<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
REGISTRATION NO. 333-44491
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CAVANAUGHS HOSPITALITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 7011 91-1032187
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
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)
<TABLE>
<S> <C>
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
</TABLE>
---------------
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. [_]
---------------
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 FEBRUARY 27, 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. Upon completion of the
Offering, the Company's current shareholders as a group will own approximately
57.7% of the outstanding shares of Common Stock. As a result these shareholders
will be able to control all corporate matters of the Company that are subject
to shareholder approval, including the election of directors. 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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."
----------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY
ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR
POSSESSION OR DISTRIBUTION OF A PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO
WHOSE POSSESSION THIS PROSPECTUS COMES ARE ADVISED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT, AND TO OBSERVE ANY RESTRICTIONS AS
TO, THE OFFERING OF THE COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
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 7,072,025 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 in
the Northwest under its proprietary brand name, "Cavanaughs(TM)". 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 for an aggregate purchase price of approximately $15.5
million. Substantially all of the Company's assets, including the Hotels, are
owned by the Operating Partnership, the day to day operations of which are
managed by the Company in its capacity as sole general partner. With 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
3
<PAGE>
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 $10.6
million, net income was $1.7 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 $14.5 million, net income was $5.5 million, REVPAR was
$41.21 and ADR was $68.94.
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"), effective November 1, 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 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.
4
<PAGE>
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 time 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. 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 64.5% due to supply growth exceeding demand
growth. 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 for the twelve months ended October 31, 1996 and 1997, compared to
the same periods in 1995 and 1996, respectively, for (i) the Hotels that were
open for each of the periods presented, (ii) U.S. full service hotels and
(iii) all U.S. hotels.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE VERSUS PRIOR PERIOD
-----------------------------------------------
REVPAR(1) ADR OCCUPANCY
-------------- -------------- ---------------
1996 1997 1996 1997 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cavanaughs Hotels(2).... 8.3% 8.7% 9.3% 9.1% (1.5)% (1.6)%
U.S. Full Service Ho-
tels(3)................ 8.4% 7.8% 7.4% 7.8% 0.8 % 0.1 %
U.S. Hotels(3)(4)....... 6.4% 5.4% 6.4% 6.4% (0.1)% (0.9)%
</TABLE>
- --------
(1) Determined by dividing annual room revenue by annual available rooms.
(2) 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: Smith Travel Research.
(4) Includes both full service and limited service hotels.
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. According to
U.S. Bank's Economic Update (October 1997), for the twelve months ended July
1997 the metropolitan areas of Seattle, Washington and Portland, Oregon were
the second and fourth fastest growing metropolitan economies in the nation,
respectively. In addition, according to the 1998 U.S. Bank Regional Economic
Review and Forecast, Washington is the fifth most rapidly growing state in the
nation. The western region of the United States is expected to continue to
outpace the nation in employment income and population growth through the year
2000, according to the Oregon Economic Review and Forecast (December 1997).
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 OCTO-
BER 31, 1997:
Cavanaughs on Fifth Ave-
nue.................... 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 Ave-
nue.................... 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 Ho-
tel.................... 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)(3)................ 1,718 84,300 $ 45.72 $ 73.43 63.5%
HOTELS ACQUIRED SINCE
OCTOBER 31, 1997:
Cavanaughs Ridpath Ho-
tel.................... Spokane, WA 1998(4) 1996 342 16,000 $ 33.49 $ 58.43 57.3%
Cavanaughs on the
Falls.................. Idaho Falls, ID 1998(5) 1994 142 8,800 34.49 57.38 60.1
Cavanaughs Templins Re-
sort................... Post Falls, ID 1998(6) 1996 167 11,000 36.45 62.65 58.2
HOTELS CURRENTLY UNDER
CONTRACT:
Cavanaughs Outlaw Ho-
tel.................... Kalispell, MT 1998(7) 1995 220 11,000 $ 29.88 $ 68.88 43.4%
Cavanaughs Hillsboro Ho-
tel.................... Portland, OR 1998(8) 1997 123 3,500 50.13 72.38 69.3
----- ------- --------- ---------- -------
Total/Weighted Average
for Hotels Acquired or
Under Contract Since
October 31, 1997...... 994 50,300 $ 35.40 $ 62.99 56.2%
Total/Weighted Average
for All Hotels
(2)(3)................ 2,712 134,600 $ 41.21 $ 68.94 59.8%
</TABLE>
- --------
(1) Leased by the Company effective October 15, 1997. See "Business and
Properties--Hotel Properties."
(2) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material impact
on REVPAR and average occupancy percentage.
(3) 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.
(4) Leased by the Company effective January 1, 1998. See "Business and
Properties--Hotel Properties."
(5) Acquired by the Company on January 7, 1998.
(6) Acquired by the Company on February 2, 1998.
(7) The Company has entered into a purchase agreement dated November 19, 1997
to acquire this hotel, subject to the satisfaction of normal closing
conditions, for a purchase price of $9.8 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.
(8) The Company has entered into a purchase agreement dated January 14, 1998
pursuant to which it intends to acquire this hotel, subject to the
satisfaction of normal closing conditions, for a purchase price of $5.7
million on April 1, 1998. This hotel, currently known as the Hallmark Inn,
will be re-branded as the "Cavanaughs Hillsboro Hotel" upon acquisition.
6
<PAGE>
STRUCTURE OF THE COMPANY
The Company is the sole general partner of the Operating Partnership and the
Company, North River Drive Company, the Barbieri Family Foundation, Donald
Barbieri, Thomas Barbieri and Richard Barbieri are currently the limited
partners 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
<PAGE>
THE OFFERING
Common Stock Offered by the
Company....................
5,175,000 shares
Common Stock Outstanding
after the Offering.........
12,270,253 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. See "Use of Proceeds."
Proposed NYSE symbol........ "CVH"
- --------
(1) Includes 7,084,253 restricted shares owned by David Barbieri, Donald
Barbieri, Kathryn 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") and Employee
Stock Purchase Plan (the "Employee Stock Purchase Plan" and together with
the 1998 Plan, the "Plans"). See "Management."
8
<PAGE>
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 and the two months ended
December 31, 1996 and 1997. The summary combined statement of operations data
for the fiscal years ended October 31, 1993 and 1994 and the two months ended
December 31, 1996 and the summary combined balance sheet data as of October 31,
1993, 1994 and 1995 and December 31, 1996 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 operations data for the fiscal years ended
October 31, 1995, 1996 and 1997 and the two months ended December 31, 1997 and
the summary combined balance sheet data as of October 31, 1996 and 1997 and
December 31, 1997 are derived from the Company's audited financial statements
included elsewhere in this Prospectus. The pro forma combined statement of
operations 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>
TWO MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31,(1) DECEMBER 31,
-------------------------------------------------------- ------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997
------- ------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Hotels and
restaurants........... $28,417 $30,573 $ 31,244 $ 35,205 $ 41,662 $ 67,001 $ 5,683 $ 6,829
Entertainment,
management and
services.............. 4,468 3,205 3,092 3,168 3,842 3,842 483 840
Rental operations...... 4,572 4,987 6,027 6,790 6,539 6,539 1,191 1,169
------- ------- -------- -------- -------- -------- -------- --------
Total revenues........ 37,457 38,765 40,363 45,163 52,043 77,382 7,357 8,838
------- ------- -------- -------- -------- -------- -------- --------
Operating income(3).... 8,528 8,165 7,978 8,914 10,635 14,478 924 1,343
Interest expense....... 5,301 5,649 6,866 7,319 8,817 (6,050) 1,317 1,422
Income (loss) before
taxes and
extraordinary
item(3)............... 3,364 2,765 1,573 1,905 2,641 9,141 (274) --0--
Income taxes........... 1,254 574 542 730 932 3,153 (104) (6)
Extraordinary gain
(loss) item(4)........ 191 -- -- -- -- (541) -- --
------- ------- -------- -------- -------- -------- -------- --------
Net income (loss) (3).. $ 2,301 $ 2,191 $ 1,041 $ 1,175 $ 1,709 $ 5,447 $ (170) $ 6
Pro forma income per
share before
extraordinary item.... -- -- -- -- $ 0.24 $ 0.48 -- --
Pro forma extraordinary
item per share........ -- -- -- -- -- $ 0.04 -- --
Pro forma net income
per share(5).......... -- -- -- -- $ 0.24 $ 0.44 -- --
Shares used in the pro
forma per share
calculation(5)........ -- -- -- -- 7,072 12,270 -- --
Net loss per share--
basic and diluted..... -- -- -- -- -- -- -- --
Weighted average shares
outstanding........... -- -- -- -- -- -- -- 7,072
BALANCE SHEET DATA:
Total assets........... $80,220 $86,924 $107,042 $120,087 $124,104 $157,914 $119,941 $125,117
Long-term debt and
capital leases
excluding current
maturities............ $57,100 $66,755 $ 77,636 $ 88,799 $ 96,026 $ 70,852 $ 88,769 $ 96,558
Stockholders'
equity(6)............. $ 5,318 $ 5,055 $ 8,791 $ 9,613 $ 8,526 $ 69,801 $ 9,089 $ 8,532
OTHER DATA:
EBITDA(3)(7)........... $11,469 $11,763 $ 11,845 $ 13,575 $ 16,174 $ 21,020 $ 1,788 $ 2,191
EBITDA as a percentage
of revenues........... 30.6% 30.3% 29.4% 30.1% 31.1% 27.1% 24.3% 24.8%
Net cash provided by
operating
activities(8)......... -- -- 3,586 5,200 6,610 6,610 287 1,094
Net cash used in
investing
activities(8)......... -- -- (24,428) (13,184) (6,268) (6,268) (1,523) (3,294)
Net cash provided by
(used in) financing
activities(8)......... -- -- 19,178 9,258 (1,102) (1,102) (261) 715
HOTEL STATISTICS:
Hotels open (at end of
period)............... 6 6 6 7 8 13 7 8
Available rooms (at end
of period)............ 1,242 1,242 1,242 1,539 1,718 2,712 1,539 1,718
REVPAR(9)(10).......... $ 38.69 $ 38.70 $ 38.83 $ 42.04 $ 45.72 $ 41.21 $ 31.93 $ 36.11
ADR(11)................ $ 56.40 $ 60.27 $ 61.54 $ 67.29 $ 73.43 $ 68.94 $ 64.88 $ 71.22
Average occupancy
percentage(10)(12).... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8% 50.7% 51.8%
</TABLE>
9
<PAGE>
- --------
(1) The summary combined financial and other data has been presented as though
(i) the predecessor businesses of Cavanaughs Hospitality Corporation,
Barbieri Investment Company, Lincoln Building Limited Partnership and
their respective subsidiaries and partnerships which they controlled had
been combined as of October 31, 1993, 1994, 1995, 1996 and 1997 and (ii)
the spin-off of certain subsidiaries engaged in businesses not related to
the core hospitality business of the Company had occurred 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 February 27, 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 $422,000 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, amortization and minority interests.
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. While not all companies calculate EBITDA
in the same fashion and therefore EBITDA as presented may not be
comparable to similarly titled measures of other companies, 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) Cash flows from operating, investing and financing activities have not
been provided for the years ended October 31, 1993 and 1994. Due to the
mergers of the companies and partnerships described in Note 1 to the
Historical Combined Financial Statements, in the opinion of management,
the cost of preparing this information outweighs the benefit of providing
the data.
(9) REVPAR represents the total revenues divided by total available rooms, net
of rooms out of service due to significant renovations.
(10) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material
impact on REVPAR and average occupancy percentage.
(11) ADR represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(12) 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.
10
<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, the Company owns, or has
under contract, multiple hotels in the cities of Spokane and Yakima,
Washington and 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
11
<PAGE>
Revolving Credit Facility, the Company may seek to obtain additional debt or
equity 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,
12
<PAGE>
Chairman, President and Chief Executive Officer of the Company, will have sole
voting and investment power with respect to 21.5% of the outstanding shares of
Common Stock. So long as the Barbieri Family owns a substantial portion of the
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 ("USTs") had been located on
the site prior to both the acquisition of the land in 1984 and the
construction of the mall in 1985, and due to lack of documentation regarding
their removal, there exists a possibility that USTs may still exist on the
site and 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. The Company determined that further investigation was not warranted
because the environmental survey revealed no evidence of any contamination,
the inaccessibility of the land under the mall and its adjacent parking lots
and the high probability that any existing USTs would have been located and
removed during the extensive site excavation work which was performed for
utilities and building foundations during the facility's construction in 1985.
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
13
<PAGE>
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.
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. For example, for the year ended December 31,
1997, the Company's revenues in the first through fourth quarters were 19.7%,
25.7%, 29.1% and 25.5%, respectively, of its total revenue for such year and
the Company's net income (loss) for the first through fourth quarters was
(17.4)%, 43.5%, 81.7% and (7.8)%, respectively, of its total net income for
such year. 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 depend 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. For the year ended December 31, 1997, revenue from management and
third-party leasing was $1.4 million and $0.3 million, respectively. 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.
14
<PAGE>
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 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, or
contracted for, by the Company since December 31, 1997, the Company's
outstanding indebtedness will be approximately $73.1 million. Substantially
all of the Company's outstanding indebtedness is secured by individual
properties, including the Hotels. 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. At December
31, 1997, the Company's outstanding indebtedness had a weighted average annual
interest rate of 8.6% and weighted average remaining maturity of eight years
and eight months. At December 31, 1997, the Company's ratio of long-term debt
(including capital lease obligations) to equity was 11.8 to 1. After giving
effect to the acquisition of the five hotels acquired, or contracted for, by
the Company and the application of net proceeds from the Offering, the
Company's ratio of long-term debt (including capital lease obligations) to
equity will be approximately 1.1 to 1 and the amount of cash required to
service the Company's existing indebtedness during 1998 will be approximately
$6.7 million.
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.
15
<PAGE>
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 $7.41
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 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 12,270,253 shares of Common Stock outstanding (13,046,503
shares if the Underwriters' over-allotment option is exercised in full). Of
the shares outstanding after the Offering, 7,084,253 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 at
an exercise price equal to the initial public offering price. 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. In
addition, 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. 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 effective November 1, 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 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 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 on January 7, 1998
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. An
aggregate of approximately $1.5 million of the net proceeds of the Offering
will be used by the Company to repay a note payable to Inland Northwest
Corporation, an entity owned by certain members of the Barbieri Family, in the
amount of $933,333 and an obligation owed to the Barbieri Family Foundation in
the amount of $600,000. 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. At December 31, 1997 the indebtedness to be repaid bore interest at
fixed and variable rates, with a weighted average annual rate of 8.8% and a
weighted average remaining maturity of six years and six 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.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 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
December 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 DECEMBER 31, 1997
-------------------------
HISTORICAL
COMBINED PRO FORMA
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Debt, including current portion:
Existing long-term debt............................ $ 98,009 $ 42,735
Existing capital lease obligations................. 2,641 2,641
Borrowings under Revolving Credit Facility(1)...... -- 27,696
----------- -----------
Total debt....................................... 100,650 73,072
----------- -----------
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; 7,095,253 shares issued and
outstanding(2); 12,270,253 shares issued and
outstanding as adjusted(2)........................ 71 123
Partners' deficit.................................. (879) --
Additional paid-in capital......................... 3,935 64,670
Retained earnings.................................. 5,405 4,956
----------- -----------
Total stockholders' equity....................... 8,532 69,749
----------- -----------
Total capitalization............................. $ 109,182 $ 142,821
=========== ===========
</TABLE>
- --------
(1) The Company has obtained a commitment for the Revolving Credit Facility
for up to $80.0 million. This Revolving Credit Facility is contingent upon
the satisfaction of certain conditions, including the successful
completion of the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity."
(2) Includes 7,084,253 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 December 31, 1997 was
approximately $6,746,000, or approximately $0.95 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
December 31, 1997 would have been approximately $68.4 million, or
approximately $5.59 per share of Common Stock. This amount represents an
immediate increase in the pro forma net tangible book value per share of $4.62
per share to the existing shareholders and an immediate dilution in pro forma
net tangible book value per share to new investors of approximately $7.41 per
share. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Net tangible book value per share before the Offering....... $0.95
Pro forma net tangible book value increase per share
attributable to the Offering............................... 4.62
-----
Pro forma net tangible book value per share after the
Offering..................................................... 5.59
------
Pro forma net tangible book value dilution per share to new
investors.................................................... $ 7.41
======
</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 December 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... 7,072 57.7% $ 8,536 11.3% $ 1.21
Common Stock purchased
by new investors in the
Offering............... 5,175 42.3 67,275 88.7 13.00
------ ----- ------- ----- ------
Total................. 12,247 100.0% $75,811 100.0% $ 6.19
====== ===== ======= ===== ======
</TABLE>
- --------
(1) Includes 7,072,025 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 and the two months
ended December 31, 1996 and 1997. The selected combined statement of
operations data for the fiscal years ended October 31, 1993 and 1994 and the
two months ended December 31, 1996 and the selected combined balance sheet
data as of October 31, 1993, 1994 and 1995 and December 31, 1996 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 operations data for the
fiscal years ended October 31, 1995, 1996 and 1997 and the two months ended
December 31, 1997 and the selected combined balance sheet data as of October
31, 1996 and 1997 and December 31, 1997 are derived from the Company's audited
financial statements included elsewhere in this Prospectus. The pro forma
combined statement of operations 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>
TWO MONTHS
ENDED
FISCAL YEAR ENDED OCTOBER 31,(1) DECEMBER 31,
------------------------------------------------- -------------
PRO FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997
------- ------- ------- ------- ------- --------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Hotels and restaurants:
Rooms................. $16,276 $17,531 $17,587 $20,972 $25,147 $39,809 $2,998 $3,626
Food and beverage..... 11,469 12,027 12,397 12,141 13,926 23,547 2,271 2,756
Other................. 672 1,015 1,260 2,092 2,589 3,645 414 447
------- ------- ------- ------- ------- ------- ------ ------
Total hotels and
restaurants........ 28,417 30,573 31,244 35,205 41,662 67,001 5,683 6,829
Entertainment,
management and
services............. 4,468 3,205 3,092 3,168 3,842 3,842 483 840
Rental operations..... 4,572 4,987 6,027 6,790 6,539 6,539 1,191 1,169
------- ------- ------- ------- ------- ------- ------ ------
Total revenues...... 37,457 38,765 40,363 45,163 52,043 77,382 7,357 8,838
------- ------- ------- ------- ------- ------- ------ ------
OPERATING EXPENSES:
Direct:
Hotels and restaurants:
Rooms................. 4,822 4,868 4,931 5,719 6,820 11,420 958 1,167
Food and beverage..... 9,193 9,657 10,034 10,181 11,483 19,312 1,822 2,208
Other................. 503 808 716 1,008 1,066 1,409 149 170
------- ------- ------- ------- ------- ------- ------ ------
Total hotels and
restaurants........ 14,518 15,333 15,681 16,908 19,369 32,141 2,929 3,545
Entertainment,
management and
services............. 2,310 1,519 1,802 2,204 2,052 2,052 397 602
Rental operations..... 364 783 1,026 1,464 1,506 1,506 243 303
------- ------- ------- ------- ------- ------- ------ ------
Total direct
operating
expenses........... 17,192 17,635 18,509 20,576 22,927 35,699 3,569 4,450
------- ------- ------- ------- ------- ------- ------ ------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
TWO MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31,(1) DECEMBER 31,
--------------------------------------------------------- ------------------
PRO FORMA
1993 1994 1995 1996 1997 1997(2) 1996 1997
------- ------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNDISTRIBUTED OPERATING
EXPENSES:
Selling, general and
administrative....... 4,909 3,966 5,426 6,461 8,188 12,244 1,161 1,225
Property operating
costs(3)............. 4,023 5,554 5,022 4,997 5,518 9,183 944 1,022
Depreciation and
amortization......... 2,805 3,419 3,428 4,215 4,775 5,778 759 798
------- ------- -------- -------- -------- -------- -------- --------
Total undistributed
operating
expenses........... 11,737 12,939 13,876 15,673 18,481 27,205 2,864 3,045
------- ------- -------- -------- -------- -------- -------- --------
Total expenses...... 28,929 30,574 32,385 36,249 41,408 62,904 6,433 7,495
------- ------- -------- -------- -------- -------- -------- --------
Operating income(3)..... 8,528 8,165 7,978 8,914 10,635 14,501 924 1,343
Interest expense........ 5,301 5,649 6,866 7,319 8,817 6,050 1,317 1,422
Other................... 137 249 471 310 823 -- 119 79
Income (loss) before
income taxes and
extraordinary item(3).. 3,364 2,765 1,583 1,905 2,641 9,141 (274) --0--
Income taxes............ 1,254 574 542 730 932 3,153 (104) (6)
Extraordinary gain
(loss) item(4)......... 191 -- -- -- -- (541) -- --
Net income (loss)(3).... $ 2,301 $ 2,191 $ 1,041 $ 1,175 $ 1,709 $5,447 $ (170) $ 6
Pro forma income per
share before
extraordinary item..... -- -- -- -- $ 0.24 $ 0.48 -- --
Pro forma extraordinary
item per share......... -- -- -- -- -- $ 0.04 -- --
Pro forma net income per
share(5)............... -- -- -- -- $ 0.24 $ 0.44 -- --
Shares used in the pro
forma per share
calculation(5)......... -- -- -- -- 7,072 12,270 -- --
Dividends per share(6).. -- -- -- -- -- -- -- --
Net loss per share-basic
and diluted............ -- -- -- -- -- -- -- --
Weighted average shares
outstanding............ -- -- -- -- -- -- -- 7,072
BALANCE SHEET DATA:
Total assets.......... $80,220 $86,924 $107,042 $120,087 $124,104 $157,914 $119,941 $125,117
Current maturities of
long-term debt and
capital leases....... 2,652 2,458 10,306 10,509 4,784 1,305 10,753 4,092
Long-term debt and
capital leases
excluding current
maturities........... 57,100 66,755 77,636 88,799 96,026 70,852 88,769 96,558
Stockholders'
equity(7)............ 5,318 5,055 8,791 9,613 8,526 69,743 9,089 8,532
OTHER DATA:
EBITDA(3)(8).......... $11,469 $11,763 $ 11,045 $ 13,575 $ 16,174 $ 21,020 $ 1,788 $ 2,191
EBITDA as a percentage
of revenues.......... 30.6% 30.3% 29.4% 30.1% 31.1% 27.1% 24.3% 24.8%
Net cash provided by
operating
activities(9)........ -- -- 3,586 5,200 6,610 6,610 287 1,094
Net cash used in
investing
activities(9)........ -- -- (24,428) (13,184) (6,268) (6,268) (1,523) (3,294)
Net cash provided by
(used in) financing
activities(9)........ -- -- 19,178 9,258 (1,102) (1,102) (261) 715
HOTEL STATISTICS:
Hotels open (at end of
period).............. 6 6 6 7 8 13 7 8
Available rooms (at
end of period)....... 1,242 1,242 1,242 1,539 1,718 2,712 1,539 1,718
REVPAR(10)(11)........ $ 38.69 $ 38.70 $ 38.83 $ 42.04 $ 45.72 $ 41.21 $ 31.93 $ 36.11
ADR(12)............... $ 56.40 $ 60.27 $ 61.54 $ 67.29 $ 73.43 $ 68.94 $ 64.88 $ 71.22
Average occupancy
percentage(11)(13)... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8% 50.7% 51.8%
</TABLE>
21
<PAGE>
- --------
(1) The summary combined financial and other data has been presented as
though (i) the predecessor businesses of Cavanaughs Hospitality
Corporation, Barbieri Investment Company, Lincoln Building Limited
Partnership and their respective subsidiaries and partnerships which they
controlled had been combined as of October 31, 1993, 1994, 1995, 1996 and
1997 and (ii) the spin-off of certain subsidiaries engaged in businesses
not related to the core hospitality business of the Company had occurred
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 February 27, 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 $422,000 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, amortization and minority interests.
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. While not all companies calculate EBITDA
in the same fashion and therefore EBITDA as presented may not be
comparable to similarly titled measures of other companies, 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) Cash flow from operating, investing and financing activities has not been
provided for the years ended October 31, 1993 and 1994. Due to the
mergers of the companies and partnerships described in Note 1 to the
Historical Combined Financial Statements, in the opinion of management,
the cost of preparing this information outweighs the benefit of providing
the data.
(10) REVPAR represents the total revenues divided by total available rooms,
net of rooms out of service due to significant renovations.
(11) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material
impact on REVPAR and average occupancy percentage.
(12) ADR represents total room revenues divided by the total number of rooms
occupied by hotel guests on a paid basis.
(13) 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
and the two months ended December 31, 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
partnerships 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 previously 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 $45.72 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.
23
<PAGE>
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>
TWO MONTHS
FISCAL YEAR ENDED OCTOBER 31, ENDED DECEMBER 31,
------------------------------- ---------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restau-
rants................ 77.4% 78.0% 80.0% 77.2% 77.3%
Entertainment, manage-
ment and services.... 7.7 7.0 7.4 6.6 9.5
Rental operations..... 14.9 15.0 12.6 16.2 13.2
--------- --------- --------- --------- ---------
Total revenues...... 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
Direct operating ex-
penses................. 45.9% 45.6% 44.0% 48.5% 50.4%
Undistributed operating
expenses:
Selling, general and
administrative....... 13.4 14.3 15.7 15.8 13.9
Property operating
costs................ 12.5 11.1 10.6 12.8 11.6
Depreciation and amor-
tization............. 8.5 9.3 9.2 10.3 9.0
--------- --------- --------- --------- ---------
Total undistributed
operating expenses: 34.4 34.7 35.5 38.9 34.5
Operating income........ 19.8 19.7 20.4 12.6 15.2
Interest expense (net).. 17.0 16.2 16.9 17.9 16.1
Income (loss) before in-
come taxes............. 3.9 4.2 5.1 (3.7) --
Income tax provision
(benefit).............. 1.3 1.6 1.8 (1.4) (0.1)
--------- --------- --------- --------- ---------
Net income (loss)..... 2.6% 2.6% 3.3% (2.3)% 0.1%
========= ========= ========= ========= =========
REVPAR.................. $ 38.83 $ 42.04 $ 45.72 $ 31.93 $ 36.11
ADR..................... $ 61.54 $ 67.29 $ 73.43 $ 64.88 $ 71.22
Occupancy............... 65.5% 64.5% 63.5% 50.7% 51.8%
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF TWO MONTHS ENDED DECEMBER 31, 1997 TO TWO MONTHS ENDED DECEMBER
31, 1996
Total revenues increased $1.5 million, or 20.1%, from $7.4 million in the
last two months of 1996 to $8.8 million in the comparable period of 1997. This
increase is attributed primarily to revenue generated from increases in total
rooms occupied, ADR and REVPAR, and the addition of Cavanaughs Gateway Hotel
in Yakima, Washington.
Total hotel and restaurant revenues increased $1.1 million, or 20.2%, from
$5.7 million in the last two months of 1996 to $6.8 million in the comparable
period of 1997. ADR increased $6.34, or 9.8%, from $64.88 in the last two
months of 1996 to $71.22 in the comparable period of 1997. Available room
nights increased 7.0% in the last two months of 1997. REVPAR increased $4.18,
or 13.1% from $31.93 in the last two months of 1996 to $36.11 in the
comparable period of 1997. The Company's hotel and restaurant revenues
increased primarily due to an increase in its ADR and total rooms occupied. In
addition, Cavanaughs Gateway Hotel was acquired in October 1997. November and
December of 1997 were the first two full months of operation for this 172-room
property which also contributed to this increase in revenues.
Entertainment, management and services revenues increased $0.4 million, or
74.0%, from $0.5 million in the last two months of 1996 to $0.8 million in the
comparable period of 1997. Entertainment revenue increased due to the greater
number of Company-presented shows and attendance at such shows. Management and
services revenue increased from the addition of new third-party management
contracts.
Rental income remained relatively stable at $1.2 million in the last two
months of 1996 and the comparable period of 1997.
