common stock of the
------------
Company, par value $.01 per share, and any equity security of the Company issued
or authorized to be issued in the future, but excluding any warrants, options or
other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
<PAGE>
1.7 Company. "Company" shall mean Cavanaughs Hospitality Corporation, a
-------
Washington corporation.
1.8 Deferred Stock. "Deferred Stock" shall mean Common Stock awarded
--------------
under Article VII of this Plan.
1.9 Director. "Director" shall mean a member of the Board.
--------
1.10 Dividend Equivalent. "Dividend Equivalent" shall mean a right to
-------------------
receive the equivalent value (in cash or Common Stock) of dividends paid on
Common Stock, awarded under Article VII of this Plan.
1.11 Employee. "Employee" shall mean any officer or other employee (as
--------
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.12 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
------------
of 1934, as amended.
1.13 Fair Market Value. "Fair Market Value" of a share of Common Stock as
-----------------
of a given date shall be (i) the mean between the highest and lowest selling
price of a share of Common Stock on the principal exchange on which shares of
Common stock are then trading, if any, on such date, or if shares were not
traded on such date, then on the closest preceding date on which a trade
occurred, or (ii) if Common Stock is not traded on an exchange, the mean between
the closing representative bid and asked prices for the Common Stock on such
date as reported by NASDAQ or, if NASDAQ is not then in existence, by its
successor quotation system; or (iii) if Common Stock is not publicly traded, the
Fair Market Value of a share of Common Stock as established by the Committee
acting in good faith.
1.14 Grantee. "Grantee" shall mean an Employee or consultant granted a
-------
Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation
Right, or an award of Deferred Stock, under this Plan.
1.15 Incentive Stock Option. "Incentive Stock Option" shall mean an
----------------------
conforms to the applicable provisions of Section 422 of the Code and which is
designated as an Incentive Stock Option by the Committee.
1.16 Independent Director. "Independent Director" shall mean a member of
--------------------
the Board who is not an Employee of the Company.
1.17 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean
--------------------------
an Option which is not designated as an Incentive Stock Option by the Committee.
2
<PAGE>
1.18 Option. "Option" shall mean a stock option granted under Article III
------
of this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
provided, however, that Options granted to Independent Directors and consultants
- -------- -------
shall be Non-Qualified Stock Options.
1.19 Optionee. "Optionee" shall mean an Employee, consultant, or
--------
Independent Director granted an Option under this Plan.
1.20 Performance Award. "Performance Award" shall mean a cash bonus, stock
----------------
bonus or other performance or incentive award that is paid in cash,
Common Stock or a combination of both, awarded under Article VII of
this Plan.
1.21 Plan. "Plan" shall mean the 1998 Stock Incentive Plan.
----
1.22 QDRO. "QDRO" shall mean any qualified domestic relations order as
----
defined by the Code or Title I of the Employee Retirement Income Security Act,
of 1974, as amended, or the rules and regulations thereunder.
1.23 Restricted Stock. "Restricted Stock" shall mean Common Stock awarded
----------------
under Article VI of this Plan.
1.24 Restricted Stockholder. "Restricted Stockholder" shall mean an
----------------------
Employee or consultant granted an award of Restricted Stock under Article VI of
this Plan.
1.25 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under
----------
the Exchange Act, as such Rule may be amended from time to time.
1.26 Stock Appreciation Right. "Stock Appreciation Right" shall mean a
------------------------
stock appreciation right granted under Article VIII of this Plan.
1.27 Stock Payment. "Stock Payment" shall mean (i) a payment in the form
-------------
of shares of Common Stock, or (ii) an option or other right to purchase shares
of Common Stock, as part of a deferred compensation arrangement, made in lieu of
all or any portion of the compensation, including without limitation, salary,
bonuses and commissions, that would otherwise become payable to a key Employee
or consultant in cash, awarded under Article VII of this Plan.
1.28 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken
----------
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
50 percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
1.29 Termination of Directorship. "Termination of Directorship" shall mean
---------------------------
the time when an Optionee who is an Independent Director ceases to be a Director
for any reason, including, but not by way of limitation, a termination by
resignation, failure to be elected, death
3
<PAGE>
or retirement. The Board, in its sole and absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Directorship.
1.30 Termination of Employment. "Termination of Employment" shall mean the
-------------------------
time when the employee-employer relationship between the Optionee, Grantee or
Restricted Stockholder and the Company or any Subsidiary is terminated for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment, continuing employment or retention as a
consultant of an Optionee, Grantee or Restricted Stockholder by the Company or
any Subsidiary, (ii) at the discretion of the Committee, terminations which
result in a temporary severance of the employee-employer relationship, and (iii)
at the discretion of the Committee, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Committee, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Employment, including, but not by way of limitation, the question of whether
a Termination of Employment resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Employment; provided, however, that, with respect to Incentive Stock Options, a
-------- -------
leave of absence, change in status from an employee to an independent contractor
or other change in the employee-employer relationship shall constitute a
Termination of Employment if, and to the extent that, such leave of absence,
change in status or other change interrupts employment for the purpose of
Section 422(a)(2) of the Code and the then applicable regulations and revenue
rulings under said Section. Notwithstanding any other provision of this Plan,
the Company or any Subsidiary has an absolute and unrestricted right to
terminate an Employee's employment at any time for any reason whatsoever, with
or without cause, except to the extent expressly provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
-----------------------
(a) The shares of stock subject to Options, awards of Restricted
Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially shares of
the Company's Common stock, par value $.01 per share. The aggregate number of
such shares which may be issued upon exercise of such options or rights or upon
any such awards under the Plan Shall not exceed nine hundred thousand (900,000).
The shares of Common Stock issuable upon exercise of such options or rights or
upon any such awards may be either previously authorized but unissued shares or
treasury shares.
(b) The maximum number of shares which may be subject to Options or
Stock Appreciation Rights granted under the Plan to any individual in any
calendar year shall not exceed the Award Limit. To the extent required by
Section 162(m) of the Code, shares subject to
4
<PAGE>
Options which are canceled continue to be counted against the Award Limit and
if, after grant of an Option, the price of shares subject to such Option is
reduced, the transaction is treated as a cancellation of the Option and a grant
of a new Option and both the Option deemed to be canceled and the Option deemed
to be granted are counted against the Award Limit. Furthermore, to the extent
required by Section 162(m) of the Code, if, after grant of a Stock Appreciation
Right, the base amount on which stock appreciation is calculated is reduced to
reflect a reduction in the Fair Market Value of the Company's Common Stock, the
transaction is treated as a cancellation of the Stock Appreciation Right and a
grant of a new Stock Appreciation Right and both the Stock Appreciation Right
deemed to be canceled and the Stock Appreciation Right deemed to be granted are
counted against the Award Limit.
2.2 Unexercised Options and Other Rights. If any Option, or other right
------------------------------------
to acquire shares of Common Stock under any other award under this Plan, expires
or is canceled without having been fully exercised, the number of shares subject
to such Option or other right but as to which such Option or other right was not
exercised prior to its expiration or cancellation may again be optioned, granted
or awarded hereunder, subject to the limitations of Section 2.1.
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Subject to the Award Limit, any Employee, consultant,
-----------
or Independent Directors elected by the Committee pursuant to Section 3.4(a)(i)
shall be eligible to be granted an Option.
3.2 Disqualification for Stock Ownership. No person may be granted an
------------------------------------
Incentive Stock Option under this Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock Option
----------------------------------------
shall be granted unless such Option, when granted, qualifies as an "incentive
stock option" under Section 422 of the Code. No Incentive Stock Option shall be
granted to any person who is not an Employee.
3.4 Granting of Options
-------------------
(a) Subject to the provisions of subsection (d) hereof, the Committee
shall from time to time, in its absolute discretion:
(i) Determine which Employees are key Employees and select from
among the key Employees, consultants, or Independent Directors (including
Employees,
5
<PAGE>
consultants, or Independent Directors who have previously received Options or
other awards under this Plan) such of them as in its opinion should be granted
Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected key Employees,
consultants, or Independent Directors;
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Stock Options and whether such Options are to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and conditions
-------- -------
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) Upon the selection of a key Employee, consultant, or Independent
Director to be granted an Option, the Committee shall instruct the Secretary of
the Company to issue the Option and may impose such conditions on the grant of
the Option as it deems appropriate. Without limiting the generality of the
preceding sentence, the Committee may, in its discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option to an
Employee, consultant, or Independent Director that the Employee, consultant, or
Independent Director surrender for cancellation some or all of the unexercised
Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments or other rights
which have been previously granted to him under this Plan or otherwise. An
Option, the grant of which is conditioned upon such surrender, may have an
option price lower (or higher) than the exercise price of such surrendered
Option or other award, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) The Board shall be authorized to make the initial grants of
Restricted Stock set forth on the Addendum to this Plan, which grants shall
become effective upon the closing of the Company's initial public offering.
Future grants shall be made by the Committee in accordance with the provisions
of this Plan
6
<PAGE>
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written Stock
----------------
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with this Plan. Stock Option Agreements
evidencing Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each
------------
Option shall be set by the Committee; provided, however, that such price shall
-------- -------
be no less than the par value of a share of Common Stock, and (i) in the case of
Options intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code such price shall be no less than 100% of the
Fair Market Value of a share of Common Stock on the date the Option is granted,
and (ii) in the case of Incentive Stock Options such price shall not be less
than the greater of: (a) 100% of the Fair Market Value of a share of Common
Stock on the date the Option is granted, or (b) 110% of the Fair Market Value of
a share of Common Stock on the date such Option is granted in the case of an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary.
