<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CHARTWELL LEISURE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 22-3326054
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR 605 THIRD AVENUE
ORGANIZATION) NEW YORK, NEW YORK 10158
(212) 692-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
RICHARD L. FISHER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
605 THIRD AVENUE
NEW YORK, NEW YORK 10158
(212) 692-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
JOHN N. TURITZIN, ESQ. RICHARD D. TRUESDELL, JR., ESQ.
BATTLE FOWLER LLP DAVIS POLK & WARDWELL
75 EAST 55TH STREET 450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10017
(212) 856-7000 (212) 450-4000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
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, other than securities offered only in connection with dividend or
interest reinvestment plans, 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 number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
AMOUNT OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.01 par value per share.. 5,175,000 $13.125 $67,921,875 $20,583
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 675,000 Shares of Common Stock which the Underwriters have the
right to purchase to cover over-allotments.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee.
(3) Calculated pursuant to Rule 457(c) promulgated under the Securities Act of
1933, based on the average high and low prices reported on the NASDAQ
National Market on November 20, 1996 of $13 1/2 and $12 3/4.
---------------
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>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of 3,600,000 shares of Common Stock (the "U.S. Offering"). The
second prospectus relates to a concurrent offering outside the United States
and Canada of an aggregate of 900,000 shares of Common Stock (the
"International Offering" and, together with the U.S. Offering, the
"Offering"). The prospectuses for each of the U.S. Offering and the
International Offering will be identical with the exception of the alternate
front cover page for the International Offering. Such alternate page appears
in this Registration Statement immediately following the complete prospectus
for the U.S. Offering.
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject To Completion)
Issued November 22, 1996
4,500,000 Shares
Chartwell Leisure Inc.
COMMON STOCK
-----------
OF THE 4,500,000 SHARES OF COMMON STOCK BEING OFFERED, 3,600,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS AND 900,000 SHARES ARE BEING OFFERED
INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL
OF THE 4,500,000 SHARES OF COMMON STOCK
OFFERED HEREBY ARE BEING OFFERED BY THE
COMPANY.
-----------
THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "CHRT." ON NOVEMBER 20, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $13 1/2 PER SHARE.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
-------- -------------- -------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses of the Offering payable by the Company,
estimated at $1,200,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
675,000 additional Shares of Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering over-
allotments, if any. If the U.S. Underwriters exercise such option in full,
the total price to public, underwriting discounts and commissions and the
proceeds to the Company will be $ , $ and $ , respectively. See
"Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1997, at the office of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in immediately available funds.
-----------
MORGAN STANLEY & CO.
Incorporated
BEAR, STEARNS & CO. INC.
MONTGOMERY SECURITIES
CHASE SECURITIES INC.
, 1997
<PAGE>
[ARTWORK TO BE PROVIDED BY AMENDMENT]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON
STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
----------------
No action has been or will be taken in any jurisdiction by the Company or
any Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this 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 required 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.
In this Prospectus references to "dollars" and "$" are to United States
dollars unless otherwise stated, and the terms "United States" and "U.S." mean
the United States of America, its states, its territories, its possessions and
all areas subject to jurisdiction. When Canadian dollar amounts have been
expressed in U.S. dollars, an exchange rate of approximately $1.36 Canadian
dollars per U.S. dollar, (the prevailing exchange rate on October 1, 1996) has
been applied.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................ 4
Risk Factors...................... 10
Use of Proceeds................... 16
Price Range of Common Stock....... 16
Dividend Policy................... 16
Capitalization.................... 17
Selected Financial Data........... 18
Pro Forma Condensed Consolidated
Financial Statements............. 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 27
Business.......................... 35
Management........................ 53
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Transactions............... 56
Principal Stockholders............. 63
Description of Capital Stock....... 65
Shares Eligible for Future Sale.... 69
Certain Federal Income Tax Conse-
quences to Non-United States Hold-
ers............................... 69
Underwriters....................... 73
Legal Matters...................... 76
Experts............................ 76
Additional Information............. 76
Incorporation of Certain
Information by Reference.......... 77
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
----------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," filings by the
Company with the Securities and Exchange Commission (the "Commission"), in the
Company's press releases and in oral statements made by authorized officers of
the Company. When used in this Prospectus, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere or incorporated by reference in this
Prospectus. Unless otherwise indicated, all information in the Prospectus
assumes (i) no exercise of the U.S. Underwriters' over-allotment option and
(ii) an offering price of $13.50 per share, which is the reported last sale
price of the Common Stock, $0.01 par value per share (the "Common Stock"), set
forth on the cover page of the Prospectus (the "Offering Price"). See
"Underwriters." Unless the context otherwise requires, all references in this
Prospectus to the Company include the Company, its subsidiaries and their
respective predecessors, and references to "hotels" include both hotels and
motels.