24
<PAGE>
Direct operating expenses increased $0.9 million, or 24.7%, from $3.6
million in the last two months of 1996 to $4.5 million in the comparable
period of 1997, primarily due to the increase in the number of hotel guests
served and the Broadway shows presented by the Company. This represents an
increase in direct operating expenses as a percentage of total revenues from
48.5% in the last two months of 1996 to 50.4% in the comparable period of 1997
which is primarily attributable to the higher variable costs associated with
the Broadway shows.
Total undistributed operating expenses increased $0.2 million, or 6.3%, from
$2.9 million in the last two months of 1996 to $3.0 million in the comparable
period of 1997. Total undistributed operating expenses include selling,
general and administrative expenses, which increased 5.5% from the last two
months of 1996 to the comparable period of 1997, and depreciation and
amortization, which increased 5.1%. Total undistributed operating expenses as
a percentage of total revenues decreased 4.4% from 38.9% in the last two
months of 1996 to 34.5% in the comparable period of 1997. The decrease in
undistributed operating expenses as a percentage of total revenues is
primarily attributed to the Company's ability to increase REVPAR of the Hotels
while effectively controlling its selling, general and administrative
expenses.
Operating income increased $0.4 million, or 45.3%, from $0.9 million in the
last two months of 1996 to $1.3 million in the comparable period of 1997. As a
percentage of total revenues, operating income increased from 12.6% in the
last two months of 1996 to 15.2% in the comparable period of 1997. This
increase is due primarily to an increase in REVPAR.
Interest expense increased $0.1 million, or 8.0%, from $1.3 million in the
last two months of 1996 to $1.4 million in the comparable period of 1997. This
increase is primarily related to the incurrence of additional debt used for
completion of the conversion of Cavanaughs on Fifth Avenue and other corporate
purposes.
The income tax benefit changed as a result of the change in the pre-tax
loss. The effective income tax rate for both years was 34%.
The Company incurred a net loss of $170,000 in the last two months of 1996
compared to a net income of $6,000 in the comparable period of 1997.
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 $3.68, 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 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
25
<PAGE>
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 $6.5 million in 1996 to $8.2 million in 1997, and
depreciation and amortization, which increased 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 19.3%, from $8.9 million in 1996
to $10.6 million in 1997. As a percentage of total revenues, operating income
increased from 19.7% in 1996 to 20.4 % 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 $0.5 million, or 45.4%, from $1.2 million in 1996 to
$1.7 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 19.1% from $5.4 million in 1995 to $6.5 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
26
<PAGE>
expenses are attributed primarily to the addition of Cavanaughs on Fifth
Avenue which management believes has not attained stabilized occupancy.
Operating income increased $0.9 million, or 11.7%, 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.
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 $0.1 million, or 12.9%, from $1.0 million in 1995 to
$1.2 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal sources of liquidity have been 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 December 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 December 31,
1997, total outstanding indebtedness decreased from approximately $100.7
million to approximately $73.1 million. See "Use of Proceeds" and
"Capitalization."
At December 31, 1997, the Company had $5.0 million in cash and cash
equivalents. 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 hotel 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
27
<PAGE>
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 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, (vi) redemption of subordinated debt, (vii) 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,
(viii) payment of dividends or distributions on the Company's capital stock,
and (ix) 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 December 31, 1997, the Company had debt and capital leases outstanding
of $100.7 million consisting of primarily variable and fixed rate debt secured
by individual properties. The Company had a working capital credit facility of
$3.0 million with $1.1 million drawn as of December 31, 1997.
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 of the Hotels, demand is higher in the late spring through and early fall
(May through October) than during the balance of the year. For example, for
the year ended December 31, 1997, the Company's revenues in the first through
fourth quarters were 19.7%, 25.7%, 29.1% and 25.5%, respectively, of its total
revenue for such year and the Company's net income (loss) for the first
through fourth quarters was (17.4)%, 43.5%, 81.7% and (7.8)%, respectively, of
its total net income for such 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.
28
<PAGE>
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.
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 did 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.
29
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Cavanaughs Hospitality Corporation is a hotel operating company that owns,
operates, acquires, develops, renovates and repositions full service hotels in
the Northwest under its proprietary brand name, "Cavanaughs(TM)". 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 for an aggregate purchase price of approximately
$15.5 million. Substantially all of the Company's assets, including the
Hotels, are owned by the Operating Partnership, the day to day operations of
which are managed by the Company in its capacity as sole general partner. With
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 $14.5 million, net income was $5.5 million, REVPAR was $41.21 and ADR was
$68.94.
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
30
<PAGE>
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 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 in 1996, during which time it produced record income of $12.5
billion. Coopers & Lybrand 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 64.5% due to supply growth exceeding demand
growth. 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 for the twelve months ended October 31, 1996 and 1997, compared to
the same periods in 1995 and 1996, respectively, for (i) the Hotels that were
open for each of the periods presented, (ii) U.S. full service hotels and
(iii) all U.S. hotels.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE VERSUS PRIOR PERIOD
-----------------------------------------------
REVPAR(1) ADR OCCUPANCY
-------------- -------------- ---------------
1996 1997 1996 1997 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cavanaughs Hotels(2).... 8.3% 8.7% 9.3% 9.1% (1.5)% (1.6)%
U.S. Full Service Ho-
tels(3)................ 8.4% 7.8% 7.4% 7.8% 0.8 % 0.1 %
U.S. Hotels(3)(4)....... 6.4% 5.4% 6.4% 6.4% (0.1)% (0.9)%
</TABLE>
- --------
(/1/)Determined by dividing annual room revenue by annual available rooms.
(/2/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:)Smith Travel Research.
(/4/)Includes both full service and limited service hotels.
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. According
to U.S. Bank's Economic Update (October 1997), for the twelve months ended
July 1997 the metropolitan areas of Seattle, Washington and Portland, Oregon
were the second and fourth fastest growing metropolitan economies in the
nation, respectively. In addition, according to the 1998 US Bank Regional
Economic Review and Forecast, Washington is the fifth most rapidly growing
state in the nation. The western region of the United States is expected to
continue to outpace the nation in employment income and population growth
through the year 2000, according to the Oregon Economic Review and Forecast
(December 1997).
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
31
<PAGE>
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 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
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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 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 although there is no assurance that such expansion
will be accomplished. The Company's expansion criteria focus 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 its 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
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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 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.
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<PAGE>
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
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
Airlines/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)(3)......... 1,718 84,300 $ 45.72 $ 73.43 63.5%
HOTELS ACQUIRED SINCE
OCTOBER 31, 1997:
Cavanaughs Ridpath
Hotel.................. Spokane, WA 1998(4) 1996 342 16,000 $ 33.49 $ 58.43 57.3%
Cavanaughs on the
Falls.................. Idaho Falls, ID 1998(5) 1994 142 8,800 34.49 57.38 60.1
Cavanaughs Templins
Resort................. Post Falls, ID 1998(6) 1996 167 11,000 36.45 62.65 58.2
HOTELS CURRENTLY UNDER
CONTRACT:
Cavanaughs Outlaw
Hotel.................. Kalispell, MT 1998(7) 1995 220 11,000 $ 29.88 $ 68.88 43.4%
Cavanaughs Hillsboro
Hotel.................. Portland, OR 1998(8) 1997 123 3,500 50.13 72.38 69.3
----- ------- --------- ---------- -------
Total/Weighted Average
for Hotels Acquired
or Under Contract
Since October 31,
1997................. 994 50,300 $ 35.40 $ 62.99 56.2%
Total/Weighted Average
for All Hotels
(2)(3)............... 2,712 134,600 $ 41.21 $ 68.94 59.8%
</TABLE>
- -------
(1) Leased by the Company effective October 15, 1997. See "--Hotel
Properties."
(2) Rooms which were under renovation were excluded from REVPAR and average
occupancy percentage. Due to the short duration of renovation, in the
opinion of management, excluding these rooms did not have a material
impact on REVPAR and average occupancy percentage.
(3) 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.
(4) Leased by the Company effective January 1, 1998. See "--Hotel Properties."
(5) Acquired by the Company on January 7, 1998.
(6) Acquired by the Company on February 2, 1998.
(7) The Company has entered into a purchase agreement dated November 19, 1997
to acquire this hotel, subject to the satisfaction of normal closing
conditions, for a purchase price of $9.8 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.
(8) 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.
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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.
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 and 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
37
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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 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 the Company pursuant to a lease which expires
in October 2012, 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. 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 $9.8 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.
38
<PAGE>
Cavanaughs Hillsboro Hotel. The property, which the Company intends to
acquire in April 1998 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 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 system 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
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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 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.
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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.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of February 27, 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............. 43 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 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.
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<PAGE>
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).
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<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 Arthur 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 has 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.
44
<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 (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 three 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
45
<PAGE>
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 the 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 the 1998 Plan to attract and retain
officers, key employees and consultants. Additional options may be granted
subject to Board approval. An aggregate of 1,200,000 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 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
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<PAGE>
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.
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 3% of a participant's earnings. The trustee under
the 401(k) Plan invests the assets of the 401(k) Plan in designated investment
options. The Company intends to amend the 401(k) Plan after the Offering 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.
47
<PAGE>
RESTRICTED STOCK AND CERTAIN STOCK OPTION GRANTS
The Company has entered 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, provided such person is an employee of the
Company at that time.
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:
<TABLE>
<CAPTION>
PERCENT OF
SHARE PRICE INCREASE: OPTION SHARES VESTED:
--------------------- ---------------------
<S> <C>
25%................. 25%
50%................. 50%
75%................. 75%
100%................. 100%
</TABLE>
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.
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<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 7,084,253 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 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, and $17,000 for the two months ended
December 31, 1997 for performing management and administrative functions for
INWC and HBC. In addition, the Company received commissions from INWC and HBC
for real estate sales on behalf of INWC and HBC of $87,000, $7,000 and $51,000
for the years ended October 31, 1997, 1996 and 1995, respectively, and $1,000
for the two months ended December 31, 1997. In connection with the Spin-Off,
the Company entered into an agreement with INWC, pursuant to which it will
provide management, development, accounting and other administrative services
to INWC in exchange for commissions, leasing fees, management fees, service
fees and development fees, as applicable, based on certain percentages and
costs incurred by the Company in connection with providing such services. The
agreement is automatically renewed annually and is subject to termination at
the option of either party upon 60 days' notice before such renewal date.
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 paid by the Company for this Hotel was $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 in Templin's
Resort and Conference Center, Inc. and are 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 interest payment of approximately $67,000 annually, which, pursuant
to the terms of the obligation, increases by 3% annually. The Company has the
right to repay its obligation in full at any time after January 1997, and BFF
has the right to require redemption in full 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, and
$11,000 for the two months ended December 31, 1997. The Company will repay
this obligation upon closing of the Offering.
49
<PAGE>
Effective January 1, 1998, the Company issued an aggregate of 150,817
OP Units to BFF, Donald Barbieri, Richard Barbieri and Thomas Barbieri and
12,228 shares of Common Stock to Kathryn Barbieri in exchange for such persons'
undivided partnership interests in the Lincoln Building Limited Partnership.
At December 31, 1997, the Company had a $1.1 million note payable to INWC.
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 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.
At 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.
50
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of February 27, 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 12.1
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
group (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.
51
<PAGE>
PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
The following summary of the material terms 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.
52
<PAGE>
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 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.
53
<PAGE>
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
Stock for which 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.
54
<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, 12,270,253 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 provide 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
55
<PAGE>
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 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.
The Company may not exempt itself from coverage of this statute.
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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering (assuming no exercise of the Underwriters'
over-allotment option), the Company will have 12,270,253 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 7,084,253 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 an 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 21.5% 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
56
<PAGE>
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 up to 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 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.
57
<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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITER PURCHASED
----------- ------------
<S> <C>
CIBC Oppenheimer Corp. ......................................
NationsBanc Montgomery Securities LLC........................
---------
Total.................................................... 5,175,000
=========
</TABLE>
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
21.5% of the Common Stock outstanding after the Offering, has agreed, subject
to the same exceptions
58
<PAGE>
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.
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.
59
<PAGE>
EXPERTS
The combined balance sheets as of October 31, 1996 and 1997 and December 31,
1997 and the combined statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended October
31, 1997, and for the two months ended December 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.
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 LLP, 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.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HISTORICAL COMBINED FINANCIAL STATEMENTS OF CAVANAUGHS HOSPITALITY
CORPORATION, BARBIERI INVESTMENT COMPANY AND LINCOLN BUILDING LIMITED
PARTNERSHIP:
- ---------------------------------------------------------------------
Report of Independent Accountants....................................... F-2
Combined Balance Sheets at October 31, 1996 and 1997 and December 31,
1997................................................................... F-3
Combined Statements of Operations for the years ended October 31, 1995,
1996 and 1997 and the two months ended December 31, 1996 and 1997...... F-4
Combined Statements of Changes in Stockholders' and Partners' Equity for
the years ended October 31, 1995, 1996 and 1997 and the two months ended
December 31, 1997...................................................... F-5
Combined Statements of Cash Flows for the years ended October 31, 1995,
1996 and 1997 and the two months ended December 31, 1996 and 1997...... F-6
Notes to Combined Financial Statements.................................. F-7
PRO FORMA COMBINED FINANCIAL STATEMENTS:
- ----------------------------------------
Condensed Pro Forma Combined Financial Information...................... F-22
Condensed Pro Forma Combined Balance Sheet at October 31, 1997.......... F-23
Condensed Pro Forma Combined Statement of Income for the year ended Oc-
tober 31, 1997......................................................... F-24
Notes to Condensed Pro Forma Combined Balance Sheet and Statement of In-
come................................................................... F-25
</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 December 31, 1997, and the related combined
statements of operations, changes in stockholders' and partners' equity and
cash flows for each of the three years in the period ended October 31, 1997
and the two months ended December 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 December 31, 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1997 and the two months ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Spokane, Washington
February 16, 1998
F-2
<PAGE>
CAVANAUGHS HOSPITALITY CORPORATION
BARBIERI INVESTMENT COMPANY
LINCOLN BUILDING LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
October 31, 1996 and 1997 and December 31, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 7,200 $ 6,440 $ 4,955
Accounts receivable......................... 1,720 2,806 2,785
Inventories................................. 374 376 427
Prepaid expenses and deposits............... 395 1,128 1,100
-------- -------- --------
Total current assets...................... 9,689 10,750 9,267
Property and equipment, net................... 108,234 109,954 112,234
Other assets, net............................. 2,164 3,400 3,616
-------- -------- --------
Total assets.............................. $120,087 $124,104 $125,117
======== ======== ========
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' EQUITY
Current liabilities:
Payable to affiliate $ -- $ 1,333 $ 1,133
Note payable to bank -- -- 1,075
Accounts payable............................ 1,780 2,263 3,234
Accrued payroll and related benefits........ 830 843 983
Accrued interest payable.................... 711 741 689
Other accrued expenses...................... 2,764 3,618 2,882
Long-term debt, due within one year......... 10,086 4,285 3,590
Capital lease obligations, due within one
year....................................... 423 499 502
-------- -------- --------
Total current liabilities................. 16,594 13,582 14,088
Long-term debt, due after one year............ 86,450 93,771 94,419
Capital lease obligations, due after one
year......................................... 2,349 2,255 2,139
Deferred income taxes......................... 4,469 5,417 5,415
Minority interest in partnerships............. 612 553 524
-------- -------- --------
Total liabilities......................... 110,474 115,578 116,585
-------- -------- --------
Commitments and contingencies (Notes 4, 10, 11
and 14)
Stockholders' and partners' equity:
Cavanaughs Hospitality Corporation:
Preferred stock--1,424, 1,424 and 5,000,000
shares authorized, $450, $450 and $0.01
par value; 1,100, 1,100 and -0- shares is-
sued and outstanding, liquidation value
$495,000 at October 31, 1996 and 1997 495 495 --
Common stock--2,848, 2,848 and 50,000,000
shares authorized, $10, $10 and $0.01 par
value; 1,858, 1,766 and 7,072,025 shares
issued and outstanding.................... 19 18 71
Discount on stock (318) (318) --
Barbieri Investment Company:
Common stock--1,000, 1,000 and -0- shares
authorized, no par value; 929, 929 and -0-
shares issued and outstanding 686 686 --
Partners' deficit........................... (796) (897) (879)
Additional paid-in capital.................. 3,787 3,125 3,935
Retained earnings........................... 5,740 5,417 5,405
-------- -------- --------
Total stockholders' and partners' equity.. 9,613 8,526 8,532
-------- -------- --------
Total liabilities and stockholders' and
partners' equity......................... $120,087 $124,104 $125,117
======== ======== ========
</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 OPERATIONS
for the years ended October 31, 1995, 1996 and 1997
and the two months ended December 31, 1996 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEARS ENDED OCTOBER 31, DECEMBER 31,
------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- ------- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restaurants:
Rooms........................ $17,587 $20,972 $25,147 $2,998 $3,626
Food and beverage............ 12,397 12,141 13,926 2,271 2,756
Other........................ 1,260 2,092 2,589 414 447
------- ------- ------- ------ ------
Total hotels and restau-
rants..................... 31,244 35,205 41,662 5,683 6,829
Entertainment, management and
services..................... 3,092 3,168 3,842 483 840
Rental operations............. 6,027 6,790 6,539 1,191 1,169
------- ------- ------- ------ ------
Total revenues............. 40,363 45,163 52,043 7,357 8,838
------- ------- ------- ------ ------
Operating expenses:
Direct:
Hotels and restaurants:
Rooms....................... 4,931 5,719 6,820 958 1,167
Food and beverage........... 10,034 10,181 11,483 1,822 2,208
Other....................... 716 1,008 1,066 149 170
------- ------- ------- ------ ------
Total hotels and restau-
rants..................... 15,681 16,908 19,369 2,929 3,545
Entertainment, management and
services.................... 1,802 2,204 2,052 397 602
Rental operations............ 1,026 1,464 1,506 243 303
------- ------- ------- ------ ------
Total direct expenses...... 18,509 20,576 22,927 3,569 4,450
------- ------- ------- ------ ------
Undistributed operating ex-
penses:
Selling, general and adminis-
trative..................... 5,426 6,461 8,188 1,161 1,225
Property operating costs..... 5,022 4,997 5,518 944 1,022
Depreciation and amortiza-
tion........................ 3,428 4,215 4,775 759 798
------- ------- ------- ------ ------
Total undistributed operat-
ing expenses.............. 13,876 15,673 18,481 2,864 3,045
------- ------- ------- ------ ------
Total expenses............. 32,385 36,249 41,408 6,433 7,495
------- ------- ------- ------ ------
Operating income............... 7,978 8,914 10,635 924 1,343
Other income (expense):
Interest expense, net of
amounts capitalized.......... (6,866) (7,319) (8,817) (1,317) (1,422)
Interest income............... 439 296 416 92 54
Other income (expense) -- 150 348 13 (4)
Minority interest in partner-
ships........................ 32 (136) 59 14 29
------- ------- ------- ------ ------
Income (loss) before income
taxes......................... 1,583 1,905 2,641 (274) --
Income tax provision (bene-
fit).......................... 542 730 932 (104) (6)
------- ------- ------- ------ ------
Net income (loss).............. $ 1,041 $ 1,175 $ 1,709 $ (170) $ (6)
======= ======= ======= ====== ======
Pro forma net income per
share--basic and diluted...... $ 0.24
=======
Number of shares used in the
pro forma computation......... 7,072
=======
Net loss per share--basic and
diluted $ nil
======
Weighted-average shares out-
standing...................... 7,072
======
</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
and the two months ended December 31, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
BARBIERI
INVESTMENT
CAVANAUGHS HOSPITALITY CORPORATION COMPANY
----------------------------------------- -------------
PREFERRED
STOCK COMMON STOCK COMMON STOCK ADDITIONAL
-------------- ----------------- DISCOUNT ------------- PARTNERS' PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT ON STOCK SHARES AMOUNT DEFICIT CAPITAL EARNINGS
------ ------ --------- ------ -------- ------ ------ --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, OCTOBER 31,
1994................... 1,100 $495 1,877 $19 $(318) 929 $686 $(428) $3,190 $1,411
Net income (loss)...... (166) 1,207
Contributions from
stockholders.......... 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.... (19) (129)
------ ---- --------- --- ----- ---- ---- ----- ------ ------
BALANCES, OCTOBER 31,
1995................... 1,100 495 1,858 19 (318) 929 686 (594) 3,661 4,842
Net income (loss)...... (243) 1,418
Contributions from
(distributions to)
stockholders and part-
ners.................. 41 126 (248)
Dividends on Cavanaughs
Hospitality Corpora-
tion 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................... 1,100 495 1,858 19 (318) 929 686 (796) 3,787 5,740
Net income (loss)...... (101) 1,810
Distributions to stock-
holders 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.... (92) (1) (662)
------ ---- --------- --- ----- ---- ---- ----- ------ ------
BALANCES, OCTOBER 31,
1997................... 1,100 495 1,766 18 (318) 929 686 (897) 3,125 5,417
Net income (loss)...... 18 (12)
Effect of merger....... (1,100) (495) 7,070,259 53 318 (929) (686) 810
------ ---- --------- --- ----- ---- ---- ----- ------ ------
BALANCES, DECEMBER 31,
1997................... 0 $ 0 7,072,025 $71 $ 0 0 $ 0 $ 879 $3,935 $5,405
====== ==== ========= === ===== ==== ==== ===== ====== ======
</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
and the two months ended December 31, 1996 and 1997
(in thousands)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEARS ENDED OCTOBER 31, DECEMBER 31,
--------------------------- ------------------
1995 1996 1997 1996 1997
-------- -------- ------- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)............ $ 1,041 $ 1,175 $ 1,709 $ (170) $ 6
Adjustments to reconcile net
income (loss) to net cash
provided by operating activ-
ities:
Depreciation and amortiza-
tion........................ 3,428 4,215 4,775 759 798
Gain on disposition of prop-
erty and equipment.......... -- -- (322) -- --
Deferred income tax provi-
sion (benefit).............. (151) 89 948 -- (2)
Minority interest in part-
nerships.................... (32) 136 (59) (14) (29)
Change in:
Accounts receivable......... 2 (356) (1,086) (675) 21
Inventories................. 25 (50) (2) 15 (51)
Prepaid expenses and depos-
its........................ 305 (64) (733) 195 28
Accounts payable............ (153) (1,576) 483 (24) 971
Accrued payroll and related
benefits................... 38 189 13 (248) 140
Accrued interest payable.... 99 21 30 (27) (52)
Other accrued expenses...... (1,016) 1,421 854 476 (736)
-------- -------- ------- ------ ------
Net cash provided by oper-
ating activities.......... 3,586 5,200 6,610 287 1,094
-------- -------- ------- ------ ------
Investing activities:
Additions to property and
equipment................... (24,124) (13,457) (6,192) (1,589) (2,400)
Proceeds from disposition of
property and equipment...... 128 185 1,159 -- --
Payment for purchase option
agreement................... -- -- (500) -- --
Other, net................... (432) 88 (735) 66 (894)
-------- -------- ------- ------ ------
Net cash used in investing
activities................ (24,428) (13,184) (6,268) (1,523) (3,294)
-------- -------- ------- ------ ------
Financing activities:
Capital contributions from
stockholders and partners... 3,096 -- -- -- --
Distributions to stockholders
and partners................ -- (122) (1,815) (353) --
Dividends to stockholders.... (272) (272) (318) -- --
Proceeds from note payable to
bank........................ -- -- -- -- 1,075
Proceeds from long-term
debt........................ 21,853 34,735 10,559 7,595 2,982
Repayment of long-term debt.. (4,389) (24,844) (9,539) (7,435) (3,029)
Purchase and retirement of
common stock................ (129) -- (663) -- --
Principal payments on capital
lease obligations........... (981) (239) (659) (68) (113)
Advances from (payments to)
affiliate................... -- -- 1,333 -- (200)
-------- -------- ------- ------ ------
Net cash provided by (used
in) financing activities.. 19,178 9,258 (1,102) (261) 715
-------- -------- ------- ------ ------
Change in cash and cash equiv-
alents:
Net increase (decrease) in
cash and cash equivalents... (1,664) 1,274 (760) (1,497) (1,485)
Cash and cash equivalents at
beginning of period......... 7,590 5,926 7,200 7,200 6,440
-------- -------- ------- ------ ------
Cash and cash equivalents at
end of period............... $ 5,926 $ 7,200 $ 6,440 $5,703 $4,955
======== ======== ======= ====== ======
Supplemental disclosure of
cash flow information:
Cash paid during period for:
Interest (net of amount cap-
italized)................... $ 6,176 $ 7,298 $ 8,787 $1,344 $1,474
Income taxes................. 300 130 1,646 -- --
Noncash investing and financ-
ing activities:.............
Acquisition of capital
leases...................... $ 1,112 $ 1,714 $ 641 $ 122 $ --
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
(Information for the two months ended December 31, 1996 is unaudited)
1. ORGANIZATION:
At October 31, 1997 and December 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(TM) 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.
In October 1997, Cavanaughs Hospitality Limited Partnership (CHLP), a
Delaware partnership, was formed. CHLP was inactive at October 31, 1997.
F-7
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
1. ORGANIZATION, CONTINUED:
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 do 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 certain of 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.
Effective December 31, 1997, the Company changed its fiscal year end from
October 31 to December 31; therefore, the combined financial statements
presented herein are audited as of and for the two months ended December 31,
1997 with comparative unaudited combined financial statements for the two
months ended December 31, 1996.
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 December
31, 1997, these accounts totaled approximately $2.1 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.
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:
<TABLE>
<S> <C>
Buildings........................................................ 25-40 years
Equipment........................................................ 5-20 years
Furniture and fixtures........................................... 15 years
Landscaping and land improvements................................ 15 years
</TABLE>
F-8
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 and
the two months ended December 31, 1996 and 1997, the Company capitalized
approximately $459,000, $1,412,000, $6,000, $12,000 and $17,000 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 and
December 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.
INCOME TAXES
Prior to their merger, CHC-Washington and BIC filed 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.
EARNINGS PER SHARE
Due to the combination of the companies and partnerships, historical
earnings per share information prior to the combination 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).
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. The Company did not
F-9
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
have any dilutive securities outstanding for any of the periods presented.
Therefore, there are no differences between basic and diluted earnings per
share. The adoption of SFAS No. 128 did not have a material effect on the
presentation of the Company's EPS for the two months ended December 31, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
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.