4.3 Option Term. The term of an Option shall be set by the Committee in
-----------
its discretion; provided, however, that, in the case of Incentive Stock Options,
-------- -------
the term shall not be more than ten (10) years from the date the Incentive Stock
Option is granted, or five (5) years from such date if the Incentive Stock
Option is granted to an individual then owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or any Subsidiary.
4.4 Option Vesting.
--------------
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee, and the
Committee may determine that an Option may not be exercised in whole or in part
for a specified period after it is granted; provided, however, that unless
-------- -------
otherwise determined by the Committee, no Option granted to a person subject to
Section 16 of the Exchange Act shall be exercisable until at least six months
have elapsed from (but excluding) the date on which the Option was granted.
Subject to the preceding sentence, at any time after grant of an Option, the
Committee may, in its sole discretion and subject to whatever terms and
conditions it selects, accelerate the period during which an Option vests.
7
<PAGE>
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship, or termination of a consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee either in the Stock Option Agreement or in a
resolution adopted following the grant of the Option; provided that the
Committee may determine that the Option may be exercised subsequent to
Termination of Employment, Termination of Directorship, or termination of
consultancy without cause, or following a change in control of the Company, or
because of the Optionee's retirement, death or disability, or otherwise.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c), the Fair Market Value
of stock shall be determined as of the time the Option with respect to such
stock is granted.
4.5 Consideration. In consideration of the granting of an Option, the
-------------
Optionee shall agree, in the written Stock Option Agreement, to remain in the
employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year
after the Option is granted (or until the next annual meeting of stockholders of
the Company, in the case of an Independent Director). Nothing in this Plan or
in any Stock Option Agreement hereunder shall confer upon any Optionee any right
to continue in the employ of, or as a consultant for, the Company or any
Subsidiary, or as a director of the Company, or shall interfere with or restrict
in any way the rights of the Company and any Subsidiary, which are hereby
expressly reserved, to discharge any Optionee at any time for any reason
whatsoever, with or without good cause.
ARTICLE V
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised in whole or
----------------
in part. However, an Option shall not be exercisable with respect to fractional
shares and the Committee may require that, by the terms of the Option, a partial
exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option shall
------------------
be deemed exercised upon delivery of all of the following to the Secretary of
the Company or the Secretary's office:
8
<PAGE>
(a) A written notice complying with the applicable rules established
by the Committee stating that the Option, or a portion thereof, is exercised.
The notice shall be signed by the Optionee or other person then entitled to
exercise the Option or such portion;
(b) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee may, in its
absolute discretion, also take whatever additional actions it deems appropriate
to effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However, at
the discretion of the Committee, the terms of the Option may (i) allow a delay
in payment up to thirty (30) days from the date the Option, or portion thereof,
is exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of Common Stock owned by the Optionee, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the surrender of shares of Common Stock then
issuable upon exercise of the Option having a Fair Market Value on the date of
Option exercise equal to the aggregate exercise price of the Option or exercised
portion thereof; (iv) allow payment, in whole or in part, through the delivery
of property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee, or (vi) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (ii),
(iii), (iv) and (v). In the case of a promissory note, the Committee may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.
5.3 Conditions to Issuance of Stock Certificate. The Company shall not be
-------------------------------------------
required to issue or deliver any certificate or certificates for shares of stock
purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange
9
<PAGE>
Commission or any other governmental regulatory body which the Committee shall,
in its absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may establish from time to time for reasons of
administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4 Rights as Stockholders. The holders of Options shall not be, nor have
----------------------
any of the rights or privileges of, stockholders of the Company in respect of
any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
5.5 Ownership and Transfer Restrictions. The Committee, in its absolute
-----------------------------------
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Stock Option Agreement
and may be referred to on the certificates evidencing such shares. The
Committee may require the Employee to give the Company prompt notice of any
disposition of shares of Common Stock acquired by exercise of an Incentive Stock
Option within (i) two years from the date of granting such Option to such
Employee or (ii) one year after the transfer of such shares to such Employee.
The Committee may direct that the certificates evidencing shares acquired by
exercise of an Option refer to such requirement to given prompt notice of
disposition.
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 Award of Restricted Stock
-------------------------
(a) The Committee shall from time to time, in its absolute discretion:
(i) Select from among the key Employees or consultants (including
Employees or consultants who have previously received other awards under
this Plan) such of them as in its opinion should be awarded Restricted
Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this Plan.
10
<PAGE>
(b) The Committee shall establish the purchase price, if any, and form
of payment for Restricted Stock; provided, however, that such purchase price
-------- -------
shall be no less than the par value of the Common Stock to be purchased. In all
cases, legal consideration shall be required for each issuance of Restricted
Stock.
(c) Upon the selection of a key Employee or consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.
6.2 Restricted Stock Agreement. Restricted Stock shall be issued only
--------------------------
pursuant to a written Restricted Stock Agreement, which shall be executed by the
selected key Employee or consultant and an authorized officer of the Company and
which shall contain such terms and conditions as the Committee shall determine,
consistent with this Plan.
6.3 Consideration. As consideration for the issuance of Restricted Stock,
-------------
in addition to payment of any purchase price, the Restricted Stockholder shall
agree, in the written Restricted Stock Agreement, to remain in the employ of, or
to consult for, the Company or any Subsidiary for a period of at least one year
after the Restricted Stock is issued. Nothing in this Plan or in any Restricted
Stock Agreement hereunder shall confer on any Restricted Stockholder any right
to continue in the employ of, or consult for, the Company or any Subsidiary or
shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Restricted
Stockholder at any time for any reason whatsoever, with or without good cause.
6.4 Rights as Stockholders. Upon delivery of the shares of Restricted
----------------------
Stock to the escrow holder pursuant to Section 6.7, the Restricted Stockholder
shall have, unless otherwise provided by the Committee, all the rights of a
stockholder with respect to said shares, subject to the restrictions in the
Restricted Stockholder's Restricted Stock Agreement, including the right to
receive all dividends and other distributions paid or made with respect to the
shares; provided, however, that in the discretion of the Committee, any
-------- -------
extraordinary distributions with respect to the Common Stock shall be subject to
the restrictions set forth in Section 6.5.
6.5 Restriction. All shares of Restricted Stock issued under this Plan
-----------
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; provided, however,
-------- -------
that unless otherwise determined by the Committee, no share of Restricted Stock
granted to a person subject to Section 16 of the Exchange Act shall be sold,
assigned or otherwise transferred until at least six months have elapsed from
(but excluding) the date on which the Restricted Stock was issued, and provided,
--------
further, that by a resolution adopted after the Restricted Stock is issued, the
- -------
Committee may, on
11
<PAGE>
such terms and conditions as it may determine to be appropriate, remove any or
all of the restrictions imposed by the terms of the Restricted Stock Agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire. Unless provided otherwise by the Committee, if no
consideration was paid by the Restricted Stockholder upon issuance, a Restricted
Stockholder's rights in unvested Restricted Stock shall lapse upon Termination
of Employment or, if applicable, upon the termination of the Restricted
Stockholder's consulting relationship with the Company.
6.6 Repurchase of Restricted Stock. The Committee shall provide in the
------------------------------
terms of each individual Restricted Stock Agreement that the Company shall have
the right to repurchase from the Restricted Stockholder the Restricted Stock
then subject to restrictions under the Restricted Stock Agreement immediately
upon a Termination of Employment or, if applicable, upon a termination of any
consulting relationship between the Restricted Stockholder and the Company, at a
cash price per share equal to the price paid by the Restricted Stockholder for
such Restricted Stock; provided, however, that provision may be made that no
-------- -------
such right of repurchase shall exist in the event of a Termination of Employment
or termination of consultancy without cause, or following a change in control of
the Company or because of the Restricted Stockholder's retirement, death or
disability, or otherwise.
6.7 Escrow. The Secretary of the Company or such other escrow holder as
------
the Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to the shares evidenced by such
certificate expire or shall have been removed.
6.8 Legend. In order to enforce the restrictions imposed upon shares of
------
Restricted Stock hereunder, the Committee shall cause a legend or legends to be
placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Restricted Stock Agreements, which legend or
legends shall make appropriate reference to the conditions imposed thereby.
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1 Performance Awards. Any key Employee or consultant selected by the
------------------
Committee may be granted one or more Performance Awards. The value of such
Performance Awards may be linked to the market value, book value, net profits or
other measure of the value of Common Stock or other specific performance
criteria determined appropriate by the Committee, in each case on a specified
date or dates or over any period or periods determined by the Committee, or may
be based upon the appreciation in the market value, book value, net profits or
other measure of the value of a specified number of shares of Common Stock over
a fixed period or periods determined by the Committee. In making such
determinations, the Committee shall consider (among such other factors as it
deems relevant in light of the specific
12
<PAGE>
type of award) the contributions, responsibilities and other compensation of the
particular key Employee or consultant.
7.2 Dividend Equivalents. Any key Employee or consultant selected by the
--------------------
Committee may be granted Dividend Equivalents based on the dividends declared on
Common Stock, to be credited as of dividend payment dates, during the period
between the date an Option, Stock Appreciation Right, Deferred Stock or
Performance Award is granted, and the date such Option, Stock Appreciation
Right, Deferred Stock or Performance Award is exercised, vests or expires, as
determined by the Committee. Such Dividend Equivalents shall be converted to
cash or additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Committee.
7.3 Stock Payments. Any key Employee or consultant selected by the
--------------
Committee may receive Stock Payments in the manner determined from time to time
by the Committee. The number of shares shall be determined by the Committee and
may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee on the date such Stock Payment is made
or on any date thereafter.