THE COMPANY
Chartwell Leisure Inc. ("Chartwell" or the "Company") is an opportunistic
acquiror of diversified hotel properties that it believes provide the potential
for cash flow and earnings growth, principally through rebranding,
repositioning, reimaging and remarketing. Chartwell owns, directly or with
joint venture partners, 134 hotel properties in both the full-service and
limited-service segments, including approximately 11,580 guest rooms, located
in 26 states and six Canadian provinces. In the full-service segment, Chartwell
operates 27 hotels aggregating approximately 5,430 guest rooms that contributed
57% of Chartwell's gross room revenues (including gross room revenues of
unconsolidated joint ventures) during the nine-month period ended September 30,
1996 on a pro forma basis. Chartwell's remaining 107 hotels, consisting of
approximately 6,150 rooms, operate in the limited-service segment, principally
under the Travelodge(R) brand.
Chartwell was spun off from HFS Incorporated ("HFS") in 1994 and until late
1995 was engaged in the business of investing in casino gaming facilities. In
December 1995, an investment group ("CL Associates") primarily consisting of
members of the Fisher Brothers family and a trust for the benefit of Gordon
Getty and members of his family acquired a 16.6% equity interest in Chartwell
by purchasing newly issued shares of Common Stock. In connection with that
purchase, Richard L. Fisher, a member of the Fisher Brothers family, was
elected to Chartwell's Board of Directors and to the chairmanship of
Chartwell's executive committee. At the same time, Chartwell's Board of
Directors decided to redirect the focus of Chartwell's business from gaming to
lodging and Chartwell agreed to acquire full and partial interests in 115
Travelodge hotels, consisting of approximately 8,000 guest rooms, from Forte
Hotels, Inc. (the "Travelodge Acquisition") for approximately $98 million (a
cost of approximately $13,000 per guest room after accounting for joint venture
interests and other assets acquired).
In connection with the closing of the Travelodge Acquisition in January 1996,
Chartwell agreed in principle to issue four million shares of Common Stock for
an aggregate purchase price of $57 million to an expanded investment group,
consisting of CL Associates and a limited liability company ("FSNL") owned
principally by a trust for the benefit of Charles de Gunzburg (the "CL
Associates/FSNL Investment"), Mr. Fisher was elected Chairman and Chief
Executive Officer of Chartwell, a new senior management team was assembled, and
Mr. Fisher and that new management team began to implement Chartwell's current
strategy. Since that time, Chartwell has (i) increased revenue per available
room ("REVPAR") for the nine months ended September 30, 1996 by approximately
10% (excluding joint venture partner interests in joint ventures) compared to
the same period in 1995 at the hotels acquired in the Travelodge Acquisition,
(ii) acquired 21 Travelodge hotels in Canada (including a one-half interest in
a joint venture) totalling approximately 3,500 guest rooms, for approximately
$77 million (a cost of approximately $22,000 per guest room) (the "Canadian
Acquisition"), (iii) obtained the 30-year exclusive master franchise licenses
for the Travelodge brand in Canada and Mexico, and (iv) formed a joint venture
with Grupo Piasa, S.A. de C.V., a diversified Mexican real estate and
development company ("Grupo Piasa"), for the purpose of developing and
operating Travelodge hotels throughout Mexico ("Chartwell de Mexico").
Chartwell has curtailed future activities in the gaming industry and, during
the nine-month period ended September 30, 1996, derived no operating revenues
from gaming.