3. PROPERTY AND EQUIPMENT:
Property and equipment at October 31, 1996 and 1997 and December 31, 1997 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- DECEMBER 31,
1996 1997 1997
--------- -------- ------------
<S> <C> <C> <C>
Buildings and equipment.................. $ 105,039 $108,507 $110,812
Furniture and fixtures................... 11,150 14,163 14,258
Equipment acquired under capital leases.. 4,421 4,543 4,543
Landscaping and land improvements........ 863 863 863
--------- -------- --------
121,473 128,076 130,476
Less accumulated depreciation and amorti-
zation.................................. (30,049) (34,325) (34,445)
--------- -------- --------
91,424 93,751 96,031
Land..................................... 16,810 16,203 16,203
--------- -------- --------
$ 108,234 $109,954 $112,234
========= ======== ========
</TABLE>
F-10
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
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 and December 31,
1997 is as follows (amounts outstanding in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1997 1997
----------- ------------
<S> <C> <C>
Note payable in monthly installments of $146,494
including interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. $16,816 $16,776
Note payable in monthly installments of $117,487
including interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 13,884 13,857
Note payable in monthly installments of $79,828
including interest at 7.25%, collateralized by
real property.................................... 9,785 9,744
Note payable in monthly installments of $85,156
including interest at a variable rate (8.125% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 9,083 9,038
Note payable in monthly installments of $64,637
including interest at a variable rate (7.88% at
October 31, 1997 and December 31, 1997),
collateralized by assignment of certain rental
income........................................... 7,773 7,746
Industrial revenue bonds payable in monthly
installments of $73,668 including interest at a
variable rate (7.65% at October 31, 1997 and
December 31, 1997), collateralized by real
property......................................... 7,555 7,504
Note payable in monthly installments of $63,378 at
October 31, 1997 and $65,393 at December 31,
1997, including interest at a variable rate
(10.375% at October 31, 1997 and 9.5% at December
31, 1997), collateralized by real property....... 7,128 7,110
Note payable in monthly installments of $46,369
including interest at 8.875%, collateralized by
real property.................................... 5,046 5,029
Note payable in monthly installments of $56,875
including interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 4,794 4,775
Note payable in monthly installments of $23,804
including interest at 8.5% at December 31, 1997,
collateralized by real property, assignment of
certain rental income and certain furniture and
fixtures......................................... -- 2,660
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 2,397
</TABLE>
F-11
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
4. LONG-TERM DEBT, CONTINUED:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1997 1997
----------- ------------
<S> <C> <C>
Note payable in monthly installments of $37,604
including interest at an index rate plus 2.375%
(8.66% at October 31, 1997 and December 31,
1997), collateralized by real property........... $ 2,292 $ 2,250
Note payable in monthly installments of $17,608 at
October 31, 1997 and $19,702 at December 31,
1997, including interest at a variable rate (8.5%
at October 31, 1997 and December 31, 1997),
collateralized by real property.................. 2,151 2,467
Note payable in monthly installments of $18,418 at
October 31, 1997 and $18,845 at December 31,
1997, 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 and 10.0% at
December 31, 1997), collateralized by real
property......................................... 1,696 1,687
Note payable in monthly installments of $22,702
including interest at a variable rate (9.5% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 1,190 1,164
Note payable in monthly installments of $41,674
including interest at a variable rate plus 0.5%
(9.0% at October 31, 1997 and December 31, 1997),
collateralized by real property.................. 1,091 1,072
Note payable in monthly installments of $9,076 at
October 31, 1997 and December 31, 1997, including
interest at a variable rate (9.5% at October 31,
1997 and December 31, 1997), collateralized by
certain equipment and furniture and fixtures..... 760 754
Amount payable at $67,000 interest only annually
(B).............................................. 600 600
Note payable of interest only at 8.0% until
maturity in October 2002, collateralized by
letter of credit................................. 500 500
Note payable in monthly installments of $9,000
including interest at an index rate (8.5% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 462 451
Note payable in monthly installments of $5,003
including interest at prime plus 1.0% (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 238 231
Note payable of interest only at 6.4% until
maturity in June 1998, collateralized by a
certificate of deposit........................... 100 100
Note payable in annual principal payments of
$37,000 plus interest at a variable rate (9.0% at
October 31, 1997 and December 31, 1997),
collateralized by real property.................. 74 74
Other............................................. 23 23
------- -------
98,056 98,009
Less current portion.............................. (4,285) (3,590)
------- -------
Total long-term debt.............................. $93,771 $94,419
======= =======
</TABLE>
F-12
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
4. LONG-TERM DEBT, CONTINUED:
- --------
(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 December 31, 1997,
are summarized by year as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................................... $ 3,590
1999............................................................... 3,908
2000............................................................... 3,252
2001............................................................... 3,331
2002............................................................... 4,089
Thereafter......................................................... 79,839
-------
$98,009
=======
</TABLE>
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. Cost and accumulated
amortization of equipment under capital lease obligations as of December 31,
1997 are approximately $4,543,000 and $2,065,000, respectively.
Future minimum lease payments at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................................... $ 706
1999............................................................... 696
2000............................................................... 661
2001............................................................... 513
2002............................................................... 400
Thereafter......................................................... 270
------
Total minimum lease payments....................................... 3,246
Less amount representing interest.................................. (605)
------
Total obligations under capital lease.............................. 2,641
Less current maturities............................................ (502)
------
$2,139
======
</TABLE>
F-13
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
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% (8.75% at December 31,
1997). At October 31, 1997, there were no amounts outstanding on the line of
credit. In November 1997, the borrowing limit under this agreement was
increased to $3.0 million and expires in March 1998. At December 31, 1997,
there was $1,075,000 outstanding on the line of credit. 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 was outstanding under this agreement (see Note 4)
and $670,000 was available to be drawn. At December 31, 1997, $9,038,000 was
outstanding under this agreement, 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 borrowings 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.
7. STOCKHOLDERS' EQUITY:
Prior to the merger 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 had 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, two 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 up
to 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 and the two months ended December
31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
TWO MONTHS
YEARS ENDED ENDED
OCTOBER 31, DECEMBER 31,
---------------- --------------
1995 1996 1997 1996 1997
----- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Current.................................... $ 693 $641 $(16) $ (104) $ (4)
Deferred................................... (151) 89 948 (2)
----- ---- ---- ------ ------
$ 542 $730 $932 $ (104) $ (6)
===== ==== ==== ====== ======
</TABLE>
F-14
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
8. INCOME TAXES, CONTINUED:
The income tax provisions (benefits) shown in the statements of operations
for the years ended October 31, 1995, 1996 and 1997 and the two months ended
December 31, 1996 and 1997 differ from the amounts calculated using the
federal statutory rate applied to income (loss) before income taxes as follows
(amounts in thousands):
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEARS ENDED OCTOBER 31, DECEMBER 31,
-------------------------------------- ------------------------
1995 1996 1997 1996 1997
------------ ----------- ----------- ------------ ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------ ---- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Provision (benefit) at
federal statutory
rate................... $ 538 34.0% $648 34.0% $898 34.0% $ 93 34.0% -- --
Effect of tax credits... (64) (4.0) -- -- (20) (0.7) -- -- -- --
Other................... 68 4.2 82 4.3 54 2.0 11 4.0 (6) --
----- ---- ---- ---- ---- ---- ----- ---- --- ---
$ 542 34.2% $730 38.3% $932 35.3% $(104) 38.0% $(6) --
===== ==== ==== ==== ==== ==== ===== ==== === ===
</TABLE>
Components of the net deferred tax assets and liabilities as of October 31,
1996 and 1997 and December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
-------------------------------------- ------------------
1996 1997 1997
------------------- ------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Depreciation on property
and equipment.......... $ -- $5,331 $ -- $5,295 $ -- $5,612
Rental income........... -- 192 -- 248 -- 285
Tax credits............. 577 -- 367 -- 367 --
Other................... 477 -- -- 241 115 --
------- ------ ---- ------ ---- ------
$ 1,054 $5,523 $367 $5,784 $482 $5,897
======= ====== ==== ====== ==== ======
</TABLE>
At October 31, 1997 and December 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.
F-15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
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. The cost and accumulated
depreciation of these properties at December 31, 1997 was approximately
$32,924,000 and $8,323,000, respectively.
Future minimum lease income under existing noncancellable leases at December
31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998............................................................... $ 6,903
1999............................................................... 6,647
2000............................................................... 6,116
2001............................................................... 5,140
2002............................................................... 4,275
Thereafter......................................................... 15,601
-------
$44,682
=======
</TABLE>
Rental income for the years ended October 31, 1995, 1996 and 1997 and the
two months ended December 31, 1996 and 1997 was approximately $6,027,000,
$6,790,000, $6,539,000, $1,191,000 and $1,169,000, respectively, which
included contingent rents of approximately $309,000, $342,000, $217,000,
$58,000 and $93,000, respectively.
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.
F-16
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
10. OPERATING LEASE COMMITMENTS, CONTINUED:
Assuming the Company exercises its purchase option for the hotel in March
2003, total payments due under these leases at December 31, 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998................................................................ $ 474
1999................................................................ 474
2000................................................................ 474
2001................................................................ 474
2002................................................................ 474
Thereafter.......................................................... 443
------
$2,813
======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Until January 1998, the Company guaranteed certain debt of entities
affiliated through common ownership, which are excluded from the combined
financial statements (see Note 1). At October 31, 1997 and December 31, 1997,
total debt outstanding which was guaranteed by the Company was approximately
$5,748,000 and $5,092,000, respectively. In January 1998, the Company's
guarantee of these affiliated companies' debt was eliminated.
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 December 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 and the two months ended December 31,
1996 and 1997:
. Interest expense of approximately $64,000, $66,000, $67,000, $11,000 and
$11,000 was incurred related to the payable to BFF (see Note 4) for the
years ended October 31, 1995, 1996 and 1997 and the two months ended
December 31, 1996 and 1997, respectively.
. The Company recorded management fee and other income of approximately
$27,000, $31,000, $35,000, $8,000 and $17,000 during the years ended
October 31, 1995, 1996 and 1997 and the two months ended December 31,
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 for real estate sales from entities
which are owned by the stockholders of the Company, but are excluded from
the combined financial statements of $51,000, $7,000, $87,000, $3,000 and
$1,000 for the years ended October 31, 1995, 1996 and 1997 and the two
months ended December 31, 1996 and 1997, respectively.
F-17
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
12. RELATED-PARTY TRANSACTIONS, CONTINUED:
. At October 31, 1997, the Company had a $1,333,000 payable to an
affiliated entity due to common control. Effective November 1, 1997, the
payable began bearing interest at the prime rate (8.5% at December 31,
1997). During the two months ended December 31, 1997, the Company
incurred $16,000 of interest expense associated with this note. At
December 31, 1997, there was $1,133,000 outstanding on this note. The
note is due in July 1998.
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 and the two months ended December 31,
1996 and 1997 were approximately $78,000, $93,000, $97,000, $18,000 and
$20,000, respectively.
14. ACQUISITIONS:
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 Company intends to exercise its option to purchase this hotel prior to
July 1998. The purchase price is $11,500,000. Approximately $2,000,000 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 $13,000,000. The Idaho Falls acquisition
was closed in January 1998 and the Post Falls acquisition closed 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 $9,800,000.
In January, 1998, the Company entered into an agreement to acquire an
operating hotel in Portland, Oregon for a total purchase price of $5,650,000.
The transaction is scheduled 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 7,072,025
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 5,175,000 shares of the Company's common
stock.
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.
F-18
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
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,
------------------------------- DECEMBER 31
1996 1997 1997
--------------- --------------- ---------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNTS VALUES AMOUNTS VALUES AMOUNTS VALUES
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.... $7,200 $7,200 $6,440 $6,440 $4,955 $4,955
Accounts receivable.......... 1,720 1,720 2,806 2,806 2,785 2,785
Financial liabilities:
Current liabilities, exclud-
ing debt.................... 6,085 6,085 8,798 8,798 8,921 8,921
Note payable to bank......... -- -- -- -- 1,075 1,075
Long-term debt............... 96,536 97,764 98,056 99,615 98,009 99,776
Capital lease obligations.... 2,772 2,772 2,754 2,754 2,641 2,641
</TABLE>
17. BUSINESS SEGMENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
-------------------------- --------------
1995 1996 1997 1996 1997
-------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Hotels and restaurants........... $ 31,244 $35,205 $41,662 $5,683 $6,829
Entertainment, management and
services........................ 3,092 3,168 3,842 483 840
Rental operations................ 6,027 6,790 6,539 1,191 1,169
-------- ------- ------- ------ ------
$ 40,363 $45,163 $52,043 $7,357 $8,838
======== ======= ======= ====== ======
Operating income:
Hotels and restaurants........... $ 15,563 $18,297 $22,293 $2,754 $3,284
Entertainment, management and
services........................ 1,290 964 1,790 86 238
Rental operations................ 5,001 5,326 5,033 948 866
Undistributed operating ex-
penses.......................... (13,876) (15,673) (18,481) (2,864) (3,045)
-------- ------- ------- ------ ------
$ 7,978 $ 8,914 $10,635 $ 924 $1,343
======== ======= ======= ====== ======
</TABLE>
F-19
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
17. BUSINESS SEGMENTS (IN THOUSANDS), CONTINUED:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
--------------------------- -----------------
1995 1996 1997 1996 1997
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Capital expenditures:
Hotels and restaurants......... $ 20,439 $ 11,705 $ 4,960 $ 1,407 $ 1,322
Rental operations.............. 3,536 1,631 980 150 1,060
General corporate, including
entertainment, management and
services...................... 149 121 252 32 18
--------- -------- -------- -------- --------
$ 24,124 $ 13,457 $ 6,192 $ 1,589 $ 2,400
========= ======== ======== ======== ========
Depreciation and amortization:
Hotels and restaurants......... $ 2,274 $ 2,840 $ 3,457 $ 573 $ 581
Rental operations.............. 1,005 1,210 1,179 172 188
General corporate, including
entertainment, management and
services...................... 149 165 139 14 29
--------- -------- -------- -------- --------
$ 3,428 $ 4,215 $ 4,775 $ 759 $ 798
========= ======== ======== ======== ========
Identifiable assets:
Hotels and restaurants......... $ 77,310 $ 90,345 $ 91,431 $ 89,591 $ 92,415
Rental operations.............. 24,155 24,049 24,035 24,645 25,965
General corporate, including
entertainment, management and
services...................... 5,577 5,693 8,638 5,705 6,737
--------- -------- -------- -------- --------
$ 107,042 $120,087 $124,104 $119,941 $125,117
========= ======== ======== ======== ========
</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 certain 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.
18. EARNINGS PER SHARE:
In accordance with SFAS No. 128, the following table presents a
reconciliation of the numerators and denominators used in the basic and
diluted EPS computations (in thousands except per share amounts).
<TABLE>
<CAPTION>
WEIGHTED-
NET AVERAGE
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1997:
Net income per share--basic and di-
luted:
Net income.......................... $ 6
===
Weighted average shares outstand-
ing................................ 7,072
=====
Per share........................... $nil
====
</TABLE>
F-20
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(Information for the two months ended December 31, 1996 is unaudited)
18. EARNINGS PER SHARE, CONTINUED:
<TABLE>
<CAPTION>
WEIGHTED-
NET AVERAGE
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
OCTOBER 31, 1997:
Net income per share--basic and di-
luted:
Net income.......................... $1,709
======
Weighted average shares outstand-
ing................................ 7,072
=====
Per share........................... $0.24
=====
</TABLE>
F-21
<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 common stock, and 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-22
<PAGE>
CONDENSED PRO FORMA COMBINED BALANCE SHEETS
at October 31, 1997
(in thousands, except for share data)
<TABLE>
<CAPTION>
ACQUIRED PRO
CHC HOTELS PRO FORMA FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 6,440 $ -- $ (6,440)(a) $ --
Accounts receivable......... 2,806 -- -- 2,806
Inventories................. 376 -- -- 376
Prepaid expenses and depos-
its........................ 1,128 -- -- 1,128
-------- ------- -------- --------
Total current assets...... 10,750 -- (6,440) 4,310
Property and equipment, net... 109,954 20,478 19,772 (b) 150,204
Other assets, net............. 3,400 -- -- 3,400
-------- ------- -------- --------
Total assets.............. $124,104 $20,478 $ 13,332 $157,914
======== ======= ======== ========
LIABILITIES, STOCKHOLDERS' AND
PARTNERS' 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 liabili-
ties..................... 13,582 -- -- 13,582
Long-term debt, due after one
year......................... 93,771 -- 31,810 (c) 125,581
Capital lease obligations, due
after one year............... 2,255 -- -- 2,255
Deferred income taxes......... 5,417 -- -- 5,417
Minority interest............. 553 -- 2,000 (d) 2,553
-------- ------- -------- --------
Total liabilities......... 115,578 -- 33,810 149,388
-------- ------- -------- --------
Stockholders'and Partners' eq-
uity:
Preferred stock, $.01 par
value, 5,000,000 autho-
rized; no shares issued and
outstanding................ -- -- -- --
Common stock, $.01 par
value, 50,000,000
authorized; 7,072,025 and
7,084,253 shares issued and
outstanding................ 71 -- -- 71
Partners' deficit........... (897) -- 897(e) --
Additional paid-in capital.. 3,935 -- (897)(e) 3,038
Retained earnings........... 5,417 20,478 (20,478) 5,417
-------- ------- -------- --------
Total stockholders' and
partners' equity......... 8,526 20,478 (21,317) 8,526
-------- ------- -------- --------
Total liabilities, stock-
holders' and partners'
equity................... $124,104 $20,478 $ 13,046 $157,914
======== ======= ======== ========
</TABLE>
See notes to condensed pro forma combined balance sheet and statement of
income.
F-23
<PAGE>
CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME
for the year ended October 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
ACQUIRED PRO
CHC HOTELS PRO FORMA 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 restau-
rants...................... 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 restau-
rants...................... 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 ex-
penses:
Selling, general and adminis-
trative....................... 8,188 4,653 (743)(f)}
Selling, general and
administrative................. -- -- 146 (g)} 12,244
Property operating costs....... 5,518 3,353 312 (h)} 9,183
Depreciation and amortization.. -- -- (495)(j)} 5,888
------- ------- ------- --------
Total undistributed operat-
ing expenses............... 18,481 9,831 (997) 27,315
------- ------- ------- --------
Total expenses.............. 41,408 22,603 (997) 63,014
------- ------- ------- --------
Operating income................ 10,635 2,736 997 14,368
Other income (expense):
Depreciation and amortization.. 4,775 1,825 (217)(i)
Interest income................ 416 -- -- 416
Other income................... 348 -- -- 348
Minority interest in partner-
ships......................... 59 -- (185)(m) (126)
------- ------- ------- --------
Income before income taxes...... 2,641 181 1,008 3,830
Income tax provision............ 932 61 406 (n) 1,399
------- ------- ------- --------
Net income...................... $ 1,709 $ 120 $ 602 $ 2,431
======= ======= ======= ========
Pro forma net income per share.. $ 0.24 $ 0.34
======= ========
Number of shares used in the pro
forma computation.............. 7,072 7,095
======= ========
</TABLE>
Interest expense, net of
amounts capitalized........... (8,817) (2,555) 2,555 (k)
Interest expense, net of
amounts capitalized............ (2,359)(l) (11,176)
See notes to condensed pro forma combined balance sheet and statement of
income.
F-24
<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
The agreement with the Ridpath Hotel is a lease with purchase option which
can be exercised at anytime. The Company intends to exercise the purchase
option prior to June 1998 and therefore has included the financial information
of the Ridpath in these pro forma financial statements assuming the purchase
option is exercised. 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 July 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 are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL EXCESS
PURCHASE PURCHASE
PRICE PRICE
-------- --------
<S> <C> <C>
Templin's Resort........................................... $ 9,500 $ 5,376
Outlaw Inn................................................. 9,800 5,477
Inn on the Falls........................................... 3,800 259
The Ridpath Hotel.......................................... 11,500 4,587
Hallmark Inn............................................... 5,650 4,073
------- -------
$40,250 $19,772
======= =======
</TABLE>
The purchase price has been allocated to the acquired land, building,
furniture and fixtures as follows based upon the estimated fair value of the
components (in thousands):
<TABLE>
<CAPTION>
DEPRECIABLE
AMOUNT LIFE
------- -----------
<S> <C> <C>
Land.................................................... $11,795
Building................................................ 25,824 35 years
Furniture and fixtures.................................. 2,631 10 years
-------
$40,250
=======
</TABLE>
F-25
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME,
CONTINUED
1. BUSINESSES ACQUIRED, CONTINUED:
The historical depreciation expense for the Acquired Hotels was calculated
using depreciable lives for certain assets that are commonly used for income
tax purposes. The pro forma adjustments include $495,000 to reduce the
historical depreciation expense to an estimated amount which would have been
reported if the useful lives of the assets were in accordance with industry
practice and generally accepted accounting principals (GAAP). Since the
acquisitions will be accounted for under the purchase method of accounting,
the excess purchase price over the historical net book value of the property
and equipment will be attributed to the property and equipment and depreciated
over the estimated remaining useful lives of the acquired assets.
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 common stock and OP Units for the
acquisition of minority interests in the Lincoln Building.
(a) Represents the cash to be 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.
(c) Represents the amount of the purchase price of the Acquired Hotels which
will be financed by the Company's revolving line-of-credit agreement.
(d) Assumes the purchase price of the Ridpath will be $9.5 million cash plus
OP Units equivalent to $2.0 million.
(e) The historical financial statements of the Lincoln Building Limited
Partnership (Lincoln Building) are included in the combined CHC historical
financial statements as they are all entities under common control (see Note 1
to the historical combined financial statements). In January 1998, the Company
issued 12,228 shares of common stock and 150,817 OP Units to the Lincoln
Building partners in exchange for their partnership interests in the Lincoln
Building. The acquisition of the Lincoln Building has been accounted for as if
it were a pooling of interests due to common control of the entities. The
partners' deficit has been reclassified to additional paid-in capital as a pro
forma adjustment.
(f) The Gateway and Inn on the Falls were previously Holiday Inn franchises.
The franchises will be terminated by the Company. Therefore, the franchise
fees which were based on gross room revenues have been eliminated as a pro
forma adjustment.
(g) Represents the maximum potential increase in management compensation
expense as a result of the planned new employment agreements as described
herein as compared to historical compensation levels. The employment
agreements will provide for bonuses up to a maximum of 100% of the executive's
base salary.
(h) The historical financial statements of the Ridpath included an equipment
lease expense of $108,000 per year. However, this equipment is a capital lease
and the expense should not have been recorded as an operating lease.
Therefore, the pro forma adjustment eliminates this lease payment.
Additionally, the Company has leased the Gateway for $420,000 annually. This
facility lease expense is not recorded in the historical financial statements
of Gateway and therefore, has been included as a pro forma adjustment.
F-26
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME,
CONTINUED
2. PRO FORMA ADJUSTMENTS, CONTINUED:
(i) Represents the reduction in depreciation and amortization expense from
the adjusted historical amounts for the Acquired Hotels based on the
depreciation of the purchase prices over the estimated remaining lives of the
acquired assets (see Note 1).
(j) Represents a reduction in historical depreciation expense for the
Acquired Hotels to record depreciation in accordance with GAAP (see Note 1).
(k) Represents the elimination of interest expense incurred by the Acquired
Hotels as the Company acquired the property and equipment only of the Acquired
Hotels and did not assume the historical liabilities. Therefore, interest
expense historically incurred by the Acquired Hotels will not be incurred by
the Company.
(l) Represents the interest expense which would be incurred by the Company
based on the purchase price of the Acquired Hotels, which will be financed
under the Company's revolving line-of-credit agreement. The interest rate used
in the pro forma adjustment was 7.40% based upon the currently expected
borrowing rate under the Company's line-of-credit agreement commitment.
(m) Represents the minority interest share of the pro forma net income
associated with OP units for the year ended October 31, 1997.
(n) Represents estimated income taxes related to the Acquired Hotels
historical income before income taxes and the tax effects of pro forma
adjustments.
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. The
Company's revolving line-of-credit agreement bears interest at a variable
rate. The expected rate of 7.4% has been used to calculate the pro forma
interest expense. If the rate increased or decreased by 0.25%, the Company's
pro forma interest expense, net income and earnings per share for the year
ended October 31, 1997 would increase or decrease by approximately $80,000,
$53,000 and $0.01, respectively.
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.
5. PRO FORMA NET INCOME PER SHARE:
The pro forma net income per share has been calculated by dividing pro forma
net income by 7,084,253 common shares outstanding plus 11,000 shares to be
issued to certain Company officers in connection with the Offering.
F-27
<PAGE>
NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME,
CONTINUED
5. PRO FORMA NET INCOME PER SHARE, CONTINUED:
The Company intends to use the $61.7 million net proceeds of the Offering to
repay outstanding indebtedness. The pro forma net income per share after
considering this debt repayment, the write-off of deferred loan fees
associated with the extinguished debt and the reduction of interest expense,
net of income taxes, is as follows:
<TABLE>
<S> <C>
Pro forma net income per share before extraordinary item............ $ 0.45
Extraordinary item.................................................. .04
-------
Pro forma net income per share...................................... $ 0.49
=======
Number of shares used in pro forma computation...................... 12,270
=======
</TABLE>
F-28
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION 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 AN 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 UNLAW-
FUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS 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.................................................. 30
Management............................................................... 42
Certain Relationships and Related Transactions........................... 49
Ownership of Common Stock................................................ 51
Partnership Agreement of the Operating Partnership....................... 52
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 56
Underwriting............................................................. 58
Experts.................................................................. 60
Legal Matters............................................................ 60
Additional Information................................................... 60
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 ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN-
DERWRITERS 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.
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.
II-1
<PAGE>
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 7,072,025 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 Section 4(2) promulgated thereunder.
Effective January 1, 1998, the Company issued an aggregate of 150,817 OP
Units to the Barbieri Family Foundation, Inc. ("BBF"), Donald Barbieri,
Richard Barbieri and Thomas Barbieri and 12,228 shares of Common Stock to
Kathryn K. Barbieri in exchange for such persons' undivided partnership
interests in the Lincoln Building Limited Partnership. This issuance is exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) thereof.
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
provided such person is an employee of the Company at that time.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 --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
10.11+ --Form of Stock Option Award Agreement
10.12* --Form of Restricted Stock Award Agreement
10.13 --Gateway Property Lease Agreement
10.13(A) --Gateway Property Option Agreement
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.14 --Ridpath Property Lease Agreement
11.0 --Computation of Earnings Per Share
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>
- --------
* Previously filed.
+ To be filed by amendment.
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-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 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 27TH DAY OF FEBRUARY, 1998.
Cavanaughs Hospitality Corporation
/s/ Richard L. Barbieri
By: _________________________________
RICHARD L. BARBIERI
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
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>
* President, Chief February 27, 1998
- ------------------------------------- Executive Officer
DONALD K. BARBIERI and Chairman of the
Board
* Executive Vice February 27, 1998
- ------------------------------------- President, Chief
ARTHUR M. COFFEY Financial Officer
and Director
(principal
accounting officer)
/s/ Richard L. Barbieri Senior Vice February 27, 1998
- ------------------------------------- President, General
RICHARD L. BARBIERI Counsel and
Director
* Senior Vice February 27, 1998
- ------------------------------------- President and
THOMAS M. BARBIERI Director
*By: /s/ Richard L. Barbieri
-----------------------------------
RICHARD L. BARBIERI
(ATTORNEY-IN-FACT)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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 --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
10.11+ --Form of Stock Option Award Agreement
10.12* --Form of Restricted Stock Award Agreement
10.13 --Gateway Property Lease Agreement
10.13(A) --Gateway Property Option Agreement
10.14 --Ridpath Property Lease Agreement
11.0 --Computation of Earnings Per Share
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>
- --------
* Previously filed
+ To be filed by amendment.
II-5
<PAGE>
Exhibit 10.7
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CAVANAUGHS HOSPITALITY LIMITED PARTNERSHIP
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as
of November 1, 1997, 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, entered into by the same parties and dated as of November
1, 1997 ("Original Partnership Agreement"), to correct it as of November 1,
1997;
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 Cash Amount" shall have the meaning set forth in Section
--------------------
8.6.
"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.
2
<PAGE>
"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.
"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
3
<PAGE>
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.
"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;
4
<PAGE>
and (iv) lease obligations of such Person which, in accordance with generally
accepted accounting principles, should be capitalized.
"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 if it were a
C corporation, calculated at the marginal federal income tax rate of the General
Partner for the prior taxable year, on the Net Income for the taxable year
through the calendar quarter to which the distribution relates ("Year-to-Date
Net Income"), minus all General Partner Distribution Amounts and all Limited
Partner Distribution Amounts previously distributed during the taxable year.
Notwithstanding the above, should the General Partner determine, based on good
faith estimates, that the Net Income for the entire taxable year ("Entire Year
Net Income") will be less than the Year-to-Date Net Income, it shall have the
right to use, in its sole and absolute discretion, the Entire Year Net Income
figure in lieu of the Year-to-Date Net Income figure for purposes of determining
the Distribution Amount for any calendar quarter.
"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.
5
<PAGE>
"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.
"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
6
<PAGE>
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 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
7
<PAGE>
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).
"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.