7.4 Deferred Stock. Any key Employee or consultant selected by the
--------------
Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock
shall be determined by the Committee and may be linked to the market value, book
value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined appropriate by the Committee, in each
case on a specified date or dates or over any period or periods determined by
the Committee. Common Stock underlying a Deferred Stock award will not be
issued until the Deferred Stock award has vested, pursuant to a vesting schedule
or performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the award has
vested and the Common Stock underlying the award has been issued.
7.5 Performance Award Agreement, Dividend Equivalent Agreement, Deferred
--------------------------------------------------------------------
Stock Agreement, Stock Payment Agreement. Each Performance Award, Dividend
- ----------------------------------------
Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by a
written agreement, which shall be executed by the Grantee and an authorized
Officer of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with this Plan.
7.6 Term. The term of a Performance Award, Dividend Equivalent, award of
----
Deferred Stock and/or Stock Payment shall be set by the Committee in its
discretion.
7.7 Exercise Upon Termination of Employment. A Performance Award,
---------------------------------------
Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable
only while the Grantee is an Employee or consultant; provided that the Committee
may determine that the Performance Award, Dividend Equivalent, award of Deferred
Stock and/or Stock Payment may be exercised
13
<PAGE>
subsequent to Termination of Employment or termination of consultancy without
cause, or following a change in control of the Company, or because of the
Grantee's retirement, death or disability, or otherwise.
7.8 Payment on Exercise. Payment of the amount determined under Section
-------------------
7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as
determined by the Committee. To the extent any payment under this Article VII
is effected in Common Stock, it shall be made subject to satisfaction of all
provisions of Section 5.3.
7.9 Consideration. In consideration of the granting of a Performance
-------------
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the
Grantee shall agree, in a written agreement, to remain in the employ of, or to
consult for, the Company or any Subsidiary for a period of at least one year
after such Performance Award, Dividend Equivalent, award of Deferred Stock
and/or Stock Payment is granted. Nothing in this Plan or in any agreement
hereunder shall confer on any Grantee any right to continue in the employ of, or
as a consultant for, the Company or any Subsidiary or shall interfere with or
restrict in any way the rights of the Company and any Subsidiary, which are
hereby expressly reserved, to discharge any Grantee at any time for any reason
whatsoever, with or without good cause.
ARTICLE VII
STOCK APPRECIATION RIGHTS
8.1 Grant of Stock Appreciation Rights. Subject to the Award Limit, a
----------------------------------
Stock Appreciation Right may be granted to any key Employee or consultant
selected by the Committee. A Stock Appreciation Right may be granted (i) in
connection and simultaneously with the grant of an Option, (ii) with respect to
a previously granted Option, or (iii) independent of an Option. A Stock
Appreciation Right shall be subject to such terms and conditions not
inconsistent with this Plan as the Committee shall impose, and shall be
evidenced by a written Stock Appreciation Right Agreement, which shall be
executed by the Grantee and an authorized officer of the Company. The Committee,
in its discretion, may determine whether a Stock Appreciation Right is to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code and Stock Appreciation Right Agreements evidencing Stock
Appreciation Rights intended to so qualify shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Without limiting the generality of the preceding sentence,
the Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition of the grant of a Stock Appreciation Right to an Employee
or consultant that the Employee or consultant surrender for cancellation some or
all of the unexercised Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, or other rights which have been previously granted to him under this
Plan or otherwise. A Stock Appreciation Right, the grant of which is
conditioned upon such surrender, may have an exercise price lower (or higher)
than the exercise price of the surrendered Option or other award, may cover the
same (or a lesser or greater) number of shares as such surrendered Option or
other award, may contain such other
14
<PAGE>
terms as the Committee deems appropriate, and shall be exercisable in accordance
with its terms, without regard to the number of shares, price, exercise period
or any other term or condition of such surrendered Option or other award.
8.2 Coupled Stock Appreciation Rights.
---------------------------------
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to which it
is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
8.3 Independent Stock Appreciation Rights.
-------------------------------------
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of Shares of Common Stock as the Committee may
determine; provided, however, that, unless otherwise determined by the
-------- -------
Committee, no ISAR granted to a person subject to Section 16 of the Exchange Act
shall be exercisable until at least six months have elapsed from (but excluding)
the date on which the ISAR was granted. The exercise price per share of Common
Stock subject to each ISAR shall be set by the Committee. An ISAR is
exercisable only while the Grantee is an Employee or consultant; provided that
the Committee may determine that the ISAR may be exercised subsequent to
Termination of Employment or termination of consultancy without cause, or
following a change in control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Committee may impose.
15
<PAGE>
8.4 Payment and Limitations on Exercise.
-----------------------------------
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock Appreciation Right is exercised) or a combination of both, as
determined by the Committee. To the extent such payment is effected in Common
Stock it shall be made subject to satisfaction of all provisions of Section 5.3
hereinabove pertaining to Options.
(b) Grantees of Stock Appreciation Rights who are subject to Section
16 of the Exchange Act may, in the discretion of the Committee, be required to
comply with any timing or other restrictions under Rule 16b-3 applicable to the
settlement or exercise of a Stock Appreciation Right.
8.5 Consideration. In consideration of the granting of a Stock
-------------
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of, or to consult for, the Company or
any Subsidiary for a period of at least one year after the Stock Appreciation
Right is granted. Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
ARTICLE IX
ADMINISTRATION
9.1 Compensation Committee. The Compensation Committee (or a subcommittee
----------------------
of the Board assuming the functions of the Committee under this Plan) shall
consist of two or more Directors appointed by and holding office at the pleasure
of the Board, each of whom is both a "Non-Employee Director" as defined by Rule
16b-3 and, if Options and Stock Appreciation Rights granted under the Plan are
intended to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code, an "outside director'' as defined under Section 162(m)
of the Code. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be
filled by the Board.
9.2 Duties and Powers of Committee. It shall be the duty of the Committee
------------------------------
to conduct the general administration of this Plan in accordance with its
provisions. The Committee shall have the power to interpret this Plan and the
agreements pursuant to which Options, awards of Restricted Stock or Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Any such grant or
award under this Plan need not be the same with respect to each Optionee,
Grantee or Restricted Stockholder. Any such
16
<PAGE>
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
9.3 Majority Rule. The Committee shall act by a majority of its members
-------------
in attendance at a meeting at which a quorum is present or by a memorandum or
other written instrument signed by all members of the Committee.
9.4 Compensation; Professional Assistance; Good Faith Actions. Members of
---------------------------------------------------------
the Committee shall receive such compensation for their services as members as
may be determined by the Board. All expenses and liabilities which members of
the Committee incur in connection with the administration of this Plan shall be
borne by the Company. The Committee may, with the approval of the board, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Committee, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all Optionees, Grantees,
Restricted Stockholders, the Company and all other interested persons. No
members of the Committee or Board shall be personally liable for any action,
determination or interpretation made in good faith with respect to this Plan,
options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments, and all members of
the Committee shall be fully protected by the Company in respect of any such
action, determination or interpretation.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Not Transferable. Options, Restricted Stock awards, Deferred Stock
----------------
awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments under this Plan may not be sold, pledged, assigned, or
transferred in any manner other than by will or the laws of descent and
distribution, unless and until such rights or awards have been exercised, or the
shares underlying such rights or awards have been issued, and all restrictions
applicable to such shares have lapsed. No Option, Restricted Stock award,
Deferred Stock award, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment or interest or right therein shall be liable for the
debts, contracts or engagements of the Optionee, Grantee or Restricted
Stockholder or his or her successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided
however, that this Section 10.1 shall not prevent (i) transfers by will or by
the
17
<PAGE>
applicable laws of descent and distribution, (ii) the designation by the
optionee or Grantee of a beneficiary to exercise the Optionee's Option or other
right or award (or any portion thereof) granted under the Plan after the
Optionee's or Grantee's death, or (iii) transfers to an Optionee's Grantee's or
Restricted Stockholder's alternate payee pursuant to a QDRO.
During the lifetime of the Optionee or Grantee, only the Optionee, or an
alternate payee under a QDRO, may exercise an Option or other right or award (or
any portion thereof) granted to the Optionee or Grantee under the Plan. After
the death of the Optionee or Grantee, any exercisable portion of an Option or
other right or award may, prior to the time when such portion becomes
unexercisable under the Plan or the applicable Stock Option Agreement or other
agreement, be exercised by the Optionee's or Grantee's personal representative
or by any person empowered to do so under the deceased Optionee's or Grantee's
beneficiary designation, will or under the then applicable laws of descent and
distribution.
10.2 Amendment, Suspension or Termination of this Plan. This Plan shall
-------------------------------------------------
terminate on the date of the annual meeting of the Board immediately following
the tenth anniversary of the Board's adoption of this Plan. This Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Committee. However, without approval of
the Company's stockholders given within twelve months before or after the action
by the Committee, no action of the Committee may, except as provided in Section
10.3, increase the limits imposed in Section 2.1 on the maximum number of shares
which may be issued under this Plan or modify the Award Limit, and no action of
the Committee may be taken that would otherwise require stockholder approval as
a matter of applicable law, regulation or rule. No amendment, suspension or
termination of this Plan shall, without the consent of the holder of Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments, alter or impair any
rights or obligations under any Options, Restricted Stock awards, Deferred Stock
awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments theretofore granted or awarded, unless the award itself otherwise
expressly so provides. No Options, Restricted Stock, Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments may be granted or awarded during any period of suspension or after
termination of this Plan, and in no event may any Incentive Stock Option be
granted under this Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 10.5.