4
<PAGE>
Many of Chartwell's Travelodge properties are situated in premier locations,
such as San Francisco's Fisherman's Wharf, San Diego's Harbor Island and Walt
Disney World Village, where development of new hotels is limited by significant
barriers to entry, including availability of financing, strict zoning
regulations and limited, high-cost development sites. Chartwell is the largest
owner of Travelodge hotels in North America. Travelodge, a franchise brand
owned by HFS, is the fourth largest limited-service hotel chain in North
America in number of rooms, with over 500 hotel properties and approximately
43,000 guest rooms. The Travelodge brand is designed to attract the economy-
conscious leisure and business traveler seeking room quality and hotel
locations that are generally comparable to those of mid-price hotels, but at
lower average room rates. In Canada, Travelodge is primarily a full-service
hotel chain.
COMPETITIVE STRENGTHS
Chartwell believes that its primary competitive strengths include the
following:
. Experienced Management Team. Chartwell's senior management team has
substantial hotel acquisition, development and operations experience.
Richard L. Fisher, the Chairman of the Board and Chief Executive Officer
of Chartwell, and Martin L. Edelman, the President of Chartwell, are also
partners, and are actively involved, in a series of private partnerships
that own a portfolio consisting of 68 hotel properties aggregating
approximately 11,500 guest rooms and various mortgage loans to other
hotels. In addition, Mr. Fisher is a principal of Fisher Brothers, one of
the largest owners of commercial real estate in New York City and Mr.
Edelman is an attorney who has negotiated and advised clients in the
acquisition and development of hotels for more than 15 years.
. Brand and Market Flexibility. Chartwell's flexible acquisition,
development and repositioning strategy permits Chartwell to own and
operate hotels in different market segments and under different franchise
brands. This strategy enables Chartwell to capture opportunities to
reposition properties in an optimal manner.
. Significant Borrowing Capacity. After giving effect to the use of
proceeds of the Offering, Chartwell will continue to have available
approximately $115 million under its $150 million committed line of
credit. In addition, HFS has agreed to guarantee up to $75 million of
borrowings under this credit facility through February 2003 (the "HFS
Guarantee"), providing Chartwell with a favorable borrowing rate under
the facility. Management believes that Chartwell's availability under its
line of credit, together with the HFS Guarantee, provide Chartwell with
significant borrowing capacity to fund its growth through the
acquisition, development and repositioning of hotels.
. Strategic Relationship with HFS. Since the spin-off of Chartwell from
HFS, Chartwell has continued its strategic relationship with HFS.
Chartwell is the largest franchisee of HFS' Travelodge brand; three of
Chartwell's directors are directors of HFS, including Henry R. Silverman,
the Chairman of the Board and Chief Executive Officer of HFS; Chartwell's
President is a director of HFS and a member of its executive committee;
and HFS has provided the HFS Guarantee.
. Owner and Operator of Hotels. Chartwell owns and operates, directly or
with joint venture partners, all of its hotels. Chartwell believes that
this commitment to hotel equity ownership, together with its experienced
in-house hotel management team, enables Chartwell to ensure the
achievement of consistent, high quality standards at its hotels, which
has contributed to improved hotel operating performance. Chartwell
believes that this commitment allows it to maximize control over its
hotels and to capture the benefits from their improved operating
performance.
GROWTH STRATEGY
Chartwell's new senior management team has implemented multiple strategies to
increase cash flow, earnings and shareholder value by (i) internal growth
through an extensive capital investments program, the
5
<PAGE>
rebranding and repositioning of its existing hotels and the reimaging and
remarketing of the Travelodge brand name, while controlling costs and (ii)
external growth through increasing and diversifying Chartwell's hotel portfolio
by selectively acquiring and developing hotels in different market segments and
geographic regions.
INTERNAL GROWTH OPPORTUNITIES: Chartwell believes that the hotels it
acquired in the Travelodge Acquisition and the Canadian Acquisition, and
the Travelodge brand as a whole, were allowed to significantly underperform
their potential and believes that capital investments and operational
changes designed to bring the performance of these hotels up to industry
averages or higher offer the potential for significant earnings growth at
these hotels.