"Other Assets Value Factor" means 1.0, provided that in the event the
------------------------- -------------
General Partner retains other assets pursuant to Section 7.5.D, or contributes
such assets to the Partnership as a Capital Contribution (the "Other Assets"),
the Other Assets Value Factor shall be adjusted by multiplying the Other Assets
Value Factor by a fraction, the numerator of which the Value of a CHC Share
multiplied by all CHC Shares outstanding as the date of the adjustment (the "CHC
Value") minus the fair market value of the Other Assets, as determined by the
General Partner, and the denominator of which shall be the CHC Value.
"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).
8
<PAGE>
"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.
"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 7,084,251 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 initially end on October 31st, but shall be changed to December 31st at
the time the General Partner changes its fiscal year to December 31st.
"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.
9
<PAGE>
"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.
"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
10
<PAGE>
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 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.
11
<PAGE>
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 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
12
<PAGE>
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
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.
13
<PAGE>
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.
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
14
<PAGE>
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 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. The General Partner shall have the right to contribute any amounts
described in Section 7.5.D to the Partnership at any time; provided however that
----------------
the General Partner shall not issue additional Partnership Units with respect to
such contribution.
D. 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
15
<PAGE>
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")
and multiplied by the Other Assets Value Factor (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.
E. Upon a contribution pursuant to Section 4.1.C above, the Percentage
Interest of the General Partner's Partnership Units shall be collectively
increased to a percentage obtained by dividing (i) the Adjusted Cash Amount
(assuming all outstanding Partnership Units are being "offered for redemption")
on the date of the contribution minus the fair market value of all assets
retained, rather than contributed, by the General Partner (as determined by the
General Partner), by (ii) the Adjusted Cash Amount on the contribution date.
The Percentage Interest of each other Partner holding Partnership Units shall be
adjusted downward 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 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.
16
<PAGE>
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:
70,842.51 (1%) Partnership Units as a General Partner Interest
6,942,565.98 (98%) Partnership Units as a Limited Partner
Interest
Original Limited Partner:
70,842.51 (1%) 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.
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
17
<PAGE>
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 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.
18
<PAGE>
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 encumbrance on the
Partnership's assets) and the incurring of any obligations it deems necessary
for the conduct of the activities of the Partnership;
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(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 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;
20
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(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;
(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
21
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(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 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).
22
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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 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
23
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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 and 7.5.D 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 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 or Limited Partner), other than such
24
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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 and assets described in Section 7.5.C and Section 7.5.D below.
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 anything to the contrary in Section 7.5.A above, and
subject to Section 7.5.D below, 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.
D. In the event the General Partner receives a distribution pursuant to
Section 5.1, the amount received, and investments and other businesses and
activities entered into utilizing such distributions, shall not be subject to
Section 7.5.C.
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
26
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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.
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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.
28
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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 entitled to deal with the General Partner as if the General
Partner were the Partnership's sole
29
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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.
Section 8.3 Outside Activities of Limited Partners
--------------------------------------
30
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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;
(2) to obtain a copy of the Partnership's federal, state and local
income tax returns for each Partnership Year;
31
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(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
the Cash Amount multiplied by the Other Assets Value Factor ("Adjusted Cash
Amount"). The redemption price shall be paid in cash 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
exercise of such rights by such Assignee on behalf of such Limited Partner, the
Adjusted 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
32
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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 Adjusted Cash
Amount, the CHC Shares Amount multiplied by the Other Assets Value Factor, 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:
(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.
33
<PAGE>
(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 Adjusted 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 Adjusted
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 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,
34
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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 initially end on October 31st, but
shall be changed to December 31st at the time the General Partner changes its
fiscal year to December 31st.
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.
35
<PAGE>
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;
36
<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
37
<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.
38
<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.
39
<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.
40
<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
41
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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.
42
<PAGE>
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.
43
<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
44
<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
45
<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
46
<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 canceled 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.
47
<PAGE>
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
Section 14. 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.
48
<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.
49
<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.
50
<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.
51
<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
52
<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.
<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 required under
Section 1.A and 1.B hereof, such Partner has an Adjusted Capital Account
<PAGE>
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 Section 704(c) of the Code to take into
account the variation between the
2
<PAGE>
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 Adjusted Cash Amount or CHC Shares Amount multiplied by the Other
Assets Value Factor (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:
<PAGE>
EXHIBIT D
LIST OF LIMITED PARTNERS
1. North River Drive Company, a Washington corporation, 201 W. North River
Drive, Spokane, Washington, 99201.(Original Limited Partner).
2. Cavanaughs Hospitality Corporation, a Washington corporation, 201 W.
North River Drive, Spokane, Washington, 99201 (Original Limited
Partner).
<PAGE>
EXHIBIT 10.13
HOTEL LEASE
THIS LEASE, dated for reference purposes September 15, 1997, is between
VA-ALTA, Inc., a Washington corporation ("Lessor") and GOODALE AND BARBIERI
COMPANIES (which is in the process of changing its name to Cavanaughs
Hospitality Corporation) ("Tenant").
1. Property. Lessor hereby leases to Tenant, upon the terms and
--------
conditions herein set forth, the real property known as the Yakima Holiday Inn
(the "Hotel") situated at 9 North Ninth Street, Yakima, WA 98901, legally
described on Exhibit I attached hereto (the "Property"). The term "Property"
includes land, building, improvements, and the personal property items described
in Section 8(b) below. In the event Exhibit I is not attached in accurate or
complete form to this document at execution, the parties authorize the Title
Company described below to prepare and attach the correct Exhibit I.
2. Use of Property; Environmental Matters. The Property shall be used for
--------------------------------------
operation as a hotel, guest services, restaurant and banquet/meeting facility
and for no other purpose (collectively "Hotel Use") without the prior consent of
Lessor. Tenant shall not allow use of the Property in a manner which would
increase insurance premiums, or for any illegal purpose. Tenant shall comply
with all governmental rules, orders, regulations, or requirements relating to
the use and occupancy of the Property. Tenant shall not allow the presence, use,
storage or disposal of any hazardous or toxic waste or materials on the Property
at any time other than in full compliance with all applicable laws, rules, and
regulations. Hazardous and/or toxic waste or materials shall include any
substance, waste, or material which is designated as a Hazardous Substance under
the Comprehensive Environmental Response, Compensation and Liability Act (42 USC
Section 9601 et seq.), the Model Toxics Control Act, revised Code of Washington
Section 70.105D), or under any other applicable law. Tenant agrees to defend,
indemnify and hold Lessor harmless from and against any liabilities,
obligations, damages, costs, and expenses (including attorneys' fees incurred
prior to trial, at trial and upon appeal) incurred as a result of any hazardous
or toxic waste or material having been used, stored, or disposed of on the
Property or violations of applicable laws, rules and regulations relating to the
use of the Property during the term of this Lease. This indemnity shall survive
termination of this Lease. Lessor warrants that the Property does not contain
any hazardous or toxic waste or materials or asbestos containing material as
those terms are defined above as of the commencement of the term of this Lease
("Existing Hazardous Substances") other than in full compliance with all
applicable laws, rules, and regulations. Lessor represents and warrants that as
of the date hereof (a) it has not received notification of any kind from any
regulatory agency stating that the Property is or may be targeted for a federal
or state Hazardous Substances cleanup or may be contaminated with any Existing
Hazardous Substances, as that term is defined above, or is currently in
violation of any applicable zoning, building, safety or accessibility law or
regulation and (b) Lessor has no knowledge of any release of any Existing
Hazardous Substances or that the Property is currently
________________________________________________________________________________
1
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
in violation of any applicable zoning, building, safety or accessibility law or
regulation. Lessor shall indemnify and hold Tenant harmless from and against any
and all loss, damage, claims, penalties, liabilities, suits, costs, and expense
(including, without limitation, cost of remedial actions or cleanup), suffered
or incurred by Tenant arising out of or related to the breach of the foregoing
representations and warranties. Tenant shall be entitled to offset the cost of
removal or abatement of Existing Hazardous Substances or of curing violations
of code or regulations relating to the condition or use of the Property which
exist as of the Commencement Date from payments next falling due under the
Lease.
3. Inspection and Inspection Waiver. Tenant shall have thirty (30) days
--------------------------------
("Inspection Period") after execution and delivery of this Lease by all parties
and delivery by Lessor to Tenant of the "Inspection Documents" described below
within which to inspect the Property and review all Inspection Documents to
determine whether the Property in its current status is suitable, in the
exercise of the sole business judgment discretion of Tenant, for the purposes of
Tenant. Immediately upon execution of this Lease, Lessor shall deliver to Tenant
all books and records and documents relating to the operation of the Property or
encumbrances on the Property (including but not limited to books and records of
operations for the past three full calendar year plus the current year to date
and all leases or maintenance agreements and all notes and encumbrances and
restrictions on the Property which will remain in effect at the Commencement
Date) and a preliminary commitment for ALTA extended coverage Owner's Leasehold
Title Insurance on the Property from Yakima Title and Escrow ("Title Company")
insuring Tenant in the amount of Six Million Two Hundred Fifty Thousand Dollars
($6,250,000), together with legible copies of all documents referred to therein
("Title Commitment") (all documents described in this sentence being referred to
herein as "Inspection Documents"). This Lease shall terminate and all
responsibilities of the parties to one another shall terminate unless, prior to
the end of the Inspection Period, Tenant notifies Lessor that Tenant has
determined to its satisfaction the Property can be used for these purposes to
Tenant's satisfaction ("Inspection Waiver" or "Waiver Notice"). Lessor shall
provide to Tenant the title insurance described in the Title Commitment by the
Commencement Date described below.
4. Term. This Lease shall be for a term of fifteen (15) years, commencing
----
the later of October 13, 1997 or seven (7) days after the Waiver Notice
("Commencement Date"). Tenant may renew the Lease for two five-year options on
the same terms and conditions, provided written binding notice to renew shall be
given at least one year in advance of any renewal commencement date, provided
also that the increased rent escalator set forth in paragraph 5 shall apply to
such extensions, and that the Lease is not in default at either the time the
lease option is exercised or the extended term commences.
5. Rental. Tenant agrees to pay monthly rent ("Rental") of Thirty Five
------
Thousand Dollars ($35,000) per month through September 30, 2003, prorated for
any partial month. Commencing October 1, 2003, Rental shall increase to Fifty
Two Thousand and Eighty Three Dollars ($52,083) per month, and rental shall
increase annually thereafter on October 1 of each
________________________________________________________________________________
2
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
year by Five Thousand Two Hundred and Eight Dollars ($5,208) per month. Rental
shall be paid by Tenant in advance on the first day of each and every month
during the term hereof, except that the first payment shall be on the
Commencement Date. The Rental is exclusive of any applicable sales or use tax on
personal property included in this Lease, or any tax now or hereafter imposed in
the nature of a sales or added tax in lieu of sales or use tax on such existing
personal property, which shall be paid by Tenant in each instance. Tenant will
be responsible for paying any use tax on personal property which it purchases in
connection with the operation of the Property. If, hereafter, a leasehold excise
tax (or sales tax on rental) is imposed on the Rental, Tenant shall pay the same
on or before the applicable due dates.
Interest and principal payments of the debt service for the debt now
encumbering the Property are not the responsibility of Tenant. During the course
of this Lease, Lessor shall hold harmless and indemnify Tenant from any claim by
any secured creditor of Lessor. Rental shall be paid to Lessor, at Lessor's
address set forth in Section 23 hereof or at such other place as Lessor may
designate in writing. Electronic transfers may be done as of the first day of
any month if Lessor and Tenant so arrange. Tenant may, at its option, make
direct payment on any encumbrance on the Property which exists as of the date of
this Lease and, upon providing evidence of such direct payment, offset such
direct payments against the Rental, which right Tenant agrees not to exercise so
long as the holder of any encumbrance agrees to provide Tenant with the same
notice of default as is required to be provided to Lessor and so long as Lessor
does not fail to make any payment on any encumbrance when due. Lessor shall not
further encumber the Property during this Lease.
6. Costs of Management, Operation and Maintenance. Tenant is to pay all
----------------------------------------------
Operating Expenses. The term "Operating Expenses" means all costs of management,
operation, and maintenance of the Property as a Hotel utilizing the Cavanaugh's
Hotel name or such other franchise as may be utilized by Tenant from time to
time; including, without limitation, the following: employment taxes,
unemployment insurance, wages, salaries, fringe benefits, and other direct and
indirect costs of employees; janitorial, cleaning, landscaping, guard, security
and other services; gas; electrical, water, waste disposal, and other utilities;
heating, ventilation and air-conditioning; window washing; materials and
supplies; painting, repairs, and other maintenance; parking lot resurfacing and
restriping, as well as cleaning, sweeping, and ice and snow removal;
maintenance, repair, replacement, and service of equipment, including without
limitation the HVAC system, alarm systems, and other equipment; reserves; costs
of independent contractors; management fees and expenses; insurance and
insurance deductibles of any kind; real and personal property taxes,
assessments; utility charges of any kind; the cost of any repair, renovation,
alteration, and improvement required to be made under any governmental law, rule
or regulation (excluding those in breach of any warranty of Lessor contained in
this Lease); supplying directional signs, other markers, and car stops; and any
other expense or charge which is a cost of management, operation, and
maintenance of the Property.
The term Operating Expenses does not include any cost or fee for
maintaining or
________________________________________________________________________________
3
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
terminating the Holiday Inn franchise/license, which shall be the sole
responsibility and expense of Lessor. The Commencement Date has been established
as seven (7) days from the Waiver Notice because the parties understand that
Lessor will need to provide seven (7) days notice to terminate the Holiday Inn
franchise/license.
7. Financial Statements. Financial statements have been provided to and
--------------------
reviewed by each party, of the other's operations to date. Each party certifies
these financial statements are materially accurate as of the date they were
written, and do not omit matters required to make a fair representation of the
financial affairs and results they encompass. Each party certifies these
financial statements are materially accurate and will remain substantially
accurate to represent their operations through the Commencement Date. Each party
is known by the other party to be relying thereon in entering into this
agreement.
Tenant is leasing the property for its own uses and purposes, and is going
to change the franchise name, method of operation, reservations systems, and
some of the employees if it so chooses. Therefore the amount of profit or loss
that may result from Tenant's decisions and operations, is totally based upon
its own skills and is not related to any promise or projection from Lessor. In
addition, Tenant shall be using its own skills, resources and personnel in
carrying out its goals and objectives. Tenant warrants that it has all of the
business expertise and experience needed to operate the facility for its own
uses and purposes and is not relying on Lessor in any manner for such new
operation. Lessor is not required to consult on the operation of the facility
after the commencement of the Lease, and should Lessor do so, it is as an unpaid
advisor and therefor Tenant is responsible for the consequences of any action or
act it implements or standard of maintenance it follows.
8. Operation of Hotel.
------------------
(a) Tenant shall operate the Property as a hotel in a first-class
manner at least equal to the quality of Lessor's prior operation of the Hotel.
(b) Included within the Property leased to Tenant under this Lease is
all personal property, furnishings, fixtures, and inventory owned by Lessor used
in connection with the operation of the Hotel except for that personal property
which Lessor, as part of the Inspection Documents, lists for Tenant as being
excluded from this Lease, which list must be approved during the Inspection
Period. The agreements for use of any other personal property now used in
connection with the operation of the Property but not owned by Lessor shall be
provided to Tenant as part of the Inspection Documents. Tenant will only assume
at the Commencement Date such agreements for use of maintenance of personal
property or fixtures as it approves during the Inspection Period. Tenant agrees
to maintain the furnishings, fixtures, and inventory in the operation of the
Hotel at normal levels. The office off the lobby, Room 102, will be made
available to lessor without charge of any kind through December 31, 1997 solely
for the purpose of concluding prior hotel business.
________________________________________________________________________________
4
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
(c) Tenant agrees to make, throughout the term of this Lease, such
replacements of furnishings, fixtures, and inventory as is reasonably necessary
to operate the Hotel in compliance with this entire Section 8, or may upgrade
furnishings, fixtures and equipment, and such replacements shall be the property
of the Lessor. In the ordinary course of such replacements, Tenant may dispose
of the replaced personal property. In the event of replacement of the personal
property, which involves wholesale replacement of substantial amounts of the
property, such as renovating rooms or replacing television sets, at least thirty
(30) days advance notice shall be given to Lessor along with a brief description
of the plan of action to accomplish replacement, and the reasons therefor. All
such replacement furnishings, fixtures and inventory shall become the property
of Lessor upon termination of the Lease free and clear of any purchase money or
other lien. Tenant shall be entitled to any proceeds of salvage or disposition
of the obsolete or removed property.
Lessor shall be entitled to updated inventory lists as prepared by
Tenant, and to have the right to conduct, at Lessor's own expense, audits of the
inventory, fixtures, furnishings, televisions and the like. No such equipment of
furnishings or fixtures shall have a brand name placed thereon of the hotel of
such a character as to make the property not readily useable by any successor
hotel operator or franchise. In the event Lessor is of the belief that the
Property is not being adequately maintained or the inventory is inadequate, the
parties shall consult and attempt to reach a plan rapidly to resolve the issue.
Should this fail, and only as to the matters contained in this paragraph and
paragraph 12, the parties agree to consult with each other to appoint an
independent party with expertise to arbitrate the controversy, each party to pay
one-half of the costs regardless of the outcome, and each to pay any of their
own attorneys fees. Procedures shall be informal and meant to accomplish to goal
of concluding the arbitration within thirty (30) days or as soon thereafter as
reasonably practical. The arbitrator may, in carrying out this intent, establish
reasonable rules and procedures to minimize fees and costs to each party and to
bring the matter to a rapid and fair conclusion. Should either party fail to
name or be unable to reach agreement on appointment of an arbitrator, the
presiding judge of the Superior Court for Yakima County shall review the names
and qualifications of three parties deemed independent by each of Lessor and
Tenant, and choose one without hearing, based solely upon the description of
such individual provided by the propounding party. If the decision of the
arbitrator requires an upgrade to the hotel, maintenance, or personal property,
the Lessor may declare this Lease in default if the order of the arbitrator is
not implemented by Tenant fully within sixty (60) days of the decision, as to
upgrade and replacement (or such time as such repairs or maintenance reasonably
requires, if longer). An arbitrator's decision may not be upset unless it is
clearly erroneous or arbitrary and capricious or the result of any unknown
conflict of interest, or similar inappropriate behavior. These arbitration
provisions apply exclusively and solely to those items in this paragraph and
paragraph 12, and do not extend to any other right or remedy of Lessor or Tenant
hereunder or under State law.
In the event Tenant shall add a class of property not already on the
premises, such property shall remain Tenant's property and may be removed at the
end of the term; but such
________________________________________________________________________________
5
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
property shall remain and title shall pass to Lessor if Tenant defaults on this
Lease.
(d) As of the Commencement Date, Lessor shall terminate all employees
of Lessor in the operation of the Hotel. Tenant may, but shall not be required
to hire some or all such employees in connection with Tenant's operation of the
Hotel. Lessor shall be responsible for all salaries, taxes, benefits, and
vacation for such employees to the commencement date of the term of this Lease.
Tenant shall be responsible for the same for all employees of Tenant in Tenant's
operation of the Hotel beginning on the Commencement Date. Lessor shall
compensate any employee with accrued but unused vacation as of the Commencement
Date.
(e) All expenses and income from the Hotel shall be prorated between
Lessor and Tenant as of 12:01AM on the Commencement Date, so that Lessor
receives all income accrued through the day prior to and pays all expenses
accrued through the day prior to the Commencement Date. Income from overnight
room rentals and events for the night of the proration time, shall be shared
equally between Lessor and Tenant (the night of October 12-13 if October 13 were
the Commencement Date). After the Commencement Date, Lessor and Tenant shall
make such payments to each other and to third parties as are necessary to
implement the proration provisions of this subsection. Lessor shall retain all
of its bank accounts, and the funds therein, as well as all cash on hand as of
Midnight on the Commencement Date, and Tenant shall open its own bank accounts
for the operation of the Hotel. From the Commencement Date forward, all
accounts receivable from the operation of the Hotel accrued to the day prior to
the Commencement Date, shall be collected by Lessor in its own name and at its
own cost.
Lessor has many thousand future reservations in the Holiday Inn
computer system and bookings for parties, events and meetings. Lessor shall
provide Tenant, as an Inspection Document, a list of all such reservations or
bookings and Tenant will, with regard only to those reservations so provided to
Tenant during the Inspection Period, assume and honor each of such reservations
at its then applicable rates and the income and expense generated thereby is
solely the property and obligation of Tenant., or terminate the obligation, and
Tenant shall defend and hold Lessor harmless from all loss, cost, expense or
claims in that regard.
In the event of default and repossession of Property, all printouts,
reservations, and future conventions, may be assumed by Lessor at its option,
and all information relating to the same shall be immediately turned over to
Lessor for its own use and benefit.
9. Quiet Enjoyment. Lessor covenants and agrees that so long as Tenant
---------------
remains in full compliance with all of Tenant's obligations under this Lease,
Tenant shall lawfully and quietly hold, occupy, and enjoy the Property during
the term of this Lease, subject only to the other terms and provisions of this
Lease and subject to all matters of record revealed by the Title Commitment, the
terms of which shall not be modified without the approval of Tenant.
10. Acceptance of Property. By giving its Waiver Notice, Tenant
----------------------
acknowledges that
________________________________________________________________________________
6
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
the Property is in good and tenantable condition. The Property has been
inspected by Tenant, and, except for the representations and warranties made by
Lessor in this Lease, is turned over as of the Commencement Date AS IS, WHERE
IS, AND WITH ALL FAULTS LATENT AND PATENT, WITH NO IMPLIED WARRANTIES, INCLUDING
THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND RISKS
OF MECHANICAL FAILURES; BREAKDOWNS AND WEAR AND TEAR OF PROPERTY AND EQUIPMENT
ARE SOLELY AT TENANTS RISK.
11. Utilities and Other Services. By giving its Waiver Notice, Tenant has
----------------------------
satisfied itself that all utilities and other services necessary for Tenant's
purposes are available to the Property. Deposits (if any) on utilities as of the
Commencement Date are the property of Lessor.
12. Repairs, and Maintenance by Tenant. Tenant shall be responsible for
----------------------------------
all maintenance of the Property during the term of this Lease. Tenant shall keep
the Property in a neat, clean, sanitary condition, and shall keep the Property
and all items used in connection with the operation of the Property in as good
condition as was done by Lessor. Tenant's maintenance obligations shall include
without limitation the structural and exterior components of the building,
plumbing, electrical system, roof, swimming pool, etc. Wear and tear is to be
offset by continuing improvements and additions to the property as reasonable
and necessary to keep the Property in a first-class hotel operation, to include
appearance items, such as painting, landscaping, carpeting and the like. The
requirements of maintenance as set forth in this paragraph 12 are subject to the
arbitration provisions of paragraph 8 (c), in the event Lessor believes the
property is not being maintained according to these standards.
13. Taxes. Tenant shall pay directly, to the taxing or assessing
-----
authority, before the same become delinquent, all taxes and special assessments
levied against the Property payable on or after the Commencement Date. Tenant
shall pay, before the same become delinquent, all taxes assessed against
Lessor's or Tenant's furniture, fixtures, equipment, and other property in the
Property. Tenant shall provide evidence of payment upon request of Lessor. Taxes
payable in the current year, assessments and insurance reserve accounts shall be
prorated as of the Commencement Date, and credited or debited to the parties as
appropriate. In the event the existing lenders of Lessor on the Property have
the right, and exercise the right, to have tax or insurance amounts paid monthly
into escrow, Tenant shall comply with the same. In the event Tenant desires to
contest the amount of any property taxes, Tenant may do so, at its own expense,
and for its own benefit, and Lessor shall cooperate with any reasonable attempt
to reduce property taxes.
14. Lessor's Access to Property. Lessor, provided Lessor notifies Tenant
---------------------------
at least 24 hours in advance, may inspect the Property at all reasonable times
and enter the same for the purpose of determining whether the Tenant is
complying with its obligations under this Lease.
________________________________________________________________________________
7
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
15. Insurance.
---------
15.1 Liability Insurance. Tenant shall, at Tenant's sole expense,
-------------------
maintain comprehensive general liability and property damage insurance insuring
against any and all claims for injury to or death of persons and loss of or
damage to property occurring upon, in, or outside of the Property. Such
insurance shall be of the type of coverage, and with the coverage limits, at
least as required by holder of any first lien deed of trust and related loan
documents encumbering the Property ("First Lien"), and, in any event, at least
$10,000,000.
15.2 Tenant's Property Insurance. Tenant shall, at Tenant's sole
---------------------------
expense, maintain on all of Tenant's personal property, fixtures and leasehold
improvements on the Property, a policy of "all risk" special perils property
damage insurance in the amount of their replacement value. Such insurance shall
name Lessor as an additional insured, and all proceeds of such insurance shall
be applied to the restoration of personal property, fixtures, and leasehold
improvements; any proceeds of such insurance remaining after such restoration
shall belong to Tenant.
15.3 Lessor's Property Insurance. Tenant shall, at Tenant's sole
---------------------------
cost and expense maintain a policy of all risk special perils building and
personal property insurance with full replacement value coverage of at least
$6,250,000. Such insurance shall comply with all requirements of the holder of
the First Lien. All proceeds of any such insurance shall be applied to the
restoration of the Property.
15.4 Rental Insurance. Tenant shall acquire a policy of rental
----------------
insurance for continuation from business interruption, with reasonable
deductibles.
15.5 General Terms. All such insurance shall name Lessor and Tenant
-------------
as co-insured as well as any lender of Lessor on the Commencement Date, all of
whom shall receive copies of endorsements and policies. Policies shall provide
for at least thirty (30) days notice to Lessor prior to cancellation. Such
insurance may be part of blanket coverage and composed of primary and umbrella
policies.
16. Assignment and Subletting. This Lease may be assigned or subleased to
-------------------------
any entity of which Tenant is the manager or general partner or controlling
owner, provided that Tenant remains responsible for all obligations under this
Lease. Any other assignment or subletting requires consent of Lessor, which
shall not be unreasonably withheld based upon the financial strength and
management ability of the assignee or subtenant.
17. Damage or Destruction. If the property is damaged or destroyed by
---------------------
fire or any other cause except condemnation, Tenant shall restore the Property
as nearly as practical to its condition immediately prior to such damage or
destruction and all insurance proceeds shall be made available to Tenant for
that purpose. Any restoration shall be promptly commenced and
________________________________________________________________________________
8
Va-Alta/Cavanaughs lease 9/15/97
<PAGE>
diligently prosecuted and rent shall not abate during such time. Lessor is not
liable for any damages or abatement of rent for any reason whatsoever dealing
with damage or destruction to the property.
18. Liens; Waste. Lessor and Tenant shall have no authority to allow any
------------
liens to be filed against the Property and shall not suffer or permit any lien
to be filed against the Property, nor waste committed thereon. If any such lien
is filed against the Property, the responsible party shall cause the same to be
discharged of record (by bond or payment) within 60 days after the date of
filing the same.
19. Indemnity by Parties. Except as provided in the last sentence of this
--------------------
Section 19, Tenant agrees that Lessor shall not be liable for any claims for
death of or injury to persons or damages to or destruction of property sustained
by Tenant or by any other person in or outside of the Property after the
Commencement Date, including without limiting the generality of the foregoing,
any claims caused by or arising from the condition or maintenance of any part of
the Property. Tenant herby waives all claims therefor and agrees to hold
harmless, defend, and indemnify Lessor against any such loss, damage, or
liability or any expense (including attorneys' fees at trial or at appeal)
incurred by Lessor in connection therewith. Tenant shall hold Lessor harmless
from and against any and all damages arising out of any damage to any persons or
property occurring in, on, or about the Property resulting from the negligent
acts or omissions of Tenant or its agents, servants, employees, or authorized
representative. Lessor shall hold harmless, defend, and indemnify Tenant from
and against any and all damages arising out of any damage to any persons or
property occurring in, on, or about the Property resulting from the negligent
acts or omissions of Lessor or its agents, servants, employees, or authorized
representatives or which are the subject of the specific representations and
warranties of Lessor to Tenant contained in this Lease.