10.3 Changes in Common Stock or Assets of the Company. In the event that
------------------------------------------------
the outstanding shares of Common Stock are hereafter changed into or exchanged
for cash or a different number or kind of shares or other securities of the
Company, or of another corporation, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock
18
<PAGE>
splitup, stock dividend, or combination of shares, appropriate adjustments shall
be made by the Committee in the number and kind of shares for which Options,
Restricted Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents, Deferred Stock awards or Stock Payments may be granted, including
adjustments of the limitations in Section 2.1 on the maximum number and kind of
shares which may be issued and of the Award limit described in Section 1.2.
In the event of such a change or exchange, other than for shares or
securities of another corporation or by reason of reorganization, the Committee
shall also make an appropriate and equitable adjustment in the number and kind
of shares as to which all outstanding Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments, or portions thereof
then unexercised, shall be exercisable and in the number and kind of shares of
outstanding Restricted Stock or Deferred Stock. Such adjustment shall be made
with the intent that after the change or exchange of shares, each Optionee's and
each Grantee's and each Restricted Stockholder's proportionate interest shall be
maintained as before the occurrence of such event. Such adjustment in an
outstanding Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment may include a necessary or appropriate corresponding
adjustment in Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment exercise price, but shall be made without change in
the total price applicable to the Option, Performance Award, Stock Appreciation
Right, Dividend Equivalent or Stock Payment, or the unexercised portion thereof
(except for any change in the aggregate price resulting from rounding-off of
share quantities or prices).
Where an adjustment of the type described above is made to an Incentive
Stock Option under this Section, the adjustment will be made in a manner which
will not be considered a "modification" under the provisions of subsection
424(h)(3) of the Code.
Notwithstanding the foregoing, in the event of such a reorganization,
merger, consolidation, recapitalization, reclassification, stock splitup, stock
dividend or combination, or other adjustment or event which results in shares of
Common Stock being exchanged for or converted into cash, securities or other
property, the Company will have the right to terminate this Plan as of the date
of the exchange or conversion, in which case all options, rights and other
awards under this Plan shall become the right to receive such cash, securities
or other property, net of any applicable exercise price.
In the event of a "spin-off" or other substantial distribution of assets of
the Company which has a material diminutive effect upon the Fair Market Value of
the Company's Common Stock, the Committee may in its discretion make an
appropriate and equitable adjustment to the Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment exercise price to
reflect such diminution.
10. Merger of the Company. In the event of the merger or consolidation of
---------------------
the Company with or into another corporation, the exchange of all or
substantially all of the assets of the Company for the securities of another
corporation, the acquisition by another corporation or
19
<PAGE>
person of all or substantially all of the Company's assets or 80% or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company:
(a) At the discretion of the Committee, the terms of an Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment may provide that it cannot be exercised after such event.
(b) In its discretion, and on such terms and conditions as it deems
appropriate, the Committee may provide either by the terms of such Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment or by a resolution adopted prior to the occurrence of such event that,
for a specified period of time prior to such event, such Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment shall be
exercisable as to all shares covered thereby, notwithstanding anything to the
contrary in this Plan or in the provisions of such Option, Performance Award,
Stock Appreciation Right, Dividend Equivalent or Stock Payment.
(c) In its discretion, and on such terms and conditions as it deems
appropriate, the Committee may provide either by the terms of such Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment or by a resolution adopted prior to the occurrence of such event that
upon such event, such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment shall be assumed by the successor
corporation, or a parent or subsidiary thereof, or shall be substituted for by
similar options, rights or awards covering the stock of the successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kind of shares and prices.
(d) In its discretion, and on such terms and conditions as it deems
appropriate, the Committee may provide either by the terms of a Restricted Stock
award or Deferred Stock award or by a resolution adopted prior to the occurrence
of such event that, for a specified period of time prior to such event, the
restrictions imposed under a Restricted Stock Agreement or a Deferred Stock
Agreement upon some or all shares of Restricted Stock or Deferred Stock may be
terminated, and, in the case of Restricted Stock, some or all shares of such
Restricted Stock may cease to be subject to repurchase under Section 6.6 after
such event.
10.5 Approval of Plan by Stockholders. This Plan will be submitted for the
--------------------------------
approval of the Company's stockholders within twelve months after the date of
the Board's initial adoption of this Plan. Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted and
Restricted Stock or Deferred Stock may be awarded prior to such stockholder
approval, provided that such Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such
Restricted Stock or Deferred Stock shall not vest prior to the time when this
Plan is approved by the stockholders, and provided further that if such approval
has not been obtained at the end of said twelve-month period, all Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments previously granted and all Restricted Stock or
20
<PAGE>
Deferred Stock previously awarded under this Plan shall thereupon be canceled
and become null and void.
10.6 Tax Withholding. The Company shall be entitled to require payment in
---------------
cash or deduction from other compensation payable to each Optionee, Grantee or
Restricted Stockholder of any sums required by federal, state or local tax law
to be withheld with respect to the issuance, vesting or exercise of any Option,
Restricted Stock, Deferred Stock, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment. The Committee may in its discretion and
in satisfaction of the foregoing requirement allow such Optionee, Grantee or
Restricted Stockholder to elect to have the Company withhold shares of Common
Stock (or allow the return of shares of Common Stock) having a Fair Market Value
equal to the sums required to be withheld.
10.7 Loan. The Committee may, in its discretion, extend one or more loans
----
to key Employees in connection with the exercise or receipt of an Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment granted under this Plan, or the issuance of Restricted Stock or Deferred
Stock awarded under this Plan. The terms and conditions of any such loan shall
be set by the Committee.
10.8 Limitations Applicable to Section 16 Persons and Performance-Based
------------------------------------------------------------------
Compensation. Notwithstanding any other provision of this Plan, any Option,
- ------------
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment granted, or Restricted Stock or Deferred Stock awarded, to a key
Employee or Director who is then subject to Section 16 of the Exchange Act,
shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule, and this Plan shall be deemed amended to the extent
necessary to conform to such limitations. Furthermore, notwithstanding any
other provision of this Plan, any Option or Stock Appreciation Right intended to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code shall be subject to any additional limitations set forth in Section
162(m) of the Code (including any amendment to Section 162(m) of the Code) or
any regulations or rulings issued thereunder that are requirements for
qualification as performance-based compensation as described in Section
162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent
necessary to conform to such requirements.
10.9 Effect of Plan Upon Options and Compensation Plans. The adoption of
--------------------------------------------------
this Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in this Plan shall be construed to
limit the right of the Company (i) to establish any other forms of incentives or
compensation for Employees of the Company or any Subsidiary or (ii) to grant or
assume options or other rights otherwise than under this Plan in connection with
any proper corporate purpose including but not by way of limitation, the grant
or assumption of options in connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, firm or association.
21
<PAGE>
10.10 Compliance with Laws. This Plan, the granting and vesting of options,
--------------------
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan and
the issuance and delivery of shares of Common Stock and the payment of money
under this Plan or under Options, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents or Stock Payments granted or Restricted Stock or Deferred
Stock awarded hereunder are subject to compliance with all applicable federal
and state laws, rules and regulations (including but not limited to state and
federal securities law and federal margin requirements) and to such approvals by
any listing, regulatory or governmental authority as may, in the opinion of
counsel for the Company, be necessary or advisable in connection therewith. Any
securities delivered under this Plan shall be subject to such restrictions, and
the person acquiring such securities shall, if requested by the Company, provide
such assurances and representations to the Company as the Company may deem
necessary or desirable to assure compliance with all applicable legal
requirements. To the extent permitted by applicable law, the Plan, Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments granted or awarded
hereunder shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
10.11 Titles. Titles are provided herein for convenience only and are not
------
to serve as a basis for interpretation or construction of this Plan.
10.12 Governing Law. This Plan and any agreements hereunder shall be
-------------
administered, interpreted and enforced under the internal laws of the State of
Washington without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of Cavanaughs Hospitality Company on January __, 1998.
Executed on this __th day of January, 1998.
/s/
-------------------
Richard Barbieri
Secretary
22
<PAGE>
ADDENDUM
The Company hereby approves the grants of awards of Restricted Stock under
the Plan to the following persons in the amounts set forth below.
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
Arthur Coffey 15,000 shares
John Taffin 10,000 shares
Lori Farnell 10,000 shares
David Peterson 10,000 shares
Shannon Kapek 10,000 shares
</TABLE>
The foregoing Restricted Stock awards shall be subject to the terms and
conditions of the Plan and those set forth in written Restricted Stock
Agreements, which shall include, among other things, that 20% of the shares of
Restricted Stock subject to each recipient's Award shall be issued on the date
the Company consummates the initial public offering of Common Stock, and an
additional 20% shall be issued on each anniversary date thereof. The officers
of the Company are authorized and directed to prepare, negotiate and execute, on
behalf of the Company, the Restricted Stock Agreements with respect to the
foregoing Awards.
23
<PAGE>
EXHIBIT 10.10
CAVANAUGHS HOSPITALITY CORPORATION
1998 COMPANY-WIDE
STOCK OPTION PLAN
1. INTRODUCTION AND DEFINITIONS
1.1 THE PLAN:
This 1998 Company-Wide Stock Option Plan (this "Plan") establishes the
right of and procedures for Cavanaughs Hospitality Corporation (the "Company")
to grant stock options to its employees.
1.2 DEFINITIONS:
Capitalized terms used in this Plan shall have the following meanings:
"ACT." "Act" shall mean the Securities Act of 1933, as amended.
"BOARD." The "Board" shall mean the Board of Directors of the Company.
"BUY OUT NOTICE." "Buy Out Notice" shall have the meaning set forth in
Section 7 hereof.
"CODE." "Code" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE. "Committee" shall mean the Compensation Committee of the Board,
or a subcommittee of the Board.