. Capital Investments: Chartwell has launched an extensive capital
improvement program to increase room and occupancy rates of its hotels by
improving the quality of its properties. By mid-1997, Chartwell intends
to have completed approximately $30 million in capital improvements at
its current hotels in addition to amounts budgeted for regular capital
maintenance. This program is expected to enhance the competitiveness of
its Travelodge hotels and increase profitability.
. Strategic Repositioning and Redevelopment of Current Hotels: Chartwell
believes there is significant potential to increase REVPAR at selected
hotels by repositioning those hotels through renovation and refurbishment
as well as rebranding to more appropriate franchise affiliations. For
example, Chartwell has converted the 476-room Travelodge hotel at Kennedy
Airport in New York and its 236-room Travelodge hotel in Portland, Oregon
to Ramada Plaza hotels, the premier Ramada(R) brand, expects to convert
its 207-room Travelodge hotel in San Diego, California to a Hilton(R)
hotel and expects to add approximately 200 guest rooms at its Travelodge
hotel at Walt Disney World Village and approximately 100 guest rooms at
its Travelodge hotel at Fisherman's Wharf in San Francisco.
. Reimaging and Remarketing the Travelodge Brand Name: HFS has implemented
a program in cooperation with Chartwell to revitalize the Travelodge
brand name, which includes (i) the proposed expenditure of approximately
$5.5 million budgeted by HFS through December 31, 1997 for marketing the
Travelodge brand name, (ii) the reintroduction of the Sleepy Bear mascot
and (iii) the introduction of a program that will reward guests with
"Travel Miles," exchangeable for gifts. In addition, Chartwell has
budgeted approximately $3 million for marketing individual hotels,
generally in their local markets.
EXTERNAL GROWTH OPPORTUNITIES:
. Acquisition of Hotels: Chartwell seeks to continue the acquisition of
underperforming hotels or portfolios of hotels throughout North America
that are candidates for improved operating performance by implementing
Chartwell's growth strategy of refurbishing, rebranding, repositioning,
and reimaging underperforming hotels. Chartwell is uniquely positioned
through its expertise, industry contacts and financial resources to
pursue this acquisition strategy across all hotel market segments and
geographic regions. The Canadian Acquisition, which contributed
approximately 30% of Chartwell's total revenues on a pro forma basis
during the nine-month period ended September 30, 1996, is the first
example of the implementation of this strategy since the Travelodge
Acquisition.
. Selected Development of Hotels: Selected development of new hotels is a
key part of Chartwell's external growth program. For example, through
Chartwell de Mexico, Chartwell intends to establish Travelodge as the
first major limited-service hotel chain in Mexico by developing up to 30
Travelodge facilities throughout Mexico. Chartwell de Mexico is to be
funded with up to $20 million in capital contributions, of which half are
to be contributed by Chartwell and half to be contributed by Grupo Piasa.
In the United States, Chartwell has begun development of two hotels: a
100-room Fairfield Suites(R) in Santa Fe, New Mexico, scheduled for
completion in late 1997, and a 112-room Wingate InnSM at Dallas/Fort
Worth International Airport scheduled for completion in late 1997.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered
U.S. Offering.............................. 3,600,000 shares
International Offering..................... 900,000 shares
----------------
Total...................................... 4,500,000 shares
Common Stock to be outstanding
after the Offering(1)..................... 13,976,600 shares
-----------------
-----------------
Use of Proceeds.............................. Repayment of certain outstanding indebtedness.
See "Use of Proceeds."
NASDAQ Symbol................................ CHRT
</TABLE>
- --------
(1) Based upon the number of shares of Common Stock outstanding as of November
15, 1996. Excludes an aggregate of 3,000,000 shares of Common Stock
reserved for issuance under the Company's 1994 Stock Option Plan (the
"Stock Option Plan") as of November 15, 1996, including 2,137,000 shares as
to which options were then outstanding, of which 46,000 were exercisable on
such date. Also excludes 389,630 shares reserved for issuance under HFS'
1992 Incentive Stock Option Plan as of November 15, 1996, including 389,630
shares as to which options were then outstanding, of which 313,520 were
exercisable on such date. See "Description of Capital Stock" and "Principal
Stockholders."