20. Default; Remedies; Late Charges. Time is of the essence hereof. In
-------------------------------
the event Tenant fails to make any payment, including the rent payment or the
additional rental items of taxes, insurance or the like, and if such default or
violation is not remedied within fifteen (15) days after notice in writing
thereof is given by Lessor to Tenant, specifying the matter in default, then
Lessor may have its default remedies, as further set forth below. If the
default or violation claimed does not involve the payment of money, then Tenant
must cure the default within thirty (30) days, or if the default is of such a
nature that it cannot be cured within thirty (30) days, but it can be cured,
then Tenant must commence the cure within the thirty (30) days and diligently
continue the same until complete, or Lessor may likewise have its default
remedies. In the event of such uncured default, or in the event of a default
which cannot by its very nature be cured, then Lessor may at its option,
immediately declare Tenant's rights under this Lease terminated, and reenter the
Property using such force as may be necessary, and repossess itself thereof, as
of its former estate, and remove all persons and property.
Tenant acknowledges that late payment by Tenant to Lessor of Rental will
cause Lessor to
________________________________________________________________________________
9
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
incur costs not contemplated by this Lease, the exact amount of which would be
extremely difficult and impractical to ascertain. Such costs include, but are
not limited to, processing and accounting charges. Therefore, in the event
Tenant fails to make any payment of Rental within ten (10) days of the date when
such payment is due, Tenant shall pay to Lessor a late charge equal to five
percent (5%) of the amount delinquent. Waiver of said 5% late charge with
respect to any payment shall not be deemed to constitute a waiver with respect
to any subsequent payment.
21. Trade Fixtures. Tenant may install on the Property such equipment as
--------------
is customarily used in the type of business conducted by Tenant on the Property.
Upon the expiration of this Lease, Tenant shall, at Tenant's expense, remove
from the Property all such equipment and all other property of Tenant and repair
any damage to the Property occasioned by the removal thereof. Any property left
in the Property after the expiration or sooner termination of this Lease shall
be deemed to have been abandoned by Tenant and become the property of Lessor to
dispose of as Lessor deems expedient without accounting to Tenant therefor. If
the Lease terminates other than at the end of its normal term or either extended
term, all property of Tenant shall be deemed a portion of the Property and shall
pass in title to Lessor at that time. No item shall be a trade fixture unless
Tenant shall before its installation give notice to Lessor of its status as such
and Lessor shall consent to such treatment, which consent shall not be
unreasonably withheld.
22. Condemnation. If all of the Property is taken by any public authority
------------
under the power of eminent domain, this Lease shall terminate as of the date
possession is taken by said public authority pursuant to such condemnation. If
any part of the Property is so taken and, in the opinion of Tenant, it is not
reasonably economically feasible to continue this Lease in effect, Tenant may
terminate this Lease. In each such case, Lessor shall receive the condemnation
award for the building, Tenant for the business.
If part of the Property is so taken, and Tenant does not elect to terminate
this Lease, or until termination is effective, as the case may be, the rental
shall be abated in the same proportion as the portion of the Property so taken
bears to the whole of the Property, and Lessor out of condemnation proceeds
received only shall make such repairs or alterations, if any, as are required to
render the remainder of the Property tenantable.
All damages awarded for the taking or damaging of all or any part of the
Property shall belong to and be the property of Lessor (except those portions
described above belonging to Tenant who shall negotiate and receive those
portion of the award), but nothing herein contained shall be construed as
precluding Tenant from asserting any claim Tenant may have against such public
authority for disruption or relocation of Tenant's business from the Property.
23. Notices. Al notices, demands, and requests to be given by either
-------
party to the other shall be in writing. All notices, demands, and requests by
Lessor to Tenant shall be sent by
________________________________________________________________________________
10
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
United States registered or certified mail, postage prepaid, (or by private
overnight courier) addressed to Tenant at W 201 North River Drive Suite 100,
Spokane, WA 99201 Attn. Chief Operating Officer. All notices, demands, and
requests by Tenant to the Lessor shall be sent by United States registered or
certified mail, postage prepaid, (or by private overnight courier) addressed to
Lessor at the street address of 360 Coombs Road, Moxee, WA 98936, with a copy to
Donald H. Bond, Halverson & Applegate, P.S., P.O. Box 22730, Yakima, WA
98907-2715, or such other place as Lessor may from time to time designate by
notice to Tenant. Notices, demands, and requests served upon Lessor or Tenant as
provided in this section in the manner aforesaid shall be deemed sufficiently
served or given for all purposes hereunder at the time such notice, demand, or
request shall be so mailed or deposited.
24. Performance of Covenants. If Tenant shall fail to make any payment or
------------------------
perform any of Tenant's obligations under this Lease after notice required for a
default, Lessor may, without further notice to or demand upon Tenant and without
waiting or releasing Tenant from any obligations of Tenant under this Lease,
make any such payment or perform any such obligation on Tenant's behalf in such
manner and to such extent as Lessor deems desirable. All sums unpaid by Tenant,
and all sums so paid by Lessor and all necessary costs and expenses in
connection with the performance of any such obligation by Lessor, together with
interest thereon at the rate of twelve percent (12%) per annum (or at the
maximum rate permitted by law, whichever is less) from the date of the making of
such expenditure by Lessor, shall be deemed Additional Rental hereunder and
shall be payable to Lessor on demand.
25. Waiver of Subrogation. Lessor and Tenant shall each procure an
---------------------
appropriate clause in, or an endorsement on, any policy of insurance required by
this Lease pursuant to which the insurance companies waive subrogation or
consent to a waiver of right of recovery, and such party hereby agrees that it
shall not make any claim against or seek to recover from the other for any loss
or damage to its property, or the property of the other, resulting from fire or
other hazards covered by such insurance, notwithstanding other provisions of
this Lease; provided, however, that the release, discharge, exoneration, and
covenant not to sue herein contained shall be limited by the terms and
provisions of the waiver of subrogation clauses or endorsement consenting to a
waiver of right of recovery, and shall be coextensive therewith.
26. Surrender of Property. Tenant, at the expiration or sooner termination
---------------------
of this Lease, shall quit and surrender the Property in good, neat, clean, and
sanitary condition, in accordance with the standards of maintenance and
replacement contained in this Lease.
27. Memorandum of Lease. This Lease may not be recorded. A Memorandum of
-------------------
this Lease will be recorded which only identifies the parties and the term.
28. Miscellaneous
-------------
28.1 Nonwaiver. No failure of Lessor to insist upon the strict
---------
performance of
________________________________________________________________________________
11
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
any provision of this Lease shall be construed as depriving Lessor of the right
to insist on strict performance of such provision or any other provision in the
future. No waiver by Lessor of any provision of this Lease shall be deemed to
have been made unless expressed in writing and signed by Lessor. No acceptance
of rent or of any other payment by Lessor from Tenant after any default by
Tenant shall constitute a waiver of any such default or any other default.
Consent by Lessor in any one instance shall not dispense with necessity of
consent by Lessor in any other instance.
28.2 Attorneys' Fees. If an action is commenced to enforce any of
---------------
the provisions of this Lease, the prevailing party shall, in addition to its
other remedies, be entitled to recover its reasonable attorneys' fees incurred
prior to trial, at trial, and upon appeal.
28.3 Captions and Construction. The captions in this Lease are for
-------------------------
the convenience of the reader and are not to be considered in the
interpretation of its terms.
28.4 Partial Invalidity. If any term or provision of this Lease or
------------------
the application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and be enforced as written to the fullest
extent permitted by law.
28.5 Governing Law. This lease shall be governed by the laws of the
-------------
State of Washington; Venue is Yakima County for any action.
28.6 Right to Certificates. Each party, within fifteen (15) days
---------------------
after notice from the other party, shall executed and deliver to the other
party, in recordable from, a certificate stating that this Lease is unmodified
and in full force and effect, or in full force and effect as modified and
stating the modifications. The certificate shall also state the amount of
Rental, the dates to which Rental has been paid in advance. Failure to deliver
the certificate within such fifteen (15) day period shall be conclusive upon the
party failing to deliver the certificate for the benefit of the party requesting
the certificate and any successor to the party requesting the certificate, and
this Lease is in full force an effect and has not been modified except as may be
represented by the party requesting the certificate. The certificate shall be
kept confidential and not recorded.
28.7 Entire Agreement. This document contains the entire and
----------------
integrated agreement of the parties as to the lease of the Property and may not
be modified except in writing signed and acknowledged by both parties.
28.8 Interpretation. This Lease has been submitted to the scrutiny
--------------
of all parties hereto and their counsel if desired, and shall be given a fair
and reasonable interpretation in
________________________________________________________________________________
12
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
accordance with the words hereof, without consideration or weight being given to
its having been drafted by any party hereto or its counsel.
28.9 Number: Gender; Permissive Versus Mandatory Usage. Where the
-------------------------------------------------
context permits, references to the singular shall include the plural and vice
versa, and to the neuter gender shall include the feminine and masculine. Use of
the words "may" shall denote an option or privilege and shall impose no
obligation upon the party which may exercise such option or privilege; use of
the word "shall" shall denote a duty or an obligation.
28.10 Time. is of the essence of this Lease.
----
28.11 Binding Effect; Counterpart Originals; Facsimile. This Agreement
-----------------------------------------------
shall be binding upon the parties hereto and upon their respective executors,
administrators, legal representatives, successors, and assigns. Each party to
this Agreement may execute separate originals of this Agreement with the same
effect as if both signed the same original. A facsimile transmission of the
executed original shall be treated as an original signed document. The parties
shall cooperate to assemble and deliver to one another duplicate signed
originals as soon as practical following such facsimile transmission.
28.12 UCC Filing. The parties shall record a notice of lease upon the
----------
commencement hereof and Lessor may record a UCC-1 filing on fixtures, equipment
and inventory owned by Lessor, which shall be kept renewed by both parties as
Lessor requests during the term hereof.
29. Early Presence on Property. In order to effect a smooth transition
--------------------------
of the operation of the Hotel, Lessor and Tenant agree that Tenant will be
present upon the Property on the two days prior to the Commencement Date, but
such presence shall not otherwise affect the dates specified in this lease.
Lessor and Tenant shall jointly work on the transition of operations on those
two days, and Lessor's employees shall work with Tenant on those dates, even
though the employees will not be formally working as Tenant's employees.
EXECUTED as of the date first above written.
TENANT: LESSOR:
GOODALE AND BARBIERI COMPANIES VA ALTA, INC.
By /s/ Richard L. Barbieri By /s/ Randy Elliott
--------------------------- ----------------------------
Name: Richard L. Barbieri Name: Randy Elliott
Title: Vice President Title: President
________________________________________________________________________________
13
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
STATE OF WASHINGTON
)SS.
County of King
I certify that I know or have satisfactory evidence Richard L. Barbieri is the
person who appeared before me, and said person acknowledged that (he/she) signed
this instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the Vice President of Goodale and Barbieri
Companies, to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
Dated: September 18, 1997.
/s/ Lyn Tangen
------------------------------------------------
Type/Print Name of Notary: Lyn Tangen
Notary Public in And For the State of Washington,
My appointment expires: November 23, 1998.
[SEAL APPEARS HERE]
STATE OF WASHINGTON
)SS.
County of Yakima
I certify that I know or have satisfactory evidence Randy Elliott is the person
who appeared before me, and said person acknowledged that (he/she) signed this
instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the President of Va-Alta, Inc., to be the free
and voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated: September 22, 1997.
[SIGNATURE ILLIGIBLE]
------------------------------------------------
Type/Print Name of Notary:
Notary Public in And For the State of Washington,
My appointment expires: ______________________
[SEAL APPEARS HERE]
________________________________________________________________________________
14
Va-Alta/Cavanaughs Lease 9/15/97
<PAGE>
Order No. X-153138
Parcel A - legal description continued
- --------
Beginning at the Northwesterly corner of Lot 15, Block 190, Huson's Addition to
North Yakima, now Yakima, as recorded in Volume "A" of Plats, page 11; thence
Easterly along the Northerly boundary line of said Lot 15, 104 feet, more or
less, to the Westerly wall of the existing building constructed on Lots 16 and
15 and a part of Lot 14, Block 190 of said Huson's Addition; thence Northerly
and parallel with the West boundary of the said Block 190, of said Huson's
Addition, 29 feet;
thence Easterly and parallel with the Northerly boundary line of the said Lot 15
40 feet;
thence Southerly and parallel with the West boundary of the said Block 190 of
the said Huson's Addition, 130 feet, more or less, to a point which is 40.00
feet Northerly as measured at right angles or radially of the "Q" center line of
Primary State Highway No. 3, East Yakima Avenue to Union Gap, as shown in Volume
"A" of Highway Maps, page 54;
thence Westerly along a line which is 40.00 feet Northerly, as measured at right
angles or radially of and parallel with said "Q" center line, to the Westerly
boundary of Larrison's Addition to North Yakima, now Yakima, Washington,
recorded in Volume "A" of Plats, page 70;
thence Northerly along the said West boundary of said Larrison's Addition to the
Southerly boundary of Lot 16, Block 190, of the said Huson's Addition;
thence Westerly along the Southerly boundary of Lot 16, Block 190 of said
Huson's Addition to the Westerly boundary of said Block 19O;
thence Northerly along the Westerly boundary of Block 190 of the said Huson's
Addition, 100 feet, more or less, to the point of beginning.
TOGETHER WITH that portion of vacated East Yakima Avenue accruing thereto as
disclosed by Ordinance No. 1905, recorded March 3, 1976, under Auditor's
No. 2412891.
Situate in Yakima County, Washington.
PARCEL B
- --------
That portion of the Northeast 1/4 of the Northeast 1/4 of Section 19, Township
13 North, Range 19, E.W.M., described as follows:
Beginning at a point on the North line of East Yakima Avenue which point is
situated 50 feet East of the East line of Lot 1, Larrison's Addition to North
Yakima, now Yakima, as recorded in Volume "A" of Plats, page 79;
thence Northeasterly parallel with the North line of East Yakima Avenue, 144
feet;
thence North 9 degrees 36' West 129.2 feet;
thence Southwesterly parallel with the North line of said Yakima Avenue 5.6
feet, more or less, to the Southwesterly corner of that certain tract of land
conveyed to C.V. Showers and Florence Ferne Showers, husband and wife, by deed
recorded in Volume 357 of Deeds under Auditor's No. 958251;
- continued -
<PAGE>
Order No. X-153138
EXHIBIT I
Parcel A
- --------
Lots 4 through 14, inclusive, Block 190, Huson's Addition to North Yakima, now
Yakima, Washington, recorded in Volume "A" of Plats, page 11, together with
vacated alley accruing thereto by reason of Ordinance No. 997 recorded February
8, 1968, under Auditor's No. 2155980, records of Yakima County, Washington;
AND
That part of the Northeast 1/4 of the Northeast 1/4 of Section 19, Township 13
North, Range 19, E.W.M., described as follows:
Commencing at the Northeast corner of Lot 8, Block 190, Huson's Addition to
North Yakima, now Yakima, Washington, recorded in Volume "A" of Plats, page 11,
said point being 42.22 feet South 0 degrees 37'20" East of the concrete monument
in the center line of East "A" Street;
thence South 0 degrees 37'20" East along the East line of said Huson's Addition
18.21 feet to the true point of beginning, said point being 208.77 feet South of
the North line of said Northeast 1/4 of the Northeast 1/4;
thence East, reference bearing, parallel with the North line of said Northeast
1/4 of the Northeast 1/4 208.77 feet;
thence South 0 degrees 37'20" East 40.27 feet;
thence West 21.29 feet to the Northerly extension of the East line of Larrison's
Addition to North Yakima, now Yakima, Washington, recorded in Volume "A" of
Plats, page 79;
thence South 13 degrees 29'55" East along the East line of said Larrison's
Addition 171.36 feet;
thence North 70 degrees 43'30" East 31.74 feet to a point which is 50 feet East
of, as measured at right angles to the West line of Lot 2 of said Larrison's
Addition;
thence South 7 degrees 02'55" East, parallel with the West line of said Lot 2,
130.00 feet to the North line of East Yakima Avenue;
thence South 70 degrees 43'30" West along the North line of said East Yakima
Avenue, 202.20 feet to a point which is 40.00 feet Northerly, as measured at
right angles or radially, of the "Q" center line of Primary State Highway No. 3,
East Yakima Avenue to Union Gap;
thence Southwesterly along a line which is 40.00 feet Northerly, as measured at
right angles or radially, of and parallel with said "Q" center line, to the East
line of said Huson's Addition;
thence North 0 degrees 37'20" West 406.61 feet to the true point of beginning,
EXCEPT that portion of Lot 14, Block 190, Huson's Addition, recorded in Volume
"A" of Plats, page 11, and Lot 1, Larrison's Addition to North Yakima, now
Yakima, recorded in Volume "A" of Plats, page 79, together with vacated allay
accruing thereto by reason of ordinance of vacation recorded under Auditor's No.
2155980, lying within the following described tract:
- continued -
<PAGE>
Order No. X-153138
Parcel B - legal description continued
- ---------
thence North 148.2 feet, more or less, to a point 215 feet South of the North
line of said subdivision;
thence West 173 feet;
thence South 39.4 feet;
thence West 21 feet;
thence South 13 degrees 35' East 168.6 feet;
thence Northeasterly and parallel with the North line of said Yakima Avenue to
a point which is 50 feet East of, as measured at right angles to the West line
of Lot 2, said Larrison's Addition to North Yakima;
thence South 7 degrees 02'55" East, parallel with the West line of said Lot 2. a
distance of 130 feet, more or less, to the point of beginning,
EXCEPTING THEREFROM that portion, if any, which may lie within that certain
tract of land conveyed to Frank Struzik by deed recorded in Volume 435 of
Deeds under Auditor's No. 1159656.
TOGETHER WITH that portion of vacated East Yakima Avenue accruing thereto as
disclosed by Ordinance No. 1905 recorded March 3, 1976, under Auditor's No.
2412891.
Situate In Yakima County, Washington.
PARCEL C
- --------
The South 1/2 of the following described land, to wit:
(The North 208.725 Feet of the West 208,725 feet of the Northeast 1/4 of the
Northeast 1/4 of Section 19, Township 13 North, Range 19, E.W.M., EXCEPT for
roads along the North and West sides thereof.)
Situate in Yakima County, Washington.
END OF EXHIBIT I
<PAGE>
Exhibit 10.13(a)
HOTEL PURCHASE OPTION
THIS PURCHASE OPTION, dated for reference purposes September 15, 1997, is
between VA ALTA, INC., a Washington corporation ("VAI") and GOODALE AND BARBIERI
COMPANIES (which is in the process of changing its name to Cavanaugh's
Hospitality Corporation) or assigns ("G&B").
1. Property. This Purchase Option upon the terms and conditions herein
--------
set forth, relates to the real property known as the Yakima Holiday Inn (the
"Hotel") situated at 9 North Ninth Street, Yakima, WA 98901, legally described
on Exhibit I attached hereto (the "Property"). The term "Property" includes
land, building, improvements, and the personal property items described below.
In the event Exhibit I is not attached to this document in correct or complete
form at execution, the parties authorize the Title Company described below to
prepare and attach the correct Exhibit I.
2. Use of Property: Environmental Matters. Hazardous and/or toxic waste
--------------------------------------
or materials shall include any substance, waste, or material which is designated
as a Hazardous Substance under the Comprehensive Environmental Response,
Compensation and Liability Act (42 USC Section 9601 et seq.), the Model Toxics
Control Act, revised Code of Washington Section 70.105D), or under any other
applicable law. VAI warrants that only as of the date of the Waiver Notice
described below, and not as to incidents thereafter, the Property does not
contain any hazardous or toxic waste or materials or asbestos containing
material as those terms are defined ("Existing Hazardous Substances") other than
in full compliance with all applicable laws, rules, and regulations. VAI
represents and warrants that as of the date hereof (a) it has not received
notification of any kind from any regulatory agency stating that the Property is
or may be targeted for a federal or state Hazardous Substances cleanup or may be
contaminated with any Existing Hazardous Substances, as that term is defined
above, or is in violation of any existing code or regulation and (b) VAI has no
actual knowledge of any release of any Existing Hazardous Substances on the
Property or that it is in violation of any existing code or regulation. VAI
shall indemnify and hold G&B harmless form and against any and all loss, damage,
claims, penalties, liabilities, suits, costs, and expense (including, without
limitation, cost of remedial actions or cleanup), suffered or incurred by G&B
arising out of or related to the breach of the foregoing representations and
warranties. G&B shall be entitled to offset the cost of removal or abatement of
Existing Hazardous Substances or of curing violations of code or regulations
relating to the condition or use of the Property which exist as the date of the
Waiver Notice from payments next falling due under the Option Payments or Option
Price described below.
3. Inspection and Inspection Waiver. G&B shall have thirty (30) days
--------------------------------
("Inspection Period") after execution and delivery of this document by all
parties and delivery of the "Inspection Documents" described below within which
to inspect the Property and review all Inspection Documents to determine whether
the Property in its current status is suitable for the
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
purposes of G&B. Immediately upon execution of this Option, VAI shall deliver to
G&B all books and records and documents relating to the operation of the
Property or encumbrances on the Property (including but not limited to books and
records of operations for the past three full calendar year plus the current
year to date and all leases or maintenance agreements and all notes and
encumbrances and restrictions on the Property) and a preliminary commitment for
ALTA owner's extended coverage Title Insurance on the Property from Yakima Title
and Escrow Company ("Title Company") insuring G&B in the full amount of the
Option Price described below, together with legible copies of all documents
referred to therein ("Title Commitment") (all documents described in this
sentence being referred to herein as "Inspection Documents"). This Option shall
terminate and all responsibilities of the parties to one another shall terminate
unless, prior to the end of the Inspection Period, G&B notifies VAI that G&B has
determined to its satisfaction that the Property can be used for these purposes
to G&B's satisfaction ("Inspection Waiver" or "Waiver Notice"). No payment or
note shall be made to VAI until the Inspection Waiver.
4. Acceptance of Property. By giving its Waiver Notice, G&B acknowledges
----------------------
that the Property is in good and acceptable condition. The Property has been
inspected by G&B, and, except for the representations and warranties specified
in this Option, is turned over AS IS, WHERE IS, AND WITH ALL FAULTS LATENT AND
PATENT, WITH NO IMPLIED WARRANTIES, INCLUDING THE WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, AND RISKS OF MECHANICAL FAILURES; BREAKDOWNS
AND WEAR AND TEAR OF PROPERTY AND EQUIPMENT ARE SOLELY AT G&B'S RISK, effective
October 10, 1997.
5. Utilities and Other Services. By giving its Waiver Notice, G&B has
----------------------------
satisfied itself that all utilities and other services necessary for G&B's
purposes are available to the Property.
6. Assignment. This Option may be assigned by G&B or its successor in
----------
interest to any entity.
7. Damage or Destruction. If the property is damaged or destroyed by fire
---------------------
or any other cause prior to Option Closing, VAI has no obligation to rebuild;
all such rights between the parties are described in that certain lease between
the parties entered into as of this date ("Lease").
8. Condemnation. If all of the Property is taken by any public authority
------------
under the power of eminent domain, this Option shall terminate as of the date
possession is taken by said public authority pursuant to such condemnation and
all Option Payments made shall be refunded to G&B without interest. If any part
of the Property is so taken and, in the opinion of G&B, it is not reasonably
economically feasible to continue the Lease in effect, G&B may terminate this
Lease and all Option Payments made shall be refunded to G&B without interest. In
each such
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
case, VAI shall receive the condemnation award for the building, G&B for the
business.
In the event VAI shall receive an award as to the building, but the Lease
continues between the parties, the amount awarded to VAI solely on account of
the Property shall be a reduction of the Option Price set forth below, without
interest. Except for this credit if the Option is exercised, G&B shall be
entitled to no part or credit for the award to VAI. Nothing herein contained
shall be construed as precluding G&B from asserting any claim G&B may have
against such public authority for disruption or relocation of G&B's business
from the Property.
9. Notices. All notices, demands, and requests to be given by either
-------
party to the other shall be in writing. All notices, demands, and requests by
VAI to G&B shall be sent by United States registered or certified mail, postage
prepaid, (or by private overnight courier) addressed to G&B at W.201 North River
Drive Suite 100, Spokane, WA 99201 Attn. Chief Operating Officer. All notices,
demands, and requests by G&B to the VAI shall be sent by United States
registered or certified mail, postage prepaid, (or by private overnight courier)
addressed to VAI at the street address of 360 Coombs Road, Moxee, WA 98936, with
a copy to Donald H. Bond, Halverson & Applegate, P.S., P.O. Box 22730, Yakima,
WA 98907-2715, or such other place as VAI may from time to time designate by
notice to G&B. Notices, demands, and requests served upon VAI or G&B as provided
in this section in the manner aforesaid shall be deemed sufficiently served or
given for all purposes hereunder at the time such notice, demand, or request
shall be so mailed or deposited.
10. Notice of Purchase Option. This Option shall not be recorded. A
-------------------------
Memorandum of this Option will be recorded which only identifies the parties,
the fact that the Option has been granted, and a legal description of the
property.
11. G&B's Option to Purchase.
------------------------
11.1 Grant of Option. In consideration for G&B entering into the
---------------
Lease, and making the Option Payments defined below, VAI hereby grants to G&B
the option (the "Option") to purchase the Property on the terms and conditions
described in this Section.
11.2 Exercise of Option. So long as the Lease has not been earlier
------------------
terminated, and all payments required under the Lease are then current, the
Option may be exercised by G&B only on or at any time between March 1, 2003 and
September 30, 2003, by G&B giving to VAI written notice of exercise of the
Option (the "Option Notice"). Upon delivery of the Option Notice, VAI shall be
bound to sell, and G&B shall be bound to buy, the Property, on the terms and
conditions hereinafter set forth herein.
11.3 Purchase Price and Payment.
--------------------------
(a) Option Price. If G&B exercises the Option, then VAI shall
------------
sell,
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
and G&B shall buy the Property on the Closing Date (defined below) at an all
cash price of Six Million Two Hundred Fifty Thousand Dollars ($6,250,000) (the
"Option Price"), against which G&B shall receive a credit for all Option
Payments. Option payments are solely for the privilege of obtaining the Option
and are not either a security deposit (there are no security deposits under the
lease) nor are they a credit, off-set or liquidated damages for any purpose and
the Option Payment is nonrefundable, and only creditable as set forth below in a
purchase arrangement.
(b) Option Payments. G&B shall make Option Payments in the
---------------
amount of One Million Dollars ($1,000,000) as follows: immediately upon giving
the Waiver Notice, G&B shall deliver to VAI Five Hundred Thousand Dollars plus
G&B's note for $500,000 payable interest only monthly in arrears for 60 months,
and due and payable in full on the fifth anniversary of the date of the note
("Option Note") and shall receive a credit against the Option Price in the
amount of the Option Payments of One Million Dollars ($1,000,000) (exclusive of
interest on the Option Note). The Option Note shall be secured by an FDIC
insured United States bank irrevocable Letter of Credit which provides for
payment in full of the Option Note upon demand in the event of default in making
a payment on the Option Note by G&B, and failure by G&B to cure such default
within 30 days of notice of such default to G&B and the bank providing the
Letter of Credit. G&B shall have the right to substitute for and obtain the
release the Letter of Credit as security for the Option Note a deed of trust on
that hotel property commonly known as Cavanaugh's at Yakima Center, provided
such deed of trust is subordinate to no more than a first lien in the maximum
principal balance of Two Million Four Hundred Thousand Dollars ($2,400,000), and
the note evidencing such debt is not then in default which first lien G&B shall
have the right, from time to time, and VAI shall cooperate by executing
appropriate subordination documents, to refinance with a replacement first lien
with the same or other lenders up to the same maximum amount. The Option Note
and any deed of trust securing the Option Note shall be in normal commercial
form, which shall be agreed upon between the parties during the Inspection
Period. The letter of credit must be in appropriate form, and if the letter of
credit expires prior to the payment in full of the note, then it must be renewed
by G&B and the renewal given to VAI prior to the expiration, or VAI shall call
upon the letter of credit immediately prior to its expiration without notice or
demand to G&B. The interest rate on the promissory note shall be 8% per year
simple interest, payable monthly.