"COMPANY." The "Company" shall mean Cavanaughs Hospitality Corporation.
"FAIR MARKET VALUE." "Fair Market Value" of a share of Common Stock as of a
given date shall be (i) the mean between the highest and lowest selling price of
a share of Common Stock on the principal exchange on which shares of Common
stock are then trading, if any, on such date, or if shares were not traded on
such date, then on the closest preceding date on which a trade occurred, or (ii)
if Common Stock is not traded on an exchange, the mean between the closing
representative bid and asked prices for the Common Stock on such date as
reported by NASDAQ or, if NASDAQ is not then in existence, by its successor
quotation system; or (iii) if Common Stock is not publicly traded, the Fair
Market Value of a share of Common Stock as established by the Committee acting
in good faith.
"PLAN." "Plan" shall mean the Cavanaughs Hospitality Corporation 1998
Company-Wide Stock Option Plan, as amended.
<PAGE>
"SHARES." The "Shares" shall mean the Shares reserved for issuance under
this Plan as further defined in Section 2.2.
2. GENERAL PROVISIONS
2.1 OBJECTIVES OF THE PLAN:
The purpose of this Plan is to encourage ownership of common stock of the
Company by all employees of the Company and any current or future subsidiary.
This Plan is intended to provide an incentive and bonus for maximum effort in
the successful operation of the Company and is expected to benefit the
shareholders by associating the interests of the Company's employees with those
of its shareholders and by enabling the Company to attract and retain personnel
of the best available talent through the opportunity to share, by the
proprietary interests created by this Plan, in the increased value of the
Company's shares to which such personnel have contributed. The benefits of this
Plan are not a substitute for compensation otherwise payable to Company
employees pursuant to the terms of their employment. This Plan provides for the
granting of "Non-Qualified Stock Options," which options are not to be construed
as "Incentive Stock Options" as defined and governed by Section 422A of the
Code. This Plan sets forth provisions applicable to Non-Qualified Options only.
2.2 STOCK RESERVED FOR THIS PLAN:
The Stock reserved for issue upon the exercise of options granted under
this Plan will not exceed 300,000 shares of the $.01 par value common stock of
the Company (the "Shares") which may be either authorized and unissued shares or
issued shares held in or hereafter acquired for the treasury of the Company.
Shares subject to any option under this Plan which are not exercised in full or
Shares as to which the right to purchase is forfeited through default or
otherwise, shall remain available for other options under this Plan.
2.3 ADMINISTRATION OF THIS PLAN:
This Plan shall be administered by the Company's Compensation Committee
(the "Committee"), provided that each member of the Board who participates in
administration must be a "non-employee director" as that term is defined in Rule
16b(3) of the Securities Exchange Act of 1934. Such committee shall have sole
discretion to determine the employees to be granted options under this Plan, to
determine the size and applicable terms and conditions of grants to be made to
such employees, to determine a time when options will be granted, and to
authorize grants to eligible employees. Such committee shall have full power
and authority to administer and interpret this Plan and to adopt, from time to
time, such guidelines, rules, regulations, agreements, and instruments for the
administration of this plan as it deems necessary or advisable.
The Committee's interpretations of this Plan, and all actions taken and
determinations made by the Committee concerning any matter arising under or with
respect to this Plan or any
2
<PAGE>
options granted pursuant to this Plan, shall be final, binding, and conclusive
on all interest parties, including the Company, its shareholders, and all
former, present and future employees of the Company. The Committee may, as to
all questions of accounting rely conclusively upon any determinations made by
independent public accounts of the Company.
The guidelines for administration of this plan as adopted by and amended by
the Board shall be attached to this Plan for reference.
2.4 ELIGIBILITY; FACTS TO BE CONSIDERED IN GRANTING OPTIONS:
An option may be granted to any full-time or part-time employee who, as of
the date the option is granted, is then an employee and had been an employee of
the Company or of any subsidiary for at least 180 consecutive days during the
Company's last fully-completed fiscal year, provided that employees who hold any
of the positions of President, Chief Executive Officer, Chief Financial Officer,
or Principal Accounting Officer may not participate. In its determination of an
employee to whom an option shall be granted and the number of shares to be
covered by such option, the Committee may also take into account any or all of
the following factors: the salary and/or wages of the employee; the duties of
the employee; the present and potential contributions of the employee to the
success of the Company; the anticipated number of years of service remaining
before the attainment by the employee of the age of retirement; and other
factors deemed relevant by the Committee in connection with accomplishing the
purpose of this Plan. An employee who has been granted an option to purchase
Shares of the Company, whether under this Plan or otherwise, may, if the
Committee shall so determine, be granted additional options, provided that no
employee may be granted options under this Plan that in the aggregate would
result in such employee receiving more than 5% of the maximum number of Shares
available for issuance under this Plan.
2.5 VESTING OF OPTIONS:
The Committee shall have the authority to establish the time or times at
which the optioned Shares may be purchased and whether all of the options may be
exercised at one time or in increments.
2.6 RIGHTS OF OPTIONEE IN EVENT OF MERGER, CONSOLIDATION, TENDER OFFER,
TAKEOVER BID, SALE OF ASSETS OR DISSOLUTION:
(a) Notwithstanding Section 2.5 above or anything else in this Plan to
the contrary, the Optionee may purchase the full amount of optioned Shares for
which options have been granted to the Optionee and for which the options have
not been exercised under the following conditions:
(1) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing twenty-seven (27) days and ending seven (7)
days prior to the scheduled effective date of a merger or consolidation (as such
effective date may be delayed
3
<PAGE>
from time to time) wherein the Company is not to be the surviving corporation,
which merger or consolidation is not between or among the Company and other
corporations related to or affiliated with the Company;
(2) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing on the initial date of a tender offer or
takeover bid for the optioned Shares (other than a tender offer by the Company)
subject to the Securities Exchange Act of 1934 and the rules promulgated
thereunder and ending on the day preceding the scheduled termination date of
acceptance of tenders of Shares by the offeror under any such tender offer or
takeover bid (as such termination date may be extended by such offeror);
(3) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing on the date the shareholders of the Company
approve a sale of substantially all the assets of the Company and ending seven
(7) days prior to the scheduled closing date of such sale (as such closing date
may be delayed from time to time); and
(4) The Optionee may conditionally purchase any or all optioned
Shares during the period commencing on the date the Company files its Statement
of Intent to Dissolve and ending thirty (30) days later but not in any event
later than the day before the Company files its Articles of Dissolution.
(b) If the merger, consolidation, tender offer, takeover bid, sale
of assets, or dissolution, as the case may be and as described in Subsections
(1) through (4) of Section 2.6(a), once commenced, is cancelled or revoked, the
conditional purchase of Shares for which the option to purchase would not have
otherwise been exercisable at the time of said cancellation or revocation, but
for the operation of this Section 2.6, shall be rescinded. With respect to all
other Shares conditionally purchased, the Optionee may rescind such purchase at
his or her option.
(c) If the merger, consolidation, tender offer, takeover bid, or sale
of assets does occur or thirty (30) days passes after a Statement of Intent to
Dissolve is filed (or Articles of Dissolution are filed), as the case may be and
as described in Subsections (1) through (4) of Section 2.6(a), and the Optionee
has not conditionally purchased all optioned Shares, all unexercised options
shall terminate on the effective, termination, or closing date, or thirty (30)
days after the date of said filing date (but not later than the day before
Articles of Dissolution are filed), as the case may be.
(d) If the Company shall be the surviving corporation in any merger or
is a party to a merger or consolidation which is between or among the Company
and other corporations related to or affiliated with the Company, any option
granted hereunder shall pertain and apply to the securities to which a holder of
the number of Shares of common stock subject to the option would have been
entitled.
(e) Nothing herein shall allow the Optionee to purchase optioned
Shares, the options for which have expired.
4
<PAGE>
2.7 TERMS AND EXPIRATION OF OPTIONS:
Each option granted under this Plan shall be in writing, shall be subject
to such amendment or modification from time to time as the Committee shall deem
necessary or appropriate to comply with or take advantage of applicable laws or
regulations and shall contain provisions to the following effect, together with
such other provisions as the Board shall from time to time approve:
(a) that, subject to the provisions of Section 2.7(b) below, the
option, as to the whole or any part thereof, may be exercised only by the
Optionee or such Optionee's personal representative;
(b) that neither the whole nor any part of the option shall be
transferable by the Optionee or by operation of law otherwise than by the will
of, or by the laws of descent and distribution applicable to, a deceased
Optionee and that the option and any and all rights granted to the Optionee
thereunder and not theretofore effectively and completely exercised shall
automatically terminate and expire upon any sale, transfer, or hypothecation or
any attempted sale, transfer, or hypothecation of such rights or upon the
bankruptcy or insolvency of the Optionee or his or her estate;
(c) that subject to the foregoing provisions, an option may be
exercised at different times for portions of the total number of Shares for
which the right to purchase shall have vested provided that such portions are in
multiples of 10 shares if the Optionee holds vested options for 99 or fewer
shares and otherwise in multiples of 100 shares;
(d) that no Optionee shall have the right to receive any dividend
on or to vote or exercise any right in respect of any Shares unless and until
the certificates for such Shares have been issued to such Optionee;
(e) that the option shall expire at the earliest of the following:
(1) The date specified in the option;
(2) Ninety (90) days after voluntary or involuntary
termination of Optionee's employment other than termination as described in
Paragraphs (3) or (4) below:
(3) Upon the discharge of Optionee for misconduct, willfully
or wantonly harmful to the Company;
(4) Twelve months after Optionee's death or disability; or
(5) In the event of a merger, consolidation, tender offer,
takeover bid, sale of assets, or filing of a Statement of Intent to Dissolve (or
the filing of Articles of Dissolution), as the case may be and as described in
Subsections (1) through (4) of
5
<PAGE>
Section 2.6(a), on the date specified in Section 2.6(c). However, if the merger,
consolidation, tender offer, takeover bid, or sale of assets does not occur or
if a Statement of Intent to Dissolve is not filed, as the case may be and as
described in Subsections (1) through (4) of Section 2.6(a), all options which
are terminated pursuant to this Subsection (e)(5) shall be reinstated as if no
action with respect to any of said events had been contemplated or taken by any
party thereto and all Optionees shall be returned to their respective positions
on the date of termination;
(f) that, to the extent an option provides for the vesting thereof
in increments, such vesting shall cease as of the date of the Optionee's death,
disability, or voluntary or involuntary termination of Optionee's employment
with the Company;
(g) that the terms of the option shall not be affected by any
change of duties or position so long as the Optionee shall continue to be
employed by the Company or a subsidiary.
2.8 EXERCISE OF OPTIONS:
The Optionee (or other person or persons, if any, entitled thereto
hereunder) desiring to exercise an option granted and exercisable hereunder as
to all or part of the Shares covered thereby shall notify the Company or, if
required by the Company, the brokerage firm designated by the Company to
facilitate exercises and sales under this Plan, specifying the number of option
Shares to be purchased and, if required by the Company, representing in form
satisfactory to the Company that the Shares are being purchased for investment
and not with a view to resale or distribution. The notification to the
brokerage firm shall be made in accordance with procedures of such brokerage
firm approved by the Company. With respect to any Shares conditionally
purchased pursuant to Section 2.6(a) above and for which such purchase has not
been voluntarily or otherwise rescinded pursuant to Section 2.6(b), the Optionee
shall be deemed to have given the notice required by this Section 2.8 as of ten
(10) days prior to the closing or effective date of the merger, consolidation,
tender offer, takeover bid, or sale of assets or as of the twentieth (20th) day
after a Statement of Intent to Dissolve is filed (or the tenth (10th) day before
the filing of Articles of Dissolution if it precedes said twentieth (20th) day),
as the case may be and as described in Subsections (1) through (4) of Section
2.6(a).
2.9 METHOD OF EXERCISE OF OPTION:
The option shall be exercised as to the number of Shares specified in the
notice provided pursuant to Section 2.8 above by payment to the Company of the
amount specified below in Section 3.2. Payment of the option price shall be
made in cash or in accordance with procedures for a "cashless exercise" as the
same shall have been established from time to time by the Company and the
brokerage firm designated by the Company to facilitate exercises and sales under
this Plan. Payment in shares of the Company's common stock shall be deemed to
be the equivalent of payment in cash at the Fair Market Value of those shares.
No such payment in shares of the Company's common stock shall be allowed when
the same may in the reasonable opinion of the Company cause the Company to
record a loss or expense as a result thereof.
6
<PAGE>
2.10 RECAPITALIZATION:
The aggregate number of Shares for which options may be granted hereunder,
the number of Shares covered by each outstanding option, and the price per Share
thereof in each such option shall be proportionately adjusted for an increase or
decrease in the number of outstanding shares of common stock of the Company
resulting from a stock split or reverse split of shares or any other capital
adjustment or the payment of a stock dividend or other increase or decrease in
such shares effected without receipt of consideration by the Company excluding
any decrease resulting from the purchase of shares for the treasury. If the
adjustment would result in a fractional Share, the Optionee shall be entitled to
one (1) additional Share, provided that the total number of Shares to be granted
under this Plan shall not be increased above the equivalent number of Shares
initially allocated or later increased by approved amendment to this Plan.
2.11 SUBSTITUTIONS AND ASSUMPTION:
The Board shall have the right to substitute or assume options in
connection with mergers, reorganizations, separations, or other "corporate
transactions" as that term is defined in and said substitutions and assumptions
are permitted by Section 425 of the Code and the regulations promulgated
thereunder. The number of Shares reserved pursuant to Section 2.2 may be
increased by the corresponding number of options assumed and, in the case of a
substitution, by the net increase in the number of Shares subject to options
before and after the substitution.
2.12 TERMINATION:
The directors of the Company may at any time modify, amend, or terminate
this Plan. No amendment, modification, or termination of the Plan may adversely
affect options granted prior to such action.
2.13 GRANTING OF OPTIONS:
The granting of any option pursuant to this Plan shall be entirely in the
discretion of the Committee and nothing herein contained shall be construed to
give any employee any right to participate under this Plan.
2.14 WITHDRAWAL:
An Optionee may at any time elect in writing to abandon an option with
respect to the number of Shares as to which the option shall not have been
exercised.
2.15 GOVERNMENT REGULATIONS:
This Plan and the granting and exercise of any option hereunder and the
obligations of the Company to sell and deliver Shares under any such option
shall be subject to all applicable laws, rules, and regulations and to such
approvals by any governmental agencies as may be required.
7
<PAGE>
2.16 PROCEEDS FROM SALE OF STOCK:
Proceeds of the purchase of optioned Shares by an Optionee shall be for the
general business purposes of the Company.
2.17 BOARD AUTHORIZATION:
This Plan has been adopted and authorized by the Board for a period of ten
years beginning as of the first day of the Company's 1998 fiscal year.
2.18 COMPLIANCE WITH SECURITIES LAWS:
The Committee shall have the right to:
(a) require an Optionee to execute, as a condition of the exercise of
an option, a letter evidencing Optionee's intent to acquire the Shares for
investment and not with a view to the resale or distribution thereof;
(b) place appropriate legends upon the certificate or certificates
for the Shares; and
(c) take such other acts as it deems necessary in order to cause the
issuance of optioned Shares to comply with applicable provisions of State and
Federal Securities Laws.
In furtherance of the foregoing, and not by way of limitation thereof, no
option shall be exercisable unless such option and the Shares to be issued
pursuant thereto shall be registered under appropriate Federal and State
Securities Laws, or shall be exempt therefrom, in the opinion of the Committee
upon advice of counsel to the Company. Each option agreement shall contain
adequate provisions to assure that there will be no violation of such Laws.
This provision shall in no way obligate the Company to undertake registration of
options or Shares hereunder. Issue, transfer or delivery of certificates for
Shares pursuant to the exercise of options may be delayed, at the discretion of
the board, until the Board is satisfied that the applicable requirements of the
Federal and State Securities Laws have been met.
2.19 TERMINAL DATE OF PLAN:
This Plan shall not extend beyond January 1, 2008.
3. OPTION PRICE AND WITHHOLDING TAX
In addition to the provisions of Section 2 above, the following paragraphs
shall apply to any options granted under this Plan:
8
<PAGE>
3.1 OPTION PRICE:
The option or purchase price of each Share optioned under this Plan shall
be determined by the Committee at the time of the action for the granting of the
option.
3.2 WITHHOLDING ON PAYMENT FOR OPTIONED SHARES:
The amount to be paid by the Optionee upon exercise of an option shall be
the full purchase price thereof provided in the option, together with the amount
of federal, state, and local income and FICA taxes required to be withheld by
the Company. An Optionee may elect to pay his or her federal, state, or local
income and FICA withholding tax by having the Company withhold shares of Company
common stock having a value equal to the amount required to be withheld. The
value of the shares to be withheld is deemed to equal the fair market value of
the shares on the day the option is exercised, as determined in accordance with
Section 2.9. An election by an Optionee to have shares withheld for this purpose
will be subject to the following restrictions:
(a) If an Optionee has received multiple option grants, a separate
election must be made for each grant;
(b) The election must be made prior to the day the option is
exercised;
(c) The election will be irrevocable;
(d) The election will be subject to the disapproval of the Board;
(e) If the Optionee is an officer of the Company within the meaning of
Section 16 of the Securities Exchange Act of 1934 ("Section 16"), the election
may not be made within six months following the grant of the option; and
(f) If the Optionee is an officer of the Company within the meaning of
said Section 16, the election must be made either six months prior to the day
the option is exercised or the ten day "window" beginning on the third day
following the release of the Company's quarterly or annual summary statement of
sales and earnings.
4. AMENDMENT
This Plan and all rules and regulations adopted in respect hereof may be
terminated, suspended, or amended at any time by a majority vote of the Board,
except as otherwise specifically set forth in Section 2.12, provided that no
such action shall adversely affect any rights of Optionees granted under this
Plan prior to such action. The Board may amend the terms and conditions of
outstanding options, provided, however, that (i) no such amendment would be
adverse to the holders of such options, (ii) no such amendment shall extend the
Period for
9
<PAGE>
exercise of an option, and (iii) the amended terms of an option would be
permitted under this Plan.
5. REGISTRATION, LISTING, AND QUALIFICATION OF SHARES
Each option shall be subject to the requirement that if at any time the
Committee shall determine that the registration, listing, or qualification of
the shares covered thereby upon any securities exchange or under any foreign,
federal, state, or local law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such option or the purchase of shares thereunder, no such
option may be exercised unless and until such registration, listing,
qualification, consent, or approval shall have been effected or obtained free of
any condition not acceptable to the Committee. Any person exercising an option
shall make such representations and agreements and furnish such information as
the Committee may request to assure compliance with the foregoing or any other
applicable legal requirements.
6. BUY OUT OF OPTION GAINS
At any time after any option becomes exercisable, the Committee shall have
the right to elect, in its sole discretion and without the consent of the
Optionee, to cancel such option and to pay such Optionee the excess of the fair
market value of the shares of the Company's common stock covered by such option
over the option exercise price of such option at the date the Committee provides
written notice (the "Buy Out Notice") of its intention to exercise such right.