11.4 Conveyance and Title.
--------------------
(a) Manner of Conveyance. If G&B exercises the Option, title to
--------------------
the subject property shall be conveyed by VAI to G&B at Closing by statutory
warranty deed (the "Deed"), and Bill of Sale, with no warranties express or
implied except as to title, free and clear of all liens, encumbrances and
defects ("Exceptions"), other than the Permitted Exceptions.
(b) Title Report: Objection to Exceptions. VAI shall provide
-------------------------------------
G&B with the Title Commitment at the beginning of the Inspection Period. All
exceptions which may be removed by monetary payment shall be removed by VAI at
or before Closing. G&B's Waiver
________________________________________________________________________________
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
Notice is conditioned upon VAI's removal at closing of all non-monetary
exceptions identified in the Title Commitment except those certain exceptions
which are approved by G&B during the Inspection Period ("Permitted Exceptions")
and any non-monetary exception which VAI notifies G&B will not be removed at or
before Closing within 10 days following receipt of the Title Commitment; in
which event G&B shall have the right to accept the exception identified in such
notice as a Permitted Exception. The Permitted Exceptions shall include those
exceptions which have been created by or arise through the occupancy and use of
the Property by the G&B. In the event the Title Report shall reveal exceptions
which are not deemed by G&B to be permitted, it is G&B's responsibility to
communicate that to VAI during the Inspection Period. VAI may at that point
terminate the transaction during the Inspection Period, if it does not wish to
pay or perform to remove the exceptions from Title to which G&B objects, unless
G&B accepts the exception as a Permitted Exception.
11.5 Closing: Possession. Closing defined as the consummation of the
-------------------
purchase of the Property by G&B from VAI in accordance with the terms and
provisions of this Option, shall occur on a date ("Closing Date") specified By
G&B in the Exercise Notice, which shall not be later than ninety (90) days from
the date of the Option Notice. G&B shall be entitled to possession of the
Property on the Closing Date. Closing and transfer of title shall not be deemed
a termination of the Lease for purposes of any Lease provision which allows VAI
to acquire title or possession to real or personal property upon termination of
the Lease.
11.6 Escrow. Upon delivery, of the Option Notice by VAI, the parties
------
will establish an escrow with the Title Company, or such other closing agent
("Closing Agent") as VAI and G&B may designate. The parties shall also execute
satisfactory escrow instructions consistent with this Option as an accommodation
to assist the Closing Agent in carrying out the escrow and in consummating this
transaction. However, in the event that the parties fail to execute said escrow
instructions, the following terms of this Option shall be deemed to be escrow
instructions to the Closing Agent. The transaction shall be consummated as
follows:
(a) Performance By VAI. VAI shall deposit into escrow with the
------------------
Closing Agent, on or before the Closing Date, the following:
(i) The fully executed and acknowledged Deed for the
Property, in a form sufficient for recording, conveying fee title to the
Property, including all improvements thereon, to G&B, subject to no exceptions
other than the Permitted Exceptions, and an executed Bill of Sale to the subject
personal property.
(ii) A fully executed real estate excise tax affidavit.
(iii) An ALTA owner's extended policy of title insurance
(the "Title Policy") issued by the Title Company in the full amount of the real
property portion of the Purchase Price, insuring G&B's title to the property.
Said Title Policy shall contain no exceptions other than the Permitted
Exceptions. To the extent allowed by applicable law or regulations, the
obligation of VAI to provide G&B with the Title Policy may be satisfied by
amendment of the Owner's Leasehold title insurance described in the Lease to an
Owner's policy.
________________________________________________________________________________
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
(iv) At the Closing, VAI will provide G&B with an
affidavit that the seller is not a "foreign person," as defined and required in
The Foreign Investment in Real Property Tax Act ("FIRPTA"), IRC Section 145 and
all other documents reasonably required to consummate this transaction.
(v) All Closing Costs of VAI (including applicable excise
tax) will be deducted from the Option Price paid at Closing.
(b) Performance By G&B. On or before the Closing Date, G&B
------------------
shall deposit in escrow with the Closing Agent, the following:
(i) Sufficient funds to consummate the purchase in
accordance with the Option, including the amount of the Option Price, less any
Option Payments, plus any Closing Costs for which G&B is responsible.
(ii) Such other documents as are reasonably required to
consummate this transaction.
(c) Closing expenses. At Closing, VAI shall pay the real estate
----------------
excise tax imposed by law upon this Lease or Option and all other transfer taxes
imposed by law; the premium for the Title Policy; and one-half of the escrow and
recording fees and costs. At Closing, G&B shall pay one-half of the escrow fees
and costs, and sales and use taxes as appropriate on the personal property being
sold by VAI. Allocation of the purchase price between real and personal property
shall be as mutually determined by the parties, or failing agreement, by
arbitration pursuant to Section 8 of the lease, and shall be based only on the
value at Closing of personal property owned by VAI as of the date of execution
of this Option and still in existence as of the Closing.
(d) Closing Procedure. When all funds and documents have been
-----------------
deposited in escrow, the Closing Agent shall complete the transfer of the
Property as follows:
(i) VAI shall receive the Purchase Price, less Closing
Costs for which VAI is responsible.
(ii) After recording, G&B shall receive the Deed to the
Property, Bill of Sale and the Title Policy.
(e) Prorations. Property taxes and water and similar items
----------
shall not be prorated between the parties as of the Closing Date, as G&B was
responsible for the same under the lease.
(f) Remedies. Each party shall have all remedies at law or at
--------
equity, including specific performance and or damages, in the event the other
fails to perform its obligations under the terms of this Option.
11.7 Termination of Lease. Upon the Closing, the Lease shall
--------------------
terminate with respect to the Property, and any prepaid rent shall be credited
against the Option Price. Prior
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
termination of the Lease by reason of unremedied default shall terminate this
Option.
12. Miscellaneous
-------------
12.1 Nonwaiver. No failure of VAI to insist upon the strict
---------
performance of any provision of this Option shall be construed as depriving VAI
of the right to insist on strict performance of such provision or any other
provision in the future. No waiver by VAI of any provision of this Option shall
be deemed to have been made unless expressed in writing and signed by VAI. No
acceptance of rent or of any other payment to VAI from G&B after any default by
G&B shall constitute a waiver of any such default or any other default. Consent
by VAI in any one instance shall not dispense with necessity of consent by VAI
in any other instance.
12.2 Attorneys' Fees. If an action is commenced to enforce any of the
---------------
provisions of this Option, the prevailing party shall, in addition to its other
remedies, be entitled to recover its reasonable attorneys' fees incurred prior
to trial, at trial, and upon appeal.
12.3 Captions and Construction. The captions in this Option are for
-------------------------
the convenience of the reader and are not to be considered in the interpretation
of its terms.
12.4 Partial Invalidity. If any term or provision of this Option or
------------------
the application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Option shall be valid and be enforced as written to the
fullest extent permitted by law.
12.5 Governing law. This Option shall be governed by the laws of the
-------------
State of Washington; Venue is Yakima County for any action.
12.6 Right to Certificates. Each party, within fifteen (15) days
---------------------
after notice from the other party, shall execute and deliver to the other party,
in recordable form, a certificate stating that this Option is unmodified and in
full force and effect, or in full force and effect as modified and stating the
modifications. Failure to deliver the certificate within such fifteen (15) day
period shall be conclusive upon the party failing to deliver the certificate for
the benefit of the party requesting the certificate and any successor to the
party requesting the certificate, and this Option is in full force an effect and
has not been modified except as may be represented by the party requesting the
certificate. The certificate shall be kept confidential and not recorded.
12.7 Entire Agreement. This document contains the entire and
----------------
integrated agreement of the parties as to the Option and may not be modified
except in writing signed and acknowledged by both parties.
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
12.8 Interpretation. This Option has been submitted to the scrutiny
--------------
of all parties hereto and their counsel if desired, and shall be given a fair
and reasonable interpretation in accordance with the words hereof, without
consideration or weight being given to its having been drafted by any party
hereto or its counsel.
12.9 Number; Gender; Permissive Versus Mandatory Usage. Where the
-------------------------------------------------
context permits, references to the singular shall include the plural and vice
versa, and to the neuter gender shall include the feminine and masculine. Use of
the word "may" shall denote an option or privilege and shall impose no
obligation upon the party which may exercise such option or privilege; use of
the word "shall" shall denote a duty or an obligation.
12.10 Time. Time is of the essence of this Option.
----
12.11 Binding Effect; Counterpart Originals; Facsimile. This Agreement
------------------------------------------------
shall be binding upon the parties hereto and upon their respective executors,
administrators, legal representatives, successors, and assigns. Each party to
this Agreement may execute separate originals of this Agreement with the same
effect as if both signed the same original. A facsimile transmission of the
executed original shall be treated as an original signed document. The parties
shall cooperate to assemble and deliver to one another duplicate signed
originals as soon as is practical following such facsimile transmission.
EXECUTED as of the date first above written.
G&B: VAI:
GOODALE AND BARBIERI COMPANIES VA ALTA, INC.
By /s/ Richard L. Barbieri By /s/ Randy Elliott
------------------------------ --------------------------
Name: Richard L. Barbieri Name: Randy Elliott
Title: Vice President Title: President
________________________________________________________________________________
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
STATE OF WASHINGTON
)SS.
County of King
I certify that I know or have satisfactory evidence Richard L. Barbieri is the
person who appeared before me, and said person acknowledged that (he/she) signed
this instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the Vice President of Gooodale and Barbieri
Companies, to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
Dated: September 18, 1997.
/s/ Lyn Tangen
-------------------------------------------------
Type/Print Name of Notary: Lyn Tangen
Notary Public in And For the State of Washington,
My appointment expires: November 23, 1998.
[SEAL APPEARS HERE]
STATE OF WASHINGTON
)SS.
County of Yakima
I certify that I know or have satisfactory evidence Randy Elliott is the person
who appeared before me, and said person acknowledged that (he/she) signed this
instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the President of Va-Alta, Inc., to be the
free and voluntary act of such party for the uses and purposes mentioned in the
instrument.
Dated: September 22, 1997.
[SIGNATURE ILLEGIBLE]
-------------------------------------------------
Type/Print Name of Notary:
-------------------------------------------------
Notary Public in And For the State of Washington,
My appointment expires: November 7, 1997
[SEAL APPEARS HERE]
________________________________________________________________________________
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Va-Alta Hotel/Cavanaughs Purchase Option 9/15/97
<PAGE>
EXHIBIT I
Parcel A
- --------
Lots 4 through 14, inclusive, Block 190, Huson's Addition to North Yakima, now
Yakima, Washington, recorded in Volume "A" of Plats, page 11, together with
vacated alley accruing thereto by reason of Ordinance No. 997 recorded February
8, 1968, under Auditor's No. 2155980, records of Yakima County, Washington;
AND
That part of the Northeast 1/4 of the Northeast 1/4 of Section 19, Township 13
North, Range 19, E.W.M., described as follows:
Commencing at the Northeast corner of Lot 8, Block 190, Huson's Addition to
North Yakima, now Yakima, Washington, recorded in Volume "A" of Plats, page 11,
said point being 42.22 feet South 0 degree 37'20" East of the concrete monument
in the center line of East "A" Street;
thence South 0 degree 37'20" East along the East line of said Huson's Addition
18.21 feet to the true point of beginning, said point being 208.77 feet South of
the North line of said Northeast 1/4 of the Northeast 1/4;
thence East, reference bearing, parallel with the North line of said Northeast
1/4 of the Northeast 1/4 208.77 feet;
thence South 0 degree 37'20" East 40,27 feet;
thence West 21.29 feet to the Northerly extension of the East line of Larrison's
Addition to North Yakima, now Yakima, Washington, recorded in Volume "A" of
Plats, page 79;
thence South 13 degrees 29'55" East along the East line of said Larrison's
Addition 171.36 feet;
thence North 70 degrees 43'30" East 31.74 feet to a point which is 50 feet East
of, as measured at right angles to the West line of Lot 2 of said Larrison's
Addition;
thence South 7 degrees 02'55" East, parallel with the West line said Lot 2,
130.00 feet to the North line of East Yakima Avenue;
thence South 70 degrees 43'30" West along the North line of said East Yakima
Avenue, 202.20 feet to a point which is 40.00 feet Northerly, as measured at
right angles or radially, of the "Q" center line of Primary State Highway No. 3,
East Yakima Avenue to Union Gap;
thence Southwesterly along a line which is 40.00 feet Northerly, as measured at
right angles or radially, of and parallel with said "Q" center line, to the East
line of said Huson's Addition;
thence North 0 degree 37'20" West 406.61 feet to the true point of beginning,
EXCEPT that portion of Lot 14, Block 190, Huson's Addition, recorded in Volume
"A" of Plats, page 11, and Lot 1, Larrison's Addition to North Yakima, now
Yakima, recorded in Volume "A" of Plats, page 79, together with vacated alley
accruing thereto by reason of ordinance of vacation recorded under Auditor's No.
2155980, lying within the following described tract;
- continued -
<PAGE>
Order No. x-153138
Parcel A - legal description continued
- --------
Beginning at the Northwesterly corner of Lot 15, Block 190, Huson's Addition to
North Yakima, now Yakima, as recorded in Volume "A" of Plats, page 11;
thence Easterly along the Northerly boundary line of said Lot 15, 104 feet,
more or less, to the Westerly wall of the existing building constructed on
Lots 16 and 15 and a part of Lot 14. Block 190 of said Huson's Addition;
thence Northerly and parallel with the West boundary of the said Block 190, of
said Huson's Addition, 29 feet;
thence Easterly and parallel with the Northerly boundary line of the said
Lot 15 40 feet;
thence Southerly and parallel with the West boundary of the said Block 190 of
the said Huson's Addition, 130 feet, more or less, to a point which is 40.00
feet Northerly as measured at right angles or radially of the "Q" center line
of Primary State Highway No.3. East Yakima Avenue to Union Gap, as shown in
Volume "A" of Higway Maps, page 54;
thence Westerly along a line which is 40.00 feet Northerly, as measured at
right angles or radially of and parallel with said "Q" center line, to the
Westerly boundary of Larrison's Addition to North Yakima, now Yakima,
Washington, recorded in Volume "A" of Plats, page 70;
thence Northerly along the said West boundary of said Larrison's Addition to
the Southerly boundary of Lot 16, Block 190, of the said Huson's Addition;
thence Westerly along the Southerly boundary of Lot 16, Block 190 of said
Huson's Addition to the Westerly boundary of said Block 190;
thence Northerly along the Westerly boundary of Block 190 of the said Huson's
Addition, 100 feet, more or less, to the point of beginning.
TOGETHER WITH that portion of vacated East Yakima Avenue accruing thereto as
disclosed by Ordinance No. 1905, recorded March 3, 1976, under Auditor's
No. 2412891.
Situate in Yakima County, Washington.
PARCEL B
- --------
That portion of the Northeast 1/4 of the Northeast 1/4 of Section 19, Township
13 North, Range 19, E.W.M., described as follows:
Beginning at a point on the North line of East Yakima Avenue which point is
situated 50 feet East of the East line of Lot 1, Larrison's Addition to North
Yakima, now Yakima, as recorded in Volume "A" of Plats, page 79;
thence Northeasterly parallel with the North line of East Yakima Avenue, 144
feet;
thence North 9 degrees 36' West 129.2 feet;
thence Southwesterly parallel with the North line of said Yakima Avenue 5.6
feet, more or less, to the Southwesterly corner of that certain tract of land
conveyed to C.V. Showers and Florence Ferne Showers, husband and wife, by deed
recorded in Volume 357 of Deeds under Auditor's No. 958251;
-continued-
<PAGE>
Order No. x-153138
Parcel B - legal description continued
- --------
thence North 148.2 feet, more or less, to a point 215 feet South of the North
line of said subdivision;
thence West 173 feet;
thence South 39.4 feet;
thence West 21 feet;
thence South 13 degrees 35' East 168.6 feet;
thence Northeasterly and parallel with the North line of said Yakima Avenue to
a point which is 50 feet East of, as measured at right angles to the West line
of Lot 2, said Larrision's Addition to North Yakima;
thence South 7 degrees 02'55" East, parallel with the West line of said Lot 2,
a distance of 130 feet, more or less, to the point of beginning,
EXCEPTING THEREFROM that portion, if any, which may lie within that certain
tract of land conveyed to Frank Strusik by deed recorded in Volume 435 of
Deeds under Auditor's No. 1159656.
TOGETHER WITH that portion of vacated East Yakima Avenue accruing thereto as
disclosed by Ordinance No. 1905 recorded March 3, 1976, under Auditor's
No. 2412891.
Situate in Yakima County, Washington.
PARCEL C
- --------
The South 1/2 of the following described land, to wit:
(The North 208.725 feet of the West 208.725 feet of the Northeast 1/4 of the
Northeast 1/4 of Section 15, Township 13 North, Range 19, E.W.M.,
EXCEPT for roads along the North and West sides thereof.)
Situate in Yakima County, Washington.
END OF EXHIBIT I
<PAGE>
Exhibit 10.14
HOTEL LEASE WITH PURCHASE OPTION
THIS LEASE, dated for reference purposes October 7, 1997, is between DUNSON
RIDPATH HOTEL ASSOCIATES LIMITED PARTNERSHIP ("Lessor") and CAVANAUGHS
HOSPITALITY CORPORATION (formerly known as Goodale and Barbieri Companies and
referred to specifically herein as "CHC") ("Lessee").
1. Property. Lessor hereby leases to Lessee, upon the terms and
--------
conditions herein set forth, the real property known as The Ridpath Hotel (the
"Hotel") situated at 515 W. Sprague, Spokane, Washington, legally described on
Exhibit I attached hereto (the "Property"). The term "Property" includes land,
building, improvements, and the personal property items described in Section 8
below. In the event Exhibit I is not attached in accurate or complete form to
this document at execution, the parties authorize the Title Company described
below to prepare and attach the correct Exhibit I.
2. Use of Property; Environmental Matters. The Property shall be used for
--------------------------------------
operation as a hotel, guest services, restaurant, retail and banquet/meeting
facility and for no other purpose (collectively "Hotel Use") without the prior
consent of Lessor. Lessee shall not allow use of the Property in a manner which
would increase insurance premiums, or for any illegal purpose. Lessee shall
comply with all governmental rules, orders, regulations, or requirements
relating to the use and occupancy of the Property. Lessee shall not allow the
presence, use, storage or disposal of any hazardous or toxic waste or materials
on the Property at any time other than in full compliance with all applicable
laws, rules, and regulations. Hazardous and/or toxic waste or materials shall
include any substance, waste, or material which is designated as a Hazardous
Substance under the Comprehensive Environmental Response, Compensation and
Liability Act (42 USC Section 9601 et seq.), the Model Toxics Control Act,
revised Code of Washington Section 70.105D), or under any other applicable law.
Lessee agrees to defend, indemnify and hold Lessor harmless from and against any
liabilities, obligations, damages, costs, and expenses (including attorneys'
fees incurred prior to trial, at trial and upon appeal) incurred as a result of
any hazardous or toxic waste or material having been used, stored, or disposed
of on the Property or violations of applicable laws, rules and regulations
relating to the use of the Property after the Commencement Date and during the
term of this Lease. This indemnity shall survive termination of this Lease.
Lessor warrants that, to the best of the knowledge of Lessor, the Property does
not contain any hazardous or toxic waste or materials or asbestos containing
material as those terms are defined above as of the commencement of the term of
this Lease ("Existing Hazardous Substances") other than in full compliance with
all applicable laws, rules, and regulations, except as disclosed in that Phase I
Environmental Site Assessment dated November 10, 1994 by Professional Service
Industries, Inc. Lessor represents and warrants that as of the date hereof (a)
it has not received notification of any kind from any regulatory agency stating
that the Property is or may be targeted for a federal or state Hazardous
Substances cleanup or may be contaminated with any Existing Hazardous
Substances, as that term is defined above, or is currently in violation of any
applicable zoning, building, safety or accessibility law or regulation and (b)
*Lessor has no knowledge of any release of any Existing Hazardous Substances or
that the Property is currently in violation of any applicable
________________________________________________________________________________
1
Ridpath Lease-Option 10/7/97
* except as disclosed in the Phase I Environmental Site Assessment.
<PAGE>
zoning, building, safety or accessibility law or regulation. Lessor shall
indemnify and hold Lessee harmless from and against any and all loss, damage,
claims, penalties, liabilities, suits, costs, and expense (including without
limitation, cost of remedial actions or cleanup), suffered or incurred by Lessee
arising out of or related to the breach of the foregoing representations and
warranties. In addition to any other remedy, in the event of a breach of the
foregoing representations and warranties, Lessee shall be entitled to offset the
cost of removal or abatement of Existing Hazardous Substances or of curing
violations of code or regulations relating to the condition or use of the
Property which exist as of the Commencement Date against the amount to be paid
at Closing in the event the Option or Put described in Section 30 below is
exercised.
3. Inspection and Inspection Waiver.
--------------------------------
3.1 Lessee's Inspection and Waiver. Lessee shall have thirty
------------------------------
(30) days ("Inspection Period") after execution and delivery of this Lease by
all parties and delivery by Lessor to Lessee of the "Inspection Documents"
described below within which to inspect the Property and review all Inspection
Documents to determine whether the Property in its current status is suitable,
in the exercise of the sole business judgment discretion of Lessee, for the
purposes of Lessee. Immediately upon execution of this Lease, Lessor shall
provide Lessee with continuing access to the Property to complete such
inspections and reports as Lessee may elect, provided they shall be conducted
without disruption of the operation of the Hotel and at Lessee's sole expense;
and Lessor shall make available to Lessee in Spokane for copying or inspection
all books and records and documents relating to the operation of the Property or
encumbrances on the Property (including but not limited to all books and records
of operations for the past three full calendar years plus the current year to
date, union agreements or other contracts, leases or maintenance agreements,
notes and encumbrances and restrictions on the Property, and all documents
evidencing any item included within the term Property) and a preliminary
commitment for ALTA extended coverage Owner's Leasehold Title Insurance on the
Property from First American Title Company of Spokane ("Title Company") insuring
Lessee in the amount of the Option Price described below, together with legible
copies of all documents referred to therein ("Title Commitment") (all documents
described in this sentence being referred to herein as "Inspection Documents").
Lessor shall pay for the cost of any survey required for extended coverage title
insurance, if such survey does not already exist (if Title Company requires a
survey for the required title insurance and another title insurer of comparable
capability is willing to do so without a survey, Lessee agrees to substitute the
other title insurer as the Title Company), and Lessee shall pay for the
difference in premium between extended and standard coverage title insurance.
Lessee shall only use the Inspection Documents for the purpose of evaluating the
Property, as opposed to any competitive use, and shall restrict access to the
Inspection Documents to those persons required to evaluate the Property. The
manner of handling objections to title exceptions and existing agreements which
will survive the Commencement Date is described in Section 30.4 (b). This Lease
shall terminate and all responsibilities of the parties to one another shall
terminate unless, prior to the end of the Inspection Period, Lessee notifies
Lessor that Lessee has determined to its satisfaction the Property can be used
for these purposes to Lessee's satisfaction ("Inspection Waiver" or "Waiver
Notice"). Upon receipt of the Waiver Notice, Lessor shall provide to Lessee, at
Lessor's cost except as specified above, the title insurance described in the
Title Commitment by the Commencement Date described below.
________________________________________________________________________________
2
Ridpath Lease-Option 10/7/97
<PAGE>
3.2 Lessor's Inspection and Waiver. Lessor shall have seven
------------------------------
days from delivery to Lessor by Lessee of the current consolidated balance sheet
of CHC, which CHC warrants is true and accurate, within which to evaluate and
approve, in Lessor's sole discretion, the financial condition of CHC and to
terminate this Lease in the event of disapproval. In the event of such
termination, each party shall be released from all further obligations, except
those of confidentiality, arising out of this Lease. In the event Lessor fails
to notify Lessee of such termination within such seven day period, the right to
terminate this Lease under this subsection 3.2 is waived.
3.3 Joint Contingency of Lessor and Lessee. Lessor and Lessee
--------------------------------------
agree to cooperate with one another in obtaining from the holders of existing
loans secured by the Property any approval of this Lease required by such loans
and the extension of such loans, on terms acceptable to both Lessor and Lessee,
through the end of the term of this Lease. In the event the parties and lenders
fail to agree upon the foregoing prior to the end of the Inspection Period, this
Lease shall terminate and each party shall be released from all further
obligations, except those of confidentiality, arising out of this Lease.
Appropriate subordination, attornment and none-disturbance agreements shall be
included in any agreements with the lenders. After waiver of this contingency
described in this subsection 3.3, neither party shall further encumber the
Property or modify the terms of the loans. Lessor may assign this Lease as
security for the loans approved under the terms of this Section 3.3.
4. Term. In the event of waiver of all contingencies described in
----
Section 3 above, this Lease shall be for a term commencing seven (7) days after
the Waiver Notice, or such other period as Lessor and Lessee may agree upon in
order to accomplish an orderly transition of management of the Property
("Commencement Date") and terminating on November 1, 1999. Any holdover after
the expiration of the term shall be deemed to be subject to all of the terms and
conditions of this Lease.
5. Rental. Lessee agrees to pay monthly rent ("Rental") in the amount
------
of the monthly principal and interest debt service (exclusive of any balloon
payments of principal in excess of normal monthly payments) of notes secured by
the Property as approved under the terms of Section 3.3 above, prorated for any
partial month. The identity of the notes and payment amounts comprising the
Rental shall be approved by Lessee in writing during the Inspection Period.
Lessee will be responsible for paying any use tax on personal property which it
purchases in connection with the operation of the Property or on Rental required
to be allocated to personal property. The parties allocate none of the Rental to
the existing personal property.
Lessee assumes no liability to the lenders for interest and principal
payments of the debt service for the debt now encumbering the Property and,
during the course of this Lease, Lessor shall hold harmless and indemnify Lessee
from any claim by any secured creditor of Lessor. Rental shall be paid by direct
payment to the holders of the notes secured by the Property, with proof of
payment supplied to Lessor, at Lessor's address set forth in Section 23 hereof
or at such other place as Lessor may designate in writing. Lessor shall not
further encumber the Property during this Lease. Lessor may assign this Lease as
security for the loans approved under the terms of Section 3.3 above.
6. Costs of Management, Operation and Maintenance. The Rental is net to
----------------------------------------------
Lessor throughout the term of this Lease. Lessor is not obligated to pay any
costs of operation, maintenance
________________________________________________________________________________
3
Ridpath Lease-Option 10/7/97
<PAGE>
or capital improvements. Lessee is to pay all Operating Expenses. The term
"Operating Expenses" means all costs of management, operation, and maintenance
of the Property as a Hotel utilizing the Cavanaughs Hotel name or such other
franchise as may be utilized by Lessee from time to time, including without
limitation, the following: employment taxes, unemployment insurance, wages,
salaries, fringe benefits, and other direct and indirect costs of employees;
janitorial, cleaning, landscaping, guard, security and other services; gas;
electrical, water, waste disposal, and other utilities; heating, ventilation and
air-conditioning; window washing; materials and supplies; painting, repairs, and
other maintenance; parking lot resurfacing and restriping, as well as cleaning,
sweeping, and ice and snow removal; maintenance, repair, replacement, and
service of equipment, including without limitation the HVAC systems, alarm
systems, and other equipment; reserves; costs of independent contractors;
management fees and expenses; insurance and insurance deductibles of any kind;
real and personal property taxes, assessments; utility charges of any kind; the
cost of any repair, renovation, alteration, and improvement required to be made
under any governmental law, rule or regulation (excluding those in breach of any
warranty of Lessor contained in this Lease); supplying directional signs, other
markers, and car stops; and any other expense or charge which is a cost of
management, operation, and maintenance of the Property.