Buy outs pursuant to this provision shall be effected by the Company as promptly
as possible after the date of the Buy Out Notice. Payments of buy out amounts
may be made in cash, in shares of the Company's common stock, or partly in cash
and partly in common stock, as the Committee deems advisable. To the extent
payment is made in shares of common stock, the number of shares shall be
determined by dividing the amount of the payment to be made by the fair market
value of a share of common stock at the date of the Buy Out Notice. In no event
shall the Company be required to deliver a fractional share of common stock in
satisfaction of this buy out provision. Payment of any such buy out amount
shall be made net of any applicable foreign, federal (including FICA), state,
and local withholding taxes.
7. NO RIGHTS TO OPTIONS OR EMPLOYMENT; NO RESTRICTIONS
No employee or other person shall have any claim or right to be granted an
option under this Plan. Having received an option under this Plan shall not
give an employee any right to receive any other grant or option under this Plan.
An Optionee shall have no rights to or interest in any option except as set
forth herein. Neither this Plan nor any action taken hereunder shall be
construed as giving any employee any right to be retained in the employ of the
Company. Nothing in this Plan shall restrict the Company's rights to adopt other
option plans pertaining to any or all of the employees covered under this Plan
or other employees not covered under this Plan.
10
<PAGE>
8. COSTS AND EXPENSES
Except as provided herein with respect to the payment of taxes, all costs
and expenses of administering the Plan shall be borne by the Company and shall
not be charged to any grant nor any employee receiving a grant.
9. PLAN UNFUNDED
This Plan shall be unfunded. Except for the Board's reservation of a
sufficient number of authorized shares to the extent required by law to meet the
requirements of the Plan, the Company shall not be required to establish any
special or separate fund or to make any other segregation of assets to assure
payment of any grant under the Plan.
10. GOVERNING LAW
This Plan shall be governed by and construed in accordance with the laws of
the state of Washington.
11
<PAGE>
EXHIBIT 10.12
CAVANAUGHS HOSPITALITY CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT, dated ________, 1998, is made by and between Cavanaughs
Hospitality Corporation, Inc., a Washington corporation hereinafter referred to
as "Company," and __________, an employee of the Company, hereinafter referred
to as "Recipient".
WHEREAS, the Company wishes to award Recipient shares of its $.01 par value
Common Stock; and
WHEREAS, the Company wishes to carry out the Plan (the terms of which are
hereby incorporated by reference and made a part of this Agreement); and
WHEREAS, the Committee, appointed to administer the Plan, has determined
that it would be to the advantage and best interest of the Company and its
shareholders to grant the Award provided for herein to the Recipient as an
inducement to enter into or remain in the service of the Company or its
Subsidiaries and as an incentive for increased efforts during such service, and
has advised the Company thereof and instructed the undersigned officers to issue
said Award;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever the following terms are used in this Agreement, they shall have
the meaning specified below unless the context clearly indicates to the
contrary. Unless otherwise defined herein, capitalized terms used herein shall
have the meanings set forth therefor in the plan. The masculine pronoun shall
include the feminine and neuter, and the singular the plural, where the context
so indicates.
"Award" shall mean an award of Restricted Stock granted under this
Agreement and Article VI of the Plan.
"Cause" shall mean (i) the Recipient's failure or refusal to perform
specific and lawful directions with respect to the Recipient's employment with
the Company, (ii) the commission by the Recipient of a felony or the
perpetration by the Recipient of an act of fraud, dishonesty, or
<PAGE>
misrepresentation against, or breach of fiduciary duty toward, the Company, or
(iii) any willful act or omission by the Recipient which is injurious in any
material respect to the financial condition or business reputation of the
Company.
"Plan" shall mean The 1998 Stock Incentive Plan of Cavanaughs Hospitality
Corporation.
ARTICLE II
GRANT OF AWARD
--------------
Section 2.1 Grant of Award
--------------
In consideration of the Recipient's agreement to remain in the employ of
the Company for a period of at least one year after the Award is granted and for
other good and valuable consideration, on the date hereof the Company
irrevocably grants to the Recipient the Award of an aggregate of ____ shares of
its $.01 par value Common Stock upon the terms and conditions set forth in this
Agreement.
Section 2.2 Purchase Price
--------------
The purchase price of the shares of stock covered by the Award shall be
$.01 per share (the par value of the Common Stock), without commission or other
charge.
Section 2.3 Consideration to Company
------------------------
The consideration to the Company for the Award consists of services
performed by Recipient and the following agreement of Recipient. In
consideration of the granting of this Award by the Company, the Recipient agrees
to render faithful and efficient services to the Company or a Subsidiary, with
such duties and responsibilities as the Company shall from time to time
prescribe, for a period of at least one (1) year from the date this Award is
granted. Nothing in the Plan or this Agreement shall confer upon any Recipient
any right to continue in the employ of the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge the Recipient at any time for any reason whatsoever, with or
without cause.
Section 2.4 Adjustments in Award
--------------------
(a) In the event that the outstanding shares of the stock subject to the
Award are changed into or exchanged for a different number or kind of shares
of the Company or other securities of the Company, or of another corporation,
by reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split up, stock dividend or combination of shares, the
Committee shall make an appropriate and equitable adjustment in the number and
2
<PAGE>
kind of shares as to which the Award, or portions thereof not then received,
shall be issuable, to the end that after such event the Recipient's
proportionate interest shall be maintained as before the occurrence of such
event. Such adjustment in the Award may include any necessary. Any such
adjustment made by the Committee shall be final and binding upon the Recipient,
the Company and all other interested persons.
(b) Notwithstanding the foregoing, in the event of such a reorganization,
merger, consolidation, recapitalization, reclassification, stock split up, stock
dividend or combination, or other adjustment or event which results in shares of
Common Stock being exchanged for or converted into cash, securities or other
property, the Company will have the right to terminate the Plan as of the date
of the exchange or conversion, in which case all Awards, rights and other awards
under this Award shall become the right to receive such cash, securities or
other property.
(c) In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Company's Common Stock, the Board may in its discretion make
an appropriate and equitable adjustment to the Award to reflect such diminution.
ARTICLE III
PROOF OF ISSUANCE
-----------------
Section 3.1 Schedule of Issuance
--------------------
(a) Subject to Section 5.6, the Award shall become issuable in five
installments as follows:
(i) The first installment shall consist of _____ (20%) of the shares
covered by the Award and shall become issuable on the date the Company completes
the initial public offering of the Common Stock under the Securities Act (the
"IPO Date").
(ii) The second installment shall consist of _____ (20%) of the
shares covered by the Award and shall become issuable on the first anniversary
of the IPO Date.
(iii) The third installment shall consist of _____ (20%) of the
shares covered by the Award and shall become issuable on the second anniversary
of the IPO Date.
(iv) The fourth installment shall consist of _____ (20%) of the
shares covered by the Award and shall become issuable on the fourth anniversary
of the IPO Date.
(v) The fifth installment shall consist of _____ (20%) of the shares
covered by the Award and shall become issuable on the fifth anniversary of the
IPO Date.
(b) No portion of the Award which has not been issued at Termination of
3
<PAGE>
Employment shall thereafter become issuable, except as may be otherwise provided
by the Committee.
Section 3.2 Expiration of Award
-------------------
The Award may not be issued to any extent after the first to occur of the
following events:
(a) The time of the Recipient's Termination of Employment unless such
Termination of Employment results from the Recipient's death, the Recipient's
retirement in accordance with the Company's retirement policies or after age
fifty five (55) if the Recipient has completed five (5) years of employment with
the Company, the Recipient's total and permanent disability, or the Recipient's
being discharged other than for Cause; or
(b) The expiration of three (3) months from the date of the Recipient's
Termination of Employment by reason of the Recipient's being discharged other
than for Cause, unless the Recipient dies within said three-month period; or
(c) The expiration of one (1) year from the date of the Recipient's
Termination of Employment by reason of the Recipient's total and permanent
disability or the Recipient's retirement in accordance with the Company's
retirement policies or after age fifty five (55) if the Recipient has completed
five (5) years of employment with the Company; or
(d) The expiration of one (1) year from the date of the Recipient's
death; or
(e) The effective date of either the merger or consolidation of the Company
with or into another corporation, the exchange of all or substantially all of
the assets of the Company for the securities of another corporation, the
acquisition by another corporation or person of all or substantially all of the
Company's assets or eighty percent (80%) or more of the Company's then
outstanding voting stock, or the liquidation or dissolution of the Company,
unless the Committee waives this provision in connection with such transaction.
At least twenty (20) days prior to the effective date of such merger,
consolidation, exchange, acquisition, liquidation or dissolution, the Committee
shall give the Recipient notice of such event if the shares subject to the Award
have not then either been issued nor become unissuable under this Section 3.2.
Section 3.3 Acceleration
------------
In the event of the merger or consolidation of the Company with or into
another corporation, the exchange of all or substantially all of the assets of
the Company for the securities of another corporation, the acquisition by
another corporation or person of all or substantially all of the Company's
assets or eighty percent (80%) or more of the Company's then outstanding voting
stock, or the liquidation or dissolution of the Company, the Committee may, in
its absolute discretion and upon such terms and conditions as it deems
appropriate, provide by resolution, adopted prior to such event and incorporated
in the notice referred to in Section 3.2(f),
4
<PAGE>
that at some time prior to the effective date of such event this Award shall be
issuable as to all the shares covered hereby, notwithstanding that this Award
may not yet have become fully issuable under Section 3.1(a); provided, however,
that this acceleration of issuance shall not take place if:
(a) This Award becomes unissuable under Section 3.2 prior to said effective
date; or
(b) In connection with such an event, provision is made for an assumption
of this Award or a substitution therefor of a new Award by an employer
corporation or a parent or subsidiary of such corporation, and
provided, further, that nothing in this Section 3.3 shall make this Award
issuable if it is otherwise unissuable by reason of Section 5.6.
The Committee may make such determinations and adopt such rules and
conditions as it, in its absolute discretion, deems appropriate in connection
with such acceleration, including, but not by way of limitation, provisions to
ensure that any such acceleration and resulting issuance shall be conditioned
upon the consummation of the contemplated corporate transaction.
None of the foregoing discretionary terms of this Section shall be
permitted to the extent that such discretion would be inconsistent with the
requirements of Rule 16b-3.
Section 3.4 Conditions to Issuance of Stock Certificates
--------------------------------------------
The shares of stock deliverable pursuant to the Award, or any portion
thereof, may be either previously authorized but unissued shares or issued
shares which have then been reacquired by the Company. Such shares shall be
fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock pursuant to the
Award or portion thereof prior to fulfillment of all of the following
conditions:
(a) The admission of such shares to listing on all stock exchanges on which
such class of stock is then listed; and
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under rulings or regulations of the
Securities and Exchange Commission or of any other governmental regulatory body,
which the Committee or Board shall, in its absolute discretion, deem necessary
or advisable; and
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee or Board shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The receipt by the Company of full payment for such shares, including
payment of all amounts which, under federal, state or local tax law, it is
required to withhold upon
5
<PAGE>
delivery of shares subject to the Award; and
(e) The receipt of a bona fide written representation and agreement, in a
form satisfactory to the Committee or the Board, signed by the Recipient or
other person then entitled to receive such Award or portion, stating that the
shares of stock are being acquired for the Recipient's own account, for
investment and without any present intention of distributing or reselling said
shares or any of them except as may be permitted under the Securities Act and
then applicable rules and regulations thereunder, and that the Recipient or
other person then entitled to receive such Award or portion will indemnify the
Company against and hold it free and harmless from any loss, damage, expense or
liability resulting to the Company if any sale or distribution of the shares by
such person is contrary to the representation and agreement referred to above.
The Committee may, in its absolute discretion, take whatever additional actions
it deems appropriate to insure the observance and performance of such
representation and agreement and to effect compliance with the Securities Act
and any other federal or state securities laws or regulations. Without limiting
the generality of the foregoing, the Committee may require an opinion of counsel
acceptable to it to the effect that any subsequent transfer of shares acquired
does not violate the Securities Act, and may issue stop-transfer orders covering
such shares. Share certificates evidencing Restricted Stock Awards shall bear
an appropriate legend referring to the provisions of this subsection and the
agreements herein. The written representation and agreement referred to in the
first sentence of this subsection shall, however, not be required if the
Restricted Stock have been registered under the Securities Act, and such
registration is then effective in respect of such shares; and
ARTICLE IV
OTHER PROVISIONS
----------------
Section 4.1 Administration
--------------
The Committee shall have the power to interpret the Plan and this Agreement
and to adopt such rules for the administration, interpretation and application
of the Plan as are consistent therewith and to interpret or revoke any such
rules. All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon the Recipient, the
Company and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or the Award. In its absolute discretion, the
Board may at any time and from time to time exercise any and all rights and
duties of the Committee under this Plan except with respect to matters which
under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules
issued thereunder, are required to be determined in the sole discretion of the
Committee.
Section 4.2 Award Not Transferable
----------------------
Neither the Award nor any interest or right therein or part thereof shall
be liable for the
6
<PAGE>
debts, contracts or engagements of the Recipient or the Recipient's successors
in interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that this Section 4.2 shall not
prevent (i) transfers by will or by the applicable laws of descent and
distribution, (ii) the designation by the Recipient of a beneficiary to receive
the Recipient's Award or other rights under this Agreement after the Recipient's
death, or (iii) transfers pursuant to a QDRO.
Section 4.3 Shares to Be Reserved
---------------------
The Company shall at all times during the term of the Award reserve and
keep available such number of shares of stock as will be sufficient to satisfy
the requirements of this Agreement.
Section 4.4 Restriction. No shares of Restricted Stock issued under this
-----------
Award (including any shares received by holders thereof with respect to shares
of Restricted Stock as a result of stock dividends, stock splits or any other
form of recapitalization) shallto a person subject to Section 16 of the Exchange
Act shall be sold, assigned or otherwise transferred until at least six months
have elapsed from (but excluding) the date on which the Restricted Stock was
issued, and provided, that by a resolution adopted after the Restricted Stock is
--------
issued, the Committee may, on such terms and conditions as it may determine to
be appropriate, remove any or all of the restrictions imposed by the terms of
this Restricted Stock Agreement.
Section 4.5 Repurchase of Restricted Stock. The Company shall have the right
------------------------------
to repurchase from the Restricted Stockholder the Restricted Stock then subject
to restrictions under the Restricted Stock Agreement immediately upon a
Termination of Employment or, if applicable, upon a termination of any
consulting relationship between the Restricted Stockholder and the Company, at a
cash price per share equal to the price paid by the Restricted Stockholder for
such Restricted Stock; provided, however, that no such right of repurchase shall
-------- -------
exist in the event of a Termination of Employment without cause, or following a
change in control of the Company or because of the Restricted Stockholder's
retirement, death or disability, or otherwise.
Section 4.6 Escrow. The Secretary of the Company or such other escrow holder
------
as the Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to the shares evidenced by such
certificate expire or shall have been removed.
Section 4.7 Legend. In order to enforce the restrictions imposed upon shares
------
of Restricted Stock hereunder, the Committee shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Restricted Stock Agreements, which legend or
legends shall make appropriate reference to the conditions
7
<PAGE>
imposed thereby.
Section 4.8 Notices
-------
Any notice to be given under the terms of this Agreement to the Company
shall be addressed to the Company in care of its Secretary, and any notice to be
given to the Recipient shall be addressed to the Recipient at the address given
beneath the Recipient's signature hereto. By a notice given pursuant to this
Section 4.8, either party may hereafter designate a different address for
notices to be given to that party. Any notice which is required to be given to
the Recipient shall, if the Recipient is then deceased, be given to the
Recipient's personal representative if such representative has previously
informed the Company of such representative's status and address by written
notice under this Section 4.8. Any notice shall be deemed duly given when
enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
deposited (with postage prepaid) in a post office or branch post office
regularly maintained by the United States Postal Service.
Section 4.9 Titles
------
Titles are provided herein for convenience only and are not to serve as a
basis for interpretation or construction of this Agreement.
Section 4.10 Shareholder Approval
--------------------
The Plan will be submitted for approval by the Company's shareholders
within twelve (12) months after the date the Plan was initially adopted by the
Board. Shares of Restricted Stock pursuant to this Award may not issued prior
to the time when the Plan is approved by the shareholders, and if such approval
has not been obtained by the end of said twelve-month period, this Award shall
thereupon be canceled and become null and void.
Section 4.11 Construction
------------
This Agreement shall be administered, interpreted and enforced under the
laws of the State of Washington.
Section 4.12 Conformity to Securities Laws
-----------------------------
The Recipient acknowledges that the Plan is intended to conform to the
extent necessary with all provisions of the Securities Act and the Exchange Act
and any and all regulations and rules promulgated by the Securities and Exchange
Commission thereunder, including without limitation Rule 16b-3. Notwithstanding
anything herein to the contrary, the Plan shall be administered, and the Award
is granted, only in such a manner as to conform to such laws, rules and
regulations. To the extent permitted by applicable law, the Plan and this
Agreement shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
8
<PAGE>
Section 4.13 Amendments. etc.
----------------
This Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by the Recipient and by a duly authorized
representative of the Company.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
parties hereto.
CAVANAUGHS HOSPITALITY CORPORATION
By:
President
By:
Secretary
[Name]
- ------
Recipient
[ ]
- ----------
Address
Recipient's Taxpayer
Identification Number:
[ ]
- ----------
9
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333- ) of our report dated December 10, 1997, except for Notes 7, 14 and 15,
as to which the date is January 15, 1998, on our audits of the combined
financial statements of Cavanaughs Hospitality Corporation, Barbieri Investment
Company and Lincoln Building Limited Partnership. We also consent to the
reference to our firm under the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Spokane, Washington
January 16, 1998
<PAGE>
Exhibit 23.3
CONSENT OF DIRECTOR NOMINEE
I, Peter Stanton, do hereby consent to being named in the Prospectus
constituting part of this Form S-1 as a nominee for director of Cavanaughs
Hospitality Corporation.
/s/ Peter F. Stanton
----------------
Peter Stanton
January 20, 1998
<PAGE>
Exhibit 23.4
CONSENT OF DIRECTOR NOMINEE
I, Ronald R. Taylor, do hereby consent to being named in the Prospectus
constituting part of this Form S-1 as a nominee for director of Cavanaughs
Hospitality Corporation.
/s/ Ronald R. Taylor
----------------
Ronald R. Taylor
January 20, 1998
<PAGE>
Exhibit 23.5
CONSENT OF DIRECTOR NOMINEE
I, Robert G. Templin, do hereby consent to being named in the Prospectus
constituting part of this Form S-1 as a nominee for director of Cavanaughs
Hospitality Corporation.
/s/ Robert G. Templin
-----------------
Robert G. Templin
January 20, 1998
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 6,440
<SECURITIES> 0
<RECEIVABLES> 2,944
<ALLOWANCES> (80)
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0
495
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</TABLE>