The term Operating Expenses does not include any cost or fee for
maintaining or terminating the WestCoast franchise/license, which shall be the
sole responsibility and expense of Lessor.
7. Operation of Hotel. Lessee shall operate, maintain and keep open at
------------------
all times (except to the extent required by damage or condemnation) the Property
as a hotel in a manner at least equal to the quality of Lessor's prior operation
of the Hotel and in compliance with all loan documents secured by the Property
as follows:
a) Lessee agrees to provide monthly operating statements to Lessor and to
maintain the furnishings, fixtures, and inventory in the operation of the Hotel
at normal levels.
b) Lessee agrees to make, throughout the term of this Lease, such
replacements of furnishings, fixtures, and inventory as is reasonably necessary
to operate the Hotel in compliance with this Lease, or may upgrade furnishings,
fixtures and equipment, and such replacements shall be the property of the
Lessee, provided such items shall be left on the Property and become the
property of Lessor in the event of the termination of this Lease other than by
purchase under Section 30 below. In the ordinary course of such replacements,
Lessee may dispose of the replaced personal property. In the event of
replacement of the personal property, which involves wholesale replacement of
substantial amounts of the property, such as renovating rooms or replacing
television sets, at least thirty (30) days advance notice shall be given to
Lessor along with a brief description of the plan of action to accomplish
replacement, and the reasons therefor. All such replacement furnishings,
fixtures and inventory shall become the property of Lessor upon termination of
the Lease free and clear of any purchase money or other lien. Lessee shall be
entitled to any proceeds of salvage or disposition of the obsolete or removed
property. Lessor shall be entitled to updated inventory lists as prepared by
Lessee, and to have the right to conduct, at Lessor's own expense, audits of the
inventory, fixtures, furnishings, televisions and the like. No such equipment of
furnishings or fixtures shall have a brand name placed thereon of the hotel of
such a character as to make the property not readily useable by any successor
hotel operator or franchise.
c) In the event Lessor is of the belief that the Property is not being
adequately maintained or the inventory is inadequate, the parties shall consult
and attempt to reach a plan rapidly to resolve the
________________________________________________________________________________
4
Ridpath Lease-Option 10/7/97
<PAGE>
issue. Should this fail, and only as to the matters contained in this paragraph
and paragraph 12, the parties agree to consult with each other to appoint an
independent party with expertise to arbitrate the controversy, each party to pay
one-half of the costs regardless of the outcome, and each to pay any of their
own attorneys fees. Procedures shall be informal and meant to accomplish the
goal of concluding the arbitration within thirty (30) days or as soon thereafter
as reasonably practical. The arbitrator may, in carrying out this intent,
establish reasonable rules and procedures to minimize fees and costs to each
party and to bring the matter to a rapid and fair conclusion. Should either
party fail to name or be unable to reach agreement on appointment of an
arbitrator, the presiding judge of the Superior Court for Spokane County shall
review the names and qualifications of three parties deemed independent by each
of Lessor and Lessee, and choose one without hearing, based solely upon the
description of such individual provided by the propounding party. If the
decision of the arbitrator requires an upgrade to the hotel, maintenance, or
personal property, the Lessor may declare this Lease in default if the order of
the arbitrator is not implemented by Lessee fully within sixty (60) days of the
decision, as to upgrade and replacement (or such time as such repairs or
maintenance reasonably requires, if longer). The decision of the arbitrator
shall be final and enforceable by any court of competent jurisdiction under
applicable statutes of the State of Washington. These arbitration provisions
apply exclusively and solely to those items in this paragraph and paragraph 12,
and do not extend to any other right or remedy of Lessor or Lessee hereunder or
under State law.
d) Lessor shall provide a written notice to all employees of the Hotel to
terminate all employees of the Hotel as of the Commencement Date. The notice
shall be made in form acceptable to Lessee. Lessee may, but shall not be
required to hire some or all such employees in connection with Lessee's
operation of the Hotel. Lessor shall be responsible for all salaries, taxes,
benefits, and vacation for such employees to the commencement date of the term
of this Lease. Lessee shall be responsible for the same for all employees of
Lessee in Lessee's operation of the Hotel beginning on the Commencement Date.
Lessor shall compensate any employee with accrued but unused vacation as of the
Commencement Date.
e) All expenses and income from the Hotel and all categories of Property
shall be prorated between Lessor and Lessee as of 12:01AM on the Commencement
Date, so that Lessor receives all income accrued through the day prior to and
pays all expenses accrued through the day prior to the Commencement Date and
Lessee receives and pays the corresponding items from the Commencement Date
forward. Income from overnight room rentals and events for the night of the
proration time, shall be shared equally between Lessor and Lessee (the night of
October 31/November 1 if November 1 were the Commencement Date). After the
Commencement Date, Lessor and Lessee shall make such payments to each other and
to third parties as are necessary to implement the proration provisions of this
subsection. Lessor shall retain all of its bank accounts, and the funds therein.
Lessee shall pay Lessor for and retain for Lessee all cash on hand as of close
of bars and restaurants on the Commencement Date, and Lessee shall open its own
bank accounts for the operation of the Hotel. From the Commencement Date
forward, all accounts received by Lessee from the operation of the Hotel
attributable to parties from whom funds are then still owed for services prior
to the Commencement Date, shall, to the extent collected, be allocated and paid
between Lessor and Lessee in proportion to the amounts owed by that customer for
the time periods before and after the Commencement Date as of the date of
collection. Lessor shall not make direct collections from such customers without
advising Lessee of the amounts so collected.
f) Lessor and Lessee shall execute and deliver on the Commencement Date
such assumptions
________________________________________________________________________________
5
Ridpath Lease-Option 10/7/97
<PAGE>
and notices as are required to transfer to Lessee all categories of Property
during the term of the Lease.
g) Lessee has the right to perform alterations or remodeling of the
Property provided that such alterations or remodeling are paid for by Lessee and
do not decrease the value of the Property.
8. Property. Included within the Property leased to Lessee under this
--------
Lease and to be sold under the Option described below are all rights, personal
property, furnishings, fixtures, and inventory owned or leased by Lessor located
on the Property or used or capable of being used in connection with the
operation of the Hotel including but not limited to the following:
a) Equipment Leases, which shall mean the leases covering items of the
type listed as Service Equipment which are not owned by Lessor but are leased by
Lessor, and which are located in or upon the Premises and are used or useable in
connection therewith.
b) Hotel Contracts, which shall mean all service, maintenance, and other
contracts respecting the maintenance or operation of the Hotel, which shall be
transferred to Lessee to the extent transferable.
c) Improvements, which shall mean all buildings and improvements on the
land described in Exhibit I.
d) Miscellaneous Assets, which shall mean all petty cash funds, all cash
in house banks as of the Commencement Date, and all contract rights, leases,
concessions, permits, receipts, trademarks, logos, copyrights, business records,
and any items of intangible personal property relating to the ownership or
operation of the Hotel except for the mark "WestCoast" Lessor shall provide to
Lessee complete copies and, to the extent allowed by law, full benefit of any
permits or other items which are not transferable.
e) Names, which shall mean the names other than WestCoast used in the
operation of the Hotel including without limitation the names now used with the
restaurants, banquet rooms and meeting rooms in the Improvements, and
specifically do include the mark "Ridpath" for hotel and restaurant use. Lessor
represents and warrants to the best of its knowledge it has the sole right to
use and transfer the Names and that it has no knowledge of any protest to its
right to use the Names or of any right of any other party to use of the Names;
however Lessor does not represent that it has protected or registered the use of
the Names under any federal or state procedure. Lessor will cooperate with
Lessee to accomplish transfer of any use rights to the Names.
f) Operating Equipment, which shall mean all china, glassware, linen,
silverware and uniforms, and supplies of every kind and nature of all operating
departments, including, without limitation, cleaning supplies, guest supplies,
printing stationery, bar supplies, fuel, laundry supplies and brochures and
promotional material whether in use, or held in stock for future use, in
connection with the operation of the Hotel, which are on hand on the date
hereof, subject to such depletion and including such resupplies as shall occur
and be made in the normal course of business.
g) Permits, which shall mean all licenses, franchises and permits used in
the operation of the Hotel as heretofore operated, which shall be transferred to
Lessee to the extent transferable, but excluding the WestCoast
license/franchise.
h) Service Equipment, which shall mean all fixtures, furnishings,
fittings, equipment, machinery, apparatus, vehicles, appliances and articles of
personal property of every kind whatsoever used or usable in connection with any
present or future operation of all or any part of the Hotel, including without
limitation all elevators, escalators, boilers, furnaces, heating, ventilating
and air-conditioning systems and equipment, office furniture and equipment
(including safes, cash registers
________________________________________________________________________________
6
Ridpath Lease-Option 10/7/97
<PAGE>
and accounting, duplicating and communication equipment)and specialized hotel
equipment (including equipment usable in the operation of kitchens, laundries,
meeting and banquet rooms, clubs, rental spaces, dry-cleaning facilities, bars
and cocktail lounges), electrical equipment (including refrigerators, radios,
television and lighting equipment), fire prevention and extinguishing apparatus,
telephone system, pictures and ornaments, which are on hand as of the date
hereof, subject to such depletion and including such replacements as shall occur
or be made in the normal course of business; excluding, however, all items of
personal property which are owned by Space Lessees or guests.
i) Space Leases, which shall mean all leases, subleases, licenses,
franchises, concessions and other occupancy agreements, written or oral, whether
or not of record, for use or occupancy of any portion of the Property, and
"Space Lessees" shall mean the tenants or occupants thereunder. During the term
of this Lease and thereafter in the event of purchase, Lessee assumes the
obligations of Lessor under such Space Leases.
j) Reservations, for which Lessor shall provide Lessee, as an Inspection
Document, a list of all such reservations or bookings and Lessee will, with
regard only to those reservations so provided to Lessee during the Inspection
Period, assume and honor each of such reservations at its then applicable rates
and the income and expense generated thereby is solely the property and
obligation of Lessee., or terminate the obligation, and Lessee shall defend and
hold Lessor harmless from all loss, cost, expense or claims in that regard.
9. Quiet Enjoyment. Lessor covenants and agrees that so long as Lessee
---------------
remains in full compliance with all of Lessee's obligations under this Lease,
Lessee shall lawfully and quietly hold, occupy, and enjoy the Property during
the term of this Lease, subject only to the other terms and provisions of this
Lease and subject to all matters of record revealed by the Title Commitment, the
terms of which shall not be modified without the approval of Lessee.
10. Acceptance of Property. By giving its Waiver Notice, Lessee
----------------------
acknowledges that the Property is in good and usuable condition. The Property
has been inspected by Lessee, and, except for the representations and warranties
made by Lessor in this Lease, is turned over as of the Commencement Date AS IS,
WHERE IS, AND WITH ALL FAULTS LATENT AND PATENT, WITH NO IMPLIED WARRANTIES,
INCLUDING THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE,
AND RISKS OF MECHANICAL FAILURES; BREAKDOWNS AND WEAR AND TEAR OF PROPERTY AND
EQUIPMENT ARE SOLELY AT LESSEE'S RISK.
11. Utilities and Other Services. By giving its Waiver Notice, Lessee has
----------------------------
satisfied itself that all utilities and other services necessary for Lessee's
purposes are available to the Property. Deposits (if any) on utilities as of the
Commencement Date are the property of Lessor.
12. Repairs, and Maintenance by Lessee. Lessee shall be responsible for
----------------------------------
all maintenance of the Property during the term of this Lease. Lessee shall keep
the Property in a neat, clean, sanitary condition, and shall keep the Property
and all items used in connection with the operation of the Property in as good
condition as was done by Lessor. Lessee's maintenance obligations shall include
without limitation the structural and exterior components of the building,
plumbing, electrical system, roof, swimming pool, etc. Wear and tear is to be
offset by continuing improvements and additions to
________________________________________________________________________________
7
Ridpath Lease-Option 10/7/97
<PAGE>
the property as reasonable and necessary to keep the Property in a first-class
hotel operation, to include appearance items, such as painting, landscaping,
carpeting and the like. The requirements of maintenance as set forth in this
paragraph 12 are subject to the arbitration provisions of section 7 c), in the
event Lessor believes the property is not being maintained according to these
standards.
13. Taxes. Lessee shall pay directly, to the taxing or assessing
-----
authority, before the same become delinquent, all taxes and special assessments
levied against the Property payable on or after the Commencement Date. Lessee
shall pay, before the same become delinquent, all taxes assessed against
Lessor's or Lessee's furniture, fixtures, equipment, and other property in the
Property. Lessee shall provide evidence of payment upon request of Lessor. Taxes
payable in the current year, assessments and insurance reserve accounts shall be
prorated as of the Commencement Date, and credited or debited to the parties as
appropriate. In the event the existing lenders of Lessor on the Property have
the right, and exercise the right, to have tax or insurance amounts paid monthly
into escrow, Lessee shall comply with the same. In the event Lessee desires to
contest the amount of any property taxes, Lessee may do so, at its own expense,
and for its own benefit, and Lessor shall cooperate with any reasonable attempt
to reduce property taxes, so long as those efforts do not result in a lien on
the Property or expense to Lessor.
14. Lessor's Access to Property. Lessor, provided Lessor notifies Lessee
---------------------------
at least 24 hours in advance, may inspect the Property at all reasonable times
and enter the same for the purpose of determining whether the Lessee is
complying with its obligations under this Lease.
15. Insurance.
---------
15.1 Liability Insurance. Lessee shall, at Lessee's sole expense,
-------------------
maintain comprehensive general liability and property damage insurance insuring
against any and all claims for injury to or death of persons and loss of or
damage to property occurring upon, in, or outside of the Property. Such
insurance shall be of the type of coverage, and with the coverage limits, at
least as required by holder of any deed of trust and related loan documents
encumbering the Property and shall name Lessor as an insured.
15.2 Lessee's Property Insurance. Lessee shall, at Lessee's sole
---------------------------
expense, maintain on all of Lessee's personal property, fixtures and leasehold
improvements on the Property, a policy of "all risk" special perils property
damage insurance in the amount of their replacement value.
15.3 Lessor's Property Insurance. Lessee shall, at Lessee's sole cost
---------------------------
and expense maintain a policy of all risk special perils building and personal
property insurance with full replacement value coverage in the amount of the
Option Price. Such insurance shall comply with all requirements of the holder of
the encumbrances on the Property. All proceeds of any such insurance shall be
applied to the restoration of the Property.
15.4 Rental Insurance. Lessee shall acquire a policy of rental
----------------
insurance for continuation from business interruption, with reasonable
deductibles.
________________________________________________________________________________
8
Ridpath Lease-Option 10/7/97
<PAGE>
15.5 General Terms. Policies shall provide for at least thirty
-------------
(30) days notice to Lessor prior to cancellation. Such insurance may be part of
blanket coverage and composed of primary and umbrella policies.
16. Assignment and Subletting. This Lease and the Option described below
-------------------------
may be assigned or subleased to any entity of which CHC is the manager or
general Partner or controlling owner, provided that CHC remains responsible for
all obligations under this Lease, including the assignment which the parties
currently contemplate to Cavanaughs Hospitality, Ltd., a limited partnership of
which CHC will be the General Partner. Any other assignment or subletting
(except for normal retail leasing of portions of the Property, or any transfer
in the control of CHC from members of the Barbieri family (other than by a
public offering under the terms of which stock of CHC is listed on a public
exchange) without the prior consent of Lessor shall entitle Lessor to exercise
its right to Put the Property as described in Section 30.
17. Damage or Destruction. If the property is damaged or destroyed by fire
---------------------
or any other cause, all insurance proceeds shall be made available to Lessee for
restoration of the property (except as to the rights of the holder of any
encumbrance on the Property) and Lessee shall restore the Property as nearly as
practical to its condition immediately prior to such damage or destruction so
long as all insurance proceeds are made available to Lessee for that purpose.
Any restoration shall be promptly commenced and diligently prosecuted and rent
shall not abate during such time. Lessor is not liable for any damages or
abatement of rent for any reason whatsoever dealing with damage or destruction
to the property, but shall cooperate in applying all proceeds of insurance to
the restoration of the Property.
18. Liens; Waste. Lessor and Lessee shall have no authority to allow any
------------
liens to be filed against the Property and shall not suffer or permit any lien
to be filed against the Property, nor waste to be committed thereon. If any such
lien is filed against the Property, the responsible party shall cause the same
to be discharged of record (by bond or payment) within 60 days after the date of
filing the same.
19. Indemnity by Parties. After the Commencement Date and during the term
--------------------
of this Lease, except as provided in the last sentence of this Section 19,
Lessee agrees that Lessor shall not be liable for any claims for death of or
injury to persons or damages to or destruction of property sustained by Lessee
or by any other person in or outside of the Property or any other loss, damage
or liability arising from the operation, management or maintenance of the
Property, including without limiting the generality of the foregoing, any claims
caused by or arising from the condition or maintenance of any part of the
Property. Lessee hereby waives all claims therefor and agrees to hold harmless,
defend, and indemnify Lessor against any such loss, damage, or liability or any
expense (including attorneys' fees at trial or at appeal) incurred by Lessor in
connection therewith. Lessee shall hold Lessor harmless from and against any and
all damages arising out of any damage to any persons or property occurring in,
on, or about the Property resulting from the negligent acts or omissions of
Lessee or its agents, servants, employees, or authorized representative. Lessor
shall hold harmless, defend, and indemnify Lessee from and against any and all
damages arising out of any damage to any persons or property occurring in, on,
or about the Property resulting from actions prior to the
________________________________________________________________________________
9
Ridpath Lease-Option 10/7/97
<PAGE>
Commencement Date or the negligent acts or omissions of Lessor or its agents,
servants, employees, or authorized representatives or which are the subject of
the specific representations and warranties of Lessor to Lessee contained in
this Lease.
20. Default; Remedies; Late Charges. Time is of the essence hereof. In the
-------------------------------
event Lessee fails to make any payment within the time period required by the
notes secured by the property as of the date of this Lease and does not cure
such default as provided in such loan documents, then Lessor may have its
default remedies, as further set forth below. If the default or violation
claimed does not involve the payment of money, then Lessee must cure the default
within thirty (30) days, or if the default is of such a nature that it cannot be
cured within thirty (30) days, but it can be cured, then Lessee must commence
the cure within the thirty (30) days and diligently continue the same until
complete, or Lessor may likewise have its default remedies. In the event of such
uncured default, or in the event of a default which cannot by its very nature be
cured, then Lessor may at its option, immediately declare Lessee's rights under
this Lease terminated, and reenter the Property using such force as may be
necessary, and repossess itself thereof, as of its former estate, and remove all
persons and property; or, in the alternative and in the sole event that the
default is material in nature and while such default continues, Lessor may elect
to exercise its rights to Put the Property as described in Section 30 below; and
in the event Lessor exercises its remedy to Put in the event of such a default,
Lessor shall be entitled only to enforce its Put and to recover its actual
expenditures on the Property or to service loans secured by the property. Lessor
shall have landlord's lien to the full extent allowed by law.
Lessee acknowledges that late payment by Lessee to Lessor of Rental will
result in late charges, which Lessee shall pay as Rental.
21. Trade Fixtures. Lessee may install on the Property such equipment as
--------------
is customarily used in the type of business conducted by Lessee on the Property.
Upon the expiration of this Lease, Lessee shall, at Lessee's expense, remove
from the Property all such equipment and all other property of Lessee and repair
any damage to the Property occasioned by the removal thereof. Any property left
in the Property after the expiration or sooner termination of this Lease shall
be deemed to have been abandoned by Lessee and become the property of Lessor to
dispose of as Lessor deems expedient without accounting to Lessee therefor. If
the Lease terminates other than at the end of its normal term, all property of
Lessee shall be deemed a portion of the Property and shall pass in title to
Lessor at that time. No item shall be a trade fixture unless Lessee shall before
its installation give notice to Lessor of its status as such and Lessor shall
consent to such treatment, which consent shall not be unreasonably withheld.
22. Condemnation. If all of the Property is taken by any public authority
------------
under the power of eminent domain, Lessee shall be deemed to have exercised its
Option and this Lease shall terminate as of the date possession is taken by said
public authority pursuant to such condemnation and all proceeds of such
condemnation shall be applied first to payment to Lessor as if the Property had
been purchased under the terms of the Option and the balance shall be the sole
property of Lessee. If part of the Property is so taken, and Lessee does not at
that time exercise its Option described in Section 30 below, the proceeds of
condemnation shall be applied to restoration of the remaining portion of the
________________________________________________________________________________
10
Ridpath Lease-Option 10/7/97
<PAGE>
Property and the Lease shall remain in effect. Lessee shall represent the
ownership interest of the Property in any condemnation process.
23. Notices. All notices, demands, and requests to be given by either
-------
party to the other shall be in writing. All notices, demands, and requests by
Lessor to Lessee shall be sent by United States registered or certified mail,
postage prepaid, (or by private overnight courier) addressed to Lessee at 201 W.
North River Drive Suite 100, Spokane, WA 99201 Attn. Chief Operating Officer.
All notices, demands, and requests by Lessee to the Lessor shall be sent by
United States registered or certified mail, postage prepaid, (or by private
overnight courier) addressed to Lessor at the street address of 1531 Seventh
Ave, Seattle WA 98101 attn. Gordon Sondland, with a copy to Gary Cole at Gary
Cole, Ball, Janik Law Firm, 101 SW Main Street, Suite 1100, Portland, OR 97204,
or such other place as Lessor may from time to time designate by notice to
Lessee. Notices, demands, and requests served upon Lessor or Lessee as provided
in this section in the manner aforesaid shall be deemed sufficiently served or
given for all purposes hereunder at the time such notice, demand, or request
shall be so mailed or deposited.
24. Performance of Covenants. If Lessee shall fail to make any payment or
------------------------
perform any of Lessee's obligations under this Lease after notice required for a
default, Lessor may, without further notice to or demand upon Lessee and without
waiting or releasing Lessee from any obligations of Lessee under this Lease,
make any such payment or perform any such obligation on Lessee's behalf in such
manner and to such extent as Lessor deems desirable. All sums unpaid by Lessee,
and all sums so paid by Lessor and all necessary costs and expenses in
connection with the performance of any such obligation by lessor, together with
interest thereon at the rate of twelve percent (12%) per annum (or at the
maximum rate permitted by law, whichever is less) from the date of the making of
such expenditure by Lessor, shall be deemed additional rental hereunder and
shall be payable to Lessor on demand.
25. Waiver of Subrogation. Lessor and Lessee shall make all reasonable
---------------------
efforts to each procure an appropriate clause in, or an endorsement on, any
policy of insurance required by this Lease pursuant to which the insurance
companies waive subrogation or consent to a waiver of right of recovery, and
such party hereby agrees that it shall not make any claim against or seek to
recover from the other for any loss or damage to its property, or the property
of the other, resulting from fire or other hazards covered by such insurance,
notwithstanding other provisions of this Lease; provided, however, that the
release, discharge, exoneration, and covenant not to sue herein contained shall
be limited by the terms and provisions of the waiver of subrogation clauses or
endorsement consenting to a waiver of right of recovery, and shall be
coextensive therewith.
26. Surrender of Property. Lessee, at the expiration or sooner termination
---------------------
of this Lease, shall quit and surrender the Property in good, neat, clean, and
sanitary condition, in accordance with the standards of maintenance and
replacement contained in this Lease.
27. Memorandum of Lease and Option. This Lease may not be recorded. A
------------------------------
Memorandum of this Lease will be recorded which only identifies the parties and
the term and the existence of the Option to sell and purchase.
________________________________________________________________________________
11
Ridpath Lease-Option 10/7/97
<PAGE>
28. Miscellaneous
-------------
28.1 Remedies and Non-waiver. Each party shall have all remedies at
-----------------------
law or at equity, including specific performance and or damages in the event the
other fails to perform its obligations under the terms of this Lease or the
Option/Put described below, with the exception that in the event Lessor
exercises its remedy to Put in the event of a default under this Lease, it
shall be entitled only to enforce its Put and to recover its actual expenditures
on the Property or to service loans secured by the Property pursuant to Section
24 above. No failure of Lessor to insist upon the strict performance of any
provision of this Lease shall be construed as depriving Lessor of the right to
insist on strict performance of such provision or any other provision in the
future. No waiver by Lessor of any provision of this Lease shall be deemed to
have been made unless expressed in writing and signed by Lessor. No acceptance
of rent or of any other payment by Lessor from Lessee after any default by
Lessee shall constitute a waiver of any such default or any other default.
Consent by Lessor in any one instance shall not dispense with necessity of
consent by Lessor in any other instance.
28.2 Attorneys' Fees. If an action is commenced to enforce any of the
---------------
provisions of this Lease, the prevailing party shall, in addition to its other
remedies, be entitled to recover its reasonable attorneys' fees incurred prior
to trial, at trial, and upon appeal.
28.3 Captions and Construction. The captions in this Lease are for the
-------------------------
convenience of the reader and are not to be considered in the interpretation of
its terms.
28.4 Partial Invalidity. If any term or provision of this Lease or the
------------------
application thereof to any person or circumstance shall to any extent be invalid
or unenforceable, the remainder of this Lease, or the application of such term
or provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and be enforced as written to the fullest
extent permitted by law.
28.5 Governing Law. This Lease shall be governed by the laws of the
-------------
State of Washington; Venue is Spokane County for any arbitration and King County
for other actions.
28.6 Right to Certificates. Each party, within fifteen (15) days after
---------------------
notice from the other party, shall execute and deliver to the other party, in
appropriate form, a certificate stating that this Lease is unmodified and in
full force and effect, or in full force and effect as modified and stating the
modifications. The certificate shall also state the amount of Rental, the dates
to which Rental has been paid in advance and such other matters as may
reasonably be requested. Failure to deliver the certificate within such fifteen
(15) day period shall be conclusive upon the party failing to deliver the
certificate for the benefit of the party requesting the certificate and any
successor to the party requesting the certificate, and this Lease is in full
force an effect and has not been modified except as may be represented by the
party requesting the certificate. The certificate shall be kept confidential and
not recorded.
28.7 Entire Agreement. This document contains the entire and
----------------
integrated
________________________________________________________________________________
12
Ridpath Lease-Option 10/7/97
<PAGE>
agreement of the parties as to the lease of the Property and may not be modified
except in writing signed and acknowledged by both parties.
28.8 Interpretation. This Lease has been submitted to the scrutiny
--------------
of all parties hereto and their counsel if desired, and shall be given a fair
and reasonable interpretation in accordance with the words hereof, without
consideration or weight being given to its having been drafted by any party
hereto or its counsel.
28.9 Number; Gender, Permissive Versus Mandatory Usage. Where the
-------------------------------------------------
context permits, references to the singular shall include the plural and vice
versa, and to the neuter gender shall include the feminine and masculine. Use of
the word "may" shall denote an option or privilege and shall impose no
obligation upon the party which may exercise such option or privilege; use of
the word "shall" shall denote a duty or an obligation.
28.10 Time. Time is of the essence of this Lease.
----
28.11 Binding Effect; Counterpart Originals; Facsimile. This
------------------------------------------------
Agreement shall be binding upon the parties hereto and upon their respective
executors, administrators, legal representatives, successors, and assigns;
subject, however, to the restrictions on transfer in Section 16 above. Each
party to this Agreement may execute separate originals of this Agreement with
the same effect as if both signed the same original. A facsimile transmission of
the executed original shall be treated as an original signed document. The
parties shall cooperate to assemble and deliver to one another duplicate signed
originals as soon as is practical following such facsimile transmission.
28.12 Confidentiality. Each party shall hold all matter relating to
---------------
this Lease strictly confidential until the Commencement Date, except as is
required for each party to implement the terms of this Lease. Any public
announcement or press release shall be made in timing and form agreed upon by
the parties.
28.13 Commissions. Lessee represents and warrants that it has not
-----------
engaged any real estate broker or contacted the Lessee as a result of
solicitation by any real estate agent. Lessee shall not be responsible for
payment of any commission to any entity or person arising out of this
transaction.
29. Early Presence on Property. The parties agree to cooperate in all
--------------------------
ways practical in the transition process. In order to effect a smooth transition
of the operation of the Hotel, Lessee will be present upon the Property on the
two days prior to the Commencement Date, but such presence shall not otherwise
affect the dates specified in this Lease. Lessor and Lessee shall jointly work
on the transition of operations on those two days, and lessor's employees shall
work with Lessee on those dates, even though the employees will not be formally
working as Lessee's employees.
30. Option and Put to Purchase
--------------------------
________________________________________________________________________________
13
Ridpath Lease-Option 10/7/97
<PAGE>
30.1 Grant of Option. In consideration for Lessee entering into the
---------------
Lease, Lessor hereby grants to Lessee the option to purchase the Property on the
terms and conditions described in this Section (the "Option") and Lessee hereby
grants to Lessor the right to require Lessee to purchase the Property on the
terms and conditions described in this Section (the "Put").
30.2 Exercise of Option by Lessee and Put by Lessor. So long as the
----------------------------------------------
Lease has not been earlier terminated, and all payments required under the Lease
are then current, the Option may be exercised by Lessee giving Lessor written
notice of exercise of the Option (the "Option Notice"). Upon delivery of the
Option Notice, Lessor shall be bound to sell, and Lessee shall be bound to buy,
the Property, on the terms and conditions hereinafter set forth herein. In the
event CHC consummates the initial public offering of the common stock of CHC, or
in the event that CHC has not given the Option Notice by six months prior to the
end of the Lease term, or in the event Lessee remains in default under
circumstances which the terms of this Lease specify allow Lessor to exercise its
Put, Lessor shall have the right, on or before 90 days prior to the expiration
of the term of the Lease, to give Lessee written notice ("Put Notice") that
Lessor is requiring Lessee to purchase the property at the Option Price. *
30.3 Purchase Price and Payment
--------------------------
a) Option Price. The Option Price shall be based upon the date of
------------
Closing (provided that a delay in Closing due to a failure of performance by
Lessor shall not result in an increase in the Option Price) as follows: i) If
Closing occurs on or prior to March 31, 1998, the Option Price is $11,500,000;
ii) If Closing occurs after March 31, 1998 and prior to April 1, 1999, the
Option Price is $12,000,000; iii) If Closing occurs after March 31, 1999, the
Option Price is $12,500,000.
b) Payment. The Option Price shall be paid at Closing by payment in full
-------
(or assumption by Lessee and release of Lessor) of all encumbrances against the
Property and the balance ("Equity") shall be paid to Lessor as follows:
i) In the event CHC is then a publicly traded company, which has
conveyed its interest as Lessee/Option Holder under this Lease/Option to a
limited partnership ("CH Ltd.") of which CHC is General Partner, then
Lessor shall receive one-half (or more, at Lessor's option) of the Equity
by transfer to Lessor of units of limited partnership interest in CH Ltd.
("Units") on condition that such Units shall have the right to be
converted, at the option of Lessor at any time after six months from
Closing, into the number of shares of common stock of CHC which are equal
in value at Closing (based on the average price at which such common stock
is traded in the 10 trading days prior to Closing or the initial public
offering price if the initial public offering closes within 10 days of
Closing) to the dollar credit against the Equity; and the balance of the
Equity shall be paid in cash at Closing.
At such time as Lessor elects to convert the Units to stock as
described in the preceding sentence, Lessor and CHC shall enter into a
registration rights agreement which will:
a) grant to Lessor customary piggyback registration rights with
respect to the CHC common stock received which will provide that if, on or
after one year from the date of initial public offering of CHC common
stock, CHC files a registration statement with respect to an
________________________________________________________________________________
14
Ridpath Lease-Option 10/7/97
* If Lessor gives a Put Notice following a default by Lessee, subsequent cure
of the default will not relieve Lessee of the obligation to purchase the
Property pursuant to the Put.
<PAGE>
offering of its common stock for cash (other than on Form S-8, employee
benefit plans, Form S-8, Rule 145 or rights offerings), Lessor may, at its
expense, include its shares of CHC stock in such registration, subject to
customary underwriter cut-back provisions; and
b) grant to Lessor that, in the event that CHC does not file an
appropriate registration statement within one year of from the date of
Closing of the Property, Lessor shall have a customary (and one-time only)
demand registration right, subject to underwriter cut-back provisions.
Lessor further agrees that:
a) other holders of CHC common stock may be entitled to register
their shares on the same registration statement;
b) if Lessor registers its CHC common stock pursuant to the
registration rights agreement, it shall provide customary underwriting and
indemnification agreements to CHC and to the underwriters of the stock
offering;
c) CHC may, at its option and in lieu of registering Lessor's CHC
common stock pursuant to such registration rights agreement, repurchase
such shares at the then current market price;
d) Lessor is not entering into this Lease based on the expectation
that CHC will consummate a public offering of its common stock and that
there is no assurance that such a public offering will take place or, if it
does, that the price per share of common stock offered thereby would be
advantageous to Lessor; and
f) Lessor has no approval rights with regard to the structure of CH
Ltd.
ii) In the event CHC is not then a publicly traded company, the
Equity shall be paid;
a) If the Closing shall occur as a result of Lessor exercising its
Put: fifty percent (50%) cash down at Closing and the balance amortized
over 120 equal monthly payments at 9.5% interest per annum, due and payable
in full two years following Closing, secured by the Property; or
b) If the Closing shall occur as a result of Lessee exercising its
Option; all cash on Closing.
30.4 Conveyance and Title
--------------------
(a) Manner of Conveyance. In the event the Option Notice or Put
--------------------
Notice is given, title to the subject property shall be conveyed by Lessor to
Lessee at Closing by statutory warranty deed (the "Deed"), and Bill of Sale,
with no warranties, express or implied except as to title and those specifically
made by Lessor to Lessee contained in this Lease, free and clear of all liens,
encumbrances and defects ("Exceptions"), other than the Permitted Exceptions.
(b) Title Report; Objection to Exceptions. Lessor shall provide
-------------------------------------
Lessee with the Title Commitment and all agreements which will survive the
Commencement Date at the beginning of the Inspection Period. Lessee's Waiver
Notice is conditioned upon Lessor's removal at closing of all non-monetary
exceptions identified in the Title Commitment except those certain exceptions
which are approved by Lessee during the Inspection Period ("Permitted
Exceptions"). Lessee shall notify Lessor within 10 days of receipt of the Title
Commitment of any non-monetary
________________________________________________________________________________
15
Ridpath Lease-Option 10/7/97
<PAGE>
exceptions or agreements which it disapproves. Lessor shall have 10 days
following such notice of disapproval within which to notify Lessee which of the
disapproved items it will remove and, in the event all such disapproved items
will not be eliminated, Lessee shall have the right, prior to the end of the
Inspection Period, to either accept the items which will not be removed as a
Permitted Exception or acceptable agreement, or to terminate the Lease. The
Permitted Exceptions shall include those exceptions which have been created by
or arise through the occupancy and use of the Property by the Lessee. Lessee
will only assume at the Commencement Date such agreements as it approves during
the Inspection Period.
30.5 Closing Possession. Closing, defined as the consummation of the
------------------
purchase of the Property by Lessee from Lessor in accordance with the terms and
provisions of this Option, shall occur on a date ("Closing Date") specified by
Lessee in the Option Notice or Lessor in the Put Notice, which shall be ninety
(90) days from the date of the Option Notice or Put Notice unless otherwise
agreed upon by the parties. Lessee shall be entitled to possession of the
Property on the Closing Date free of the terms of the Lease.
30.6 Escrow. Upon delivery of the Option Notice by Lessor, the
------
parties will establish an escrow with the Title Company, or such other closing
agent ("Closing Agent") as Lessor and Lessee may designate. The parties shall
also execute satisfactory escrow instructions consistent with this Option as an
accommodation to assist the Closing Agent in carrying out the escrow and in
consummating this transaction. However, in the event that the parties fail to
execute said escrow instructions, the following terms of this Option shall be
deemed to be escrow instructions to the Closing Agent. The transaction shall be
consummated as follows:
(a) Performance By Lessor. Lessor shall deposit into escrow
---------------------
with the Closing Agent, on or before the Closing Date, the following:
(i) The fully executed and acknowledged Deed for the
Property, in a form sufficient for recording, conveying fee title to the
Property, including all improvements thereon, to Lessee, subject to no
exceptions other than the Permitted Exceptions, and an executed Bill of Sale to
the subject personal property.
(ii) A fully executed real estate excise tax affidavit.
(iii) An ALTA owner's extended policy of title insurance
(the "Title Policy") issued by the Title Company in the full amount of the real
property portion of the Purchase Price, insuring Lessee's title to the property.
Said Title Policy shall contain no exceptions other than the Permitted
Exceptions. Lessee shall pay the difference between the premium for extended
coverage and that for standard coverage.
(iv) At the Closing, Lessor will provide Lessee with an
affidavit that the Lessor is not a "foreign person," as defined and required in
The Foreign Investment in Real Property Tax Act ("FIRPTA"), IRC Section 145 and
all other documents reasonably required to consummate this transaction.
(v) All Closing Costs for which Lessor shall be
responsible will be deducted from the Option Price paid at Closing.
(vi) Lessor shall execute acknowledge and deliver to
Lessee a bill of sale and title registration transfer documents sufficient to
transfer clear title and interest in and to the
________________________________________________________________________________
16
Ridpath Lease-Option 10/7/97
<PAGE>
Service Equipment, any Hotel vehicles, consumables and Operating Equipment
subject to and in accordance with the provisions of this Agreement.
(vii) Lessor shall also execute, acknowledge and deliver to
Lessee an assignment of all security deposits then held by Lessor pursuant to
the terms of Space Leases.
(viii) Lessor shall, to the extent transferable, execute,
acknowledge and deliver to Lessee an assignment of all of Lessor's right, title
and interest under the Hotel Contracts, Transferable Permits, Names and the
Miscellaneous Assets to be sold pursuant to this Agreement and shall deliver
Lessor's original counterparts of all documents which are in writing together
with such correspondence and other records, if any, pertaining thereto which
Lessor has. The Hotel WestCoast Franchise Agreement and management contract
shall be terminated by Lessor as of the Closing Date.
(ix) As to any nontransferable Permits, Lessor will, at
Lessee's cost and expense, execute and deliver to Lessee any documents
reasonably required to be signed by Lessor to effect the reissuance thereof in
the name of Lessee.
(x) To the extent transferable and not previously provided to
Lessee during the Inspection Period, Lessor shall use its best efforts to obtain
and deliver to Lessee certificates from the lessees under any Space Leases and
from parties to each of the material Hotel Contracts and stating that said
leases and/or contracts are in full force and effect in accordance with their
terms, that to the best of their knowledge there are no defaults thereunder, and
that, to the extent that the consent of such party is required for the
assignment thereof, such consent has been given.
(xi) To the extent transferable and not previously provided to
Lessee during the Inspection Period, Lessor shall deliver to Lessee all records
pertaining to the then registration of guests, advance bookings of banquets and
similar functions, advance room reservations, promotion records, due bills,
records of the purchasing and engineering departments of the Hotel and all other
records, instruments, documents and deposits for Hotel operation.
(xii) Lessor shall deliver to Lessee all other instruments and
documents to which Purchase may be entitled at the Closing under any of the
other provisions of this Agreement.
(b) Performance By Lessee. On or before the Closing Date, Lessee
---------------------
shall deposit in escrow with the Closing Agent, the following:
(i) Sufficient funds to consummate the purchase in accordance
with this Option, including the amount of the Option Price less any credit for
units of limited partnership to be transferred as described above, plus any
Closing Costs for which Lessee is responsible.
(ii) Such other documents as are reasonably required to
consummate this transaction.
(c) Closing expenses. At Closing Lessor shall pay the real estate
----------------
excise tax imposed by law upon this Lease or Option and all other transfer taxes
imposed by law; the premium for the Title Policy; and one-half of the escrow and
recording fees and costs. At Closing, Lessee shall pay one-half of the escrow
fees and costs, and sales and use taxes as appropriate on the personal property
being sold by Lessor. Allocation of the purchase price between real and
personal property shall be as mutually determined by the parties, or failing
agreement, by arbitration pursuant to Section 8 of the lease, and shall be based
only on the value at Closing of personal property owned by Lessor as of the
date of execution of this Option and still in existence as of the Closing.
________________________________________________________________________________
17
Ridpath Lease-Option 10/7/97
<PAGE>
(d) Closing Procedure. When all funds and documents have been
-----------------
deposited in escrow, the Closing Agent shall complete the transfer of the
Property as follow:
(i) Lessor shall receive the Purchase Price, less Closing Costs
for which Lessor is responsible.
(ii) After recording, Lessee shall receive the Deed to the
Property, Bill of Sale, all other documents described under Lessor's obligations
above, and the Title Policy.
(e) Prorations. Property taxes and water and similar items shall not
----------
be prorated between the parties as of the Closing Date, as Lessee was
responsible for the same under the lease.
30.7 Termination of Lease. Prior written termination of the Lease by reason
--------------------
of unremedied default shall terminate this Option and Put.
EXECUTED as of the date first above written.
Cavanaughs Hospitality Corporation Dunson Ridpath Hotel Associates
by Spokane Hotel, Inc., General Partners
By: /s/ Donald K. Barbieri by /s/ Gordon Sondland
--------------------------- ----------------------------
Donald K. Barbieri Gordon Sondland
its president its President
________________________________________________________________________________
18
Ridpath Lease-Option 10/7/97
<PAGE>
STATE OF WASHINGTON
)SS.
County of Spokane
I certify that I know or have satisfactory evidence Donald K. Barbieri is the
person who appeared before me, and said person acknowledged that (he/she) signed
this instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the President of Cavanaughs Hospitality
Corporation, to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
Dated: October 8, 1997.
/s/ Patricia R. Stapleton
------------------------------------------------
Type/Print Name of Notary: ________________________________________________
Notary Public in And For the State of Washington
residing at Spokane
My appointment expires: January 6, 1998
[SEAL APPEARS HERE]
STATE OF OREGON
)SS.
County of Multnomah
I certify that I know or have satisfactory evidence Gordon Sondland is the
person who appeared before me, and said person acknowledged that (he/she) signed
this instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the President of Spokane Hotel Inc. in its
capacity as General Partner of Dunson Ridpath Hotel Associates Limited
Partnership, to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
Dated: October 8, 1997.
________________________________________________
Type/Print Name of Notary: /s/ Penelope Gresham
------------------------------------------------
Notary Public in And For the State of Oregon
residing at_________________________________
My appointment expires: May 18, 1998
[SEAL APPEARS HERE]
________________________________________________________________________________
19
Ridpath Lease-Option 10/7/97
<PAGE>
FIRST ADDENDUM TO
HOTEL LEASE WITH PURCHASE OPTION
THIS FIRST ADDENDUM, dated for reference purposes November 25, 1997, is to
that Hotel Lease with purchase Option dated October 7, 1997 ("Lease") between
DUNSON RIDPATH HOTEL ASSOCIATES LIMITED PARTNERSHIP ("Lessor") and CAVANAUGHS
HOSPITALITY CORPORATION. Except as otherwise specified in this Addendum, all
terms shall have the same meaning as defined in the Lease. For good and valuable
consideration, receipt of which is acknowledged, the Lease is amended as
follows:
A) Property: The Property is identified as being that described in
Exhibit 1, which is attached to and incorporated in this Addendum by this
reference.
B) Lessee: Cavanaughs Hospitality Corporation hereby assigns all rights
and obligations of Lessee under the Lease to Cavanaughs Hospitality Limited
Partnership ("Lessee"), the sole general partner of which is Cavanaughs
Hospitality Corporation from any of its obligations under the Lease.
C) Waiver of Contingencies: Subject to the terms of this Addendum, Lessor
and Lessee waive the contingencies described in Section 3.1, 3.2 and 3.3 of
the Lease. Lessee accepts the Property in its condition as of the date of this
Addendum. Lessee further agrees that Lessee will not assert any offset to which
it may be entitled against Lessor for any defect known to Lessee as of the date
of this Addendum.
D) Condition of Title: With the exclusion of the items specified in the
next sentence, Lessee accepts title subject to the exceptions set forth in First
American Title of Spokane Commitment Order No. 124974-CB. Lessor shall provide
the Title Company with all affidavits required to delete exception numbers 14,
17, 21, 23, 24, 25, and 26 which refer to leases and terms contained in leases
which Lessor warrants are no longer in effect. Lessors inability to cause the
deletion of the exceptions described in the preceding sentence, other than
exception number 14, shall not affect Lessee's and Lessor's obligation to
consummate the transactions described in the Lease. Removal of exception number
14 by the Commencement Date is a precondition to any further obligation of Lease
under the Lease unless waived by Lessee in writing.
E) Term: The term of the Lease shall be from January 1, 1998 ("Commencement
Date") to November 1, 1999.
F) Rental and Encumbrances: The identity and payment terms of the notes
comprising the Rental as follows; a) Washington Mutual Bank Loan having
principal balance of $4,820,705.24 with interest paid in November 1, 1997 and
payment terms modified as provided in Washington Mutual letter dated October 30,
1997; b) U.S. Bank Loan having principal
_______________________________________________________________________________
1
First Addendum to Ridpath Lease-Option (11/25/97)
<PAGE>
balance of $2,147,438 with interest paid to November 1, 1997 and payment terms
modified as described in U.S. Bank letter dated November 18, 1997; and c) Aspen
Path Loan currently encumbering the Property having an unpaid principal balance
of $125,000 with interest paid to November 1, 1997 shall be modified prior to
the Commencement Date to eliminate all payments through the term of the Lease by
providing that interest that shall accrue until payment in full on November 1,
1999, unless earlier prepaid. The payments of the monthly principal and interest
debt service (exclusive of any balloon payments of principal in excess of normal
monthly payments) on the notes described in a) and b) of the preceeding sentence
comprise the Rental. As of the date of Closing, the sum of the following shall
constitute the encumbrances to be paid or assumed by Lessee as described in
Section 30.3 b) in part payment of the Option Price: x) the then unpaid balance
of principal and interest on the notes described in a), b) and c) of the first
sentence of this Section F; plus y) the lesser of the then payoff figure which
the contract holder would accept in total satisfaction of the contract or the
then total unpaid payments and buyout amounts of the following contracts
described in Exhibit II to this Addendum; I) Miller Elevator Service Company
dated 11/3/95 (only the "Special Provision" described in Exhibit II.I); 2) GE
Capital Lease for Copier start dated 2/28/95; 3) T&W Lease for Voice Mail start
dated 10/2 4) T&W Lease for Compactor start dated 6/25/96; 5) T&W Lease for CLS
System start dated 4/20/95; 6) T&W Lease for Saflok System start dated 8/20/96;
7) Associates Leasing Lease for Radios start dated 10/1/96; 8) Associated
Leasing Lease for Paging System start dated 5/1/96 9) Fleet Lease for 1997 Ford
Van start dated 10/1/96; 10) Fleet Lease for 1995 Dodge Van start dated 11/1/94.
Lessor agrees to pay any loan fee imposed by U.S. Bank or Aspen Path for the
modification of the terms of payment of the U.S. Bank note or Aspen Path note.
Lessee agrees to pay the $6,500 loan fee imposed by Washington Mutual Bank for
the modification of the terms of payment of the Washington Mutual note. The
parties will equally divide any other reasonable costs for which U.S. Bank or
Washington Mutual Bank require reimbursement for the above described
modifications.
G) Contract Obligations: With the exceptions stated in the next sentence.
Lessee accepts all contracts which have been provided to Lessee in writing by
Lessor. Lessee does not accept, and Lessor shall hold Lessee harmless from all
obligations, including attorney fees or costs, arising from a) Any contracts or
collective bargaining agreements with or other obligations (including any
obligation to provide notice of or bargain with regard to termination or sale
imposed by contract or law) to employees or unions; b) Any contracts or licenses
pertaining to West Coast Hotels; c) Any listing contract for the sale of lease
of all or any portion of the Property. Lessee agrees, however, to bargain in
good faith with the Hotel Employees and Restaurant Employees and with the
Operating Engineers with regard to the terms of employment of employees of
Lessee at the Hotel in bargaining units represented by those unions.
H) Cooperation in Transition: Lessor and Lessee agree, in addition to
the other terms of the Lease to cooperate in the transition period between the
date of this Addendum and the Commencement Date by; a) Lessor providing Lessee
access, to the extent possible without disrupting Hotel operations, to Lessor's
employees for the purpose of conducting employment
_______________________________________________________________________________
2
First Addendum to Ridpath Lease-Option (11/25/97)
<PAGE>
interviews; b) Lessor allowing Lessee, at Lessee's sole expense, to maintain an
on site representative(s) to begin sales efforts for post-Commencement Date
operations without disrupting Hotel operations; c) Lessor and Lessee, to the
extent a liquor license for the Hotel has not been issued in the name of
Lessee as of the Commencement Date, entering into a liquor operations management
agreement under the terms of which Lessee will operate under Lessor's existing
liquor license with the consent of the public authorities, with Lessee holding
Lessor harmless from all such operations and paying to Lessor the minimum
amount which the public authorities will allow for such operations; and d) Until
the Commencement Date, Lessor shall at all times maintain and operate the Hotel
in accordance with past practice.
Options Price: Section 30.3a) of the Lease is modified to read as follows:
"The Option Price shall be based upon the date of Closing (provided that a delay
in Closing due to a failure of performance by Lessor shall not result in an
increase in the Option Price) as follows: (i) if Closing occurs prior to July 1,
1998, the Option Price is $11,500,000; ii) if Closing occurs after June 30, 1998
and prior to April 1, 1999, the Option Price shall increase by $55, 555 per
month with no proration for any partial month (for example, if Closing occurs in
July 1998 the Option Price shall be $11,555,555; if Closing occurs in August
1998, the Option Price shall be $11,611,110, and so forth until April 1999);
iii) if Closing occurs after March 31, 1999, Option Price is $12,500,000.(TM)
Units: Section 30.3b) i) of the Lease is modified to provide: a) that
Lessor and the partners of Lessor shall have the right but not the obligation,
under an agreement reasonably satisfactory in form to Lessee, to guarantee debt
of Lessee at the time of acquisition of Units at closing but without any right
to control the terms or payment of existing or future debt of Lessee b) that
Lessor or the partners of Lessor are, for a period of one year from date of the
issuance of Units to Lessor or its partners, prohibited from converting Units to
shares of common stock of Cavanaughs Hospitality Corporation; c) that
conveyances to Lessee may be by deeds for undivided interests in the Property;
and d) that Lessee will reasonably cooperate with Lessor, without expense or
liability to Lessee, in structuring the Units by Lessor and Lessor's partners as
non-taxable transactions, however the non-taxable status of the transaction
described in the Lease is not a pre-condition to performance by Lessor or
Lessor's partners of Lessor's obligations under the Lease.
EXECUTED as of the date first above written.
Cavanaughs Hospitality Corporation Dunson Ridpath Hotel Associates
Limited Partnership
by Spokane Hotel, Inc., General
Partner
by /s/ Donald K. Barbieri by /s/ Gordan Sondland
-------------------------------- -------------------------------
Donald K. Barbieri Gordan Sondland
its President its President
________________________________________________________________________________
3
First Addendum to Ridpath Lease-Option (11/25/97)
<PAGE>
Cavanaughs Hospitality Limited Partnership
??? Cavanaughs Hospitality Corporation
??? partner
by /s/ Donald K. Barbieri
Donald K. Barbieri
President
STATE OF WASHINGTON
)SS
County of Spokane
I certify that I know or have satisfactory evidence Donald K. Barbieri is the
person who appeared before me, and said person acknowledged that (he/she) signed
this instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the President of Cavanaughs Hospitality
Corporation in its own capacity and in the capacity as the general partner of
Cavanaughs Hospitality Limited Partnership, to be the free and voluntary act of
such party for the uses and purposes mentioned in the instrument.
Dated: November 26, 1997.
/s/ Patricia R. Stapleton
------------------------------------------------
Type/Print Name of Notary: PATRICIA R. STAPLETON
Notary Public in And For the State of Washington
residing at Spokane
My appointment expires: 01/06/98
[SEAL APPEARS HERE]
STATE OF OREGON
)SS.
County of Multnomah
I certify that I know or have satisfactory evidence Gordan Sondland is the
person who appeared before me, and said person acknowledged that (he/she) signed
this instrument, on oath stated that (he/she) was authorized to execute the
instrument and acknowledged it as the President of Spokane Hotel Inc. in its
capacity as General Partner of Dunson Ridpath Hotel Associates Limited
Partnership, to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
Dated: November 25, 1997.
/s/ Penelope Gresham
------------------------------------------------
Type/Print Name of Notary: Penelope Gresham
Notary Public in And For the State of Oregon
residing at Gresham, Oregon
My appointment expires: May 18, 1998
[SEAL APPEARS HERE]
________________________________________________________________________________
4
First Addendum to Ridpath Lease-Option (11/25/97)
<PAGE>
PARCEL 1
- --------
Lots 3, 4, 5, and 8, Block 9; and Lots 3, 4, 5 and 6, Block 13, RAILROAD
ADDITION, according to plat recorded in Volume "D" of Plats, Page 82, in the
City of Spokane, Spokane County, Washington.
TOGETHER WITH that portion of vacated alley lying South of and adjacent to said
Block 13, as set forth in Ordinance No. 29154, filed as Recording No.
8808230119.
PARCEL 2
- --------
That portion of Lots 8, 9 and 10 and of the Easterly 15 feet of Lot 11, Block
"A" of RAILWAY COMPANY'S SUBDIVISION OF ITS RIGHT OF WAY, lying Northerly of the
Northerly retaining wall supporting Railway Company's tracks, in the City of
Spokane, Spokane County, Washington.
<PAGE>
EXHIBIT 11.0
CAVANAUGHS HOSPITALITY CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
NET INCOME
SHARES OUTSTANDING NUMBER OF DAYS WEIGHTED AVERAGE (LOSS) PER SHARE
------------------ -------------- ---------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Pro forma earnings per share for the
year ended October 31, 1997 /1/....... 7,072,023 365 7,072,023 $1,709,000 $0.24
Income per share for the period ended
December 31, 1997..................... 7,072,023 61 7,072,023 6,000 nil
</TABLE>
________________________________
/1/ The earnings per share reflect the number of shares outstanding after
the merger of the companies and partnerships (see Note 15 to the
historical combined financial statements) As of October 31, 1997 and
December 31, 1997, there were no dilutive securities outstanding.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-44491) of our report dated February 16, 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
February 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 2-MOS
<FISCAL-YEAR-END> OCT-31-1997 DEC-31-1997
<PERIOD-END> OCT-31-1997 DEC-31-1997
<CASH> 6,440 4,995
<SECURITIES> 0 0
<RECEIVABLES> 2886 2,896
<ALLOWANCES> (80) (11)
<INVENTORY> 376 427
<CURRENT-ASSETS> 10,750 9,267
<PP&E> 144,279 146,679
<DEPRECIATION> (34,325) (34,445)
<TOTAL-ASSETS> 124,104 125,117
<CURRENT-LIABILITIES> 13,582 14,088
<BONDS> 93,771 94,419
0 0
495 0
<COMMON> 704 71
<OTHER-SE> 7,327 8,461
<TOTAL-LIABILITY-AND-EQUITY> 124,104 125,117
<SALES> 52,043 8,838
<TOTAL-REVENUES> 52,043 8,838
<CGS> 22,927 4,450
<TOTAL-COSTS> 41,408 7,495
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,817 1,422
<INCOME-PRETAX> 2,641 0
<INCOME-TAX> 932 6
<INCOME-CONTINUING> 1,709 6
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,709 6
<EPS-PRIMARY> 0.24 0
<EPS-DILUTED> 0.24 0
</TABLE>