BACKGROUND
The Company's original gaming business was conducted as a division of HFS
from August 1993 until September 1994, when the Company was formed as National
Gaming Corp., a Delaware corporation and a wholly owned subsidiary of HFS
created for the purpose of carrying on that business. In November 1994, the
Company became an independent public company when HFS distributed all of the
outstanding shares of the Company's Common Stock to the stockholders of HFS
(the "Distribution"). In January 1996, the Company's name was changed to
National Lodging Corp., and on August 8, 1996, the Company's name became
Chartwell Leisure Inc. The Company's principal executive offices are located at
605 Third Avenue, New York, New York 10158, and its telephone number is (212)
692-1400.
The occupancy, average daily room rate ("ADR") and REVPAR data for the hotel
industry referred to in this Prospectus are derived from information compiled
by Smith Travel Research, Inc. ("Smith Travel Research"). Smith Travel Research
has not provided any form of consultation, advice or counsel regarding any
aspect of, and is in no way associated with, the Offering.
7
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following tables present summary pro forma financial data for the
business of the Company as of, and for the nine-month period ended, September
30, 1996, for the nine-month period ended September 30, 1995 and for the one-
year period ended December 31, 1995. The pro forma financial data has been
presented to reflect the results of the Company's business operations as if the
Travelodge Acquisition, the Canadian Acquisition, the CL Associates/FSNL
Investment (which closed in August 1996) and the Offering had occurred on
January 1, 1995.
The information in these tables is qualified by and should be read in
conjunction with the "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma
Condensed Consolidated Financial Statements," and the pro forma financial
statements of the Company and notes thereto included elsewhere herein or
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30, PRO FORMA
--------------------------- YEAR ENDED
1996 1995 DECEMBER 31, 1995
------------ ------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Hotel revenue.................. $ 82,562 $ 74,588 $ 95,252
Management fee and other in-
come.......................... 4,491 4,057 5,623
Equity in earnings of unconsol-
idated hotel joint ventures... 5,230 4,688 5,350
------------ ------------- ------------
Total revenue................. 92,283 83,333 106,225
------------ ------------- ------------
OPERATING EXPENSES:
Hotel operating expense........ 35,802 33,455 43,191
General and administrative..... 13,922 13,974 17,023
Marketing, franchise & reserva-
tion fees..................... 8,772 8,390 10,737
Maintenance and property tax-
es............................ 7,365 6,768 8,620
Rent........................... 4,119 3,425 4,700
Depreciation and amortization.. 9,499 9,119 11,794
Other.......................... 2,966 2,162 3,748
Minority interest.............. 1,005 850 1,088
General and administrative re-
lated party(1)................ 1,147 1,339 1,747
Gaming development costs....... -- 14,953 15,482
Provision for losses on gaming
assets........................ 14,240 -- --
------------ ------------- ------------
Total operating expenses...... 98,837 94,435 118,130
------------ ------------- ------------
OPERATING LOSS(2).............. (6,554) (11,102) (11,905)
INTEREST EXPENSE--NET.......... 2,065 1,004 1,435
------------ ------------- ------------
LOSS BEFORE INCOME TAX EX-
PENSE......................... (8,619) (12,106) (13,340)
INCOME TAX EXPENSE............. 213 709 709
------------ ------------- ------------
NET LOSS(3).................... $ (8,832) $ (12,815) $ (14,049)
============ ============= ============
PER SHARE INFORMATION:
Net Loss....................... $ (0.61) $ (0.94) $ (1.03)
============ ============= ============
Weighted average common shares
outstanding................... 14,368 13,612 13,599
OTHER DATA:
EBITDA before gaming ex-
penses(4)..................... $ 18,760 $ 14,617 $ 17,553
EBITDA margin before gaming ex-
penses(5)..................... 20.3% 17.5% 16.5%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
PRO FORMA(6) AS ADJUSTED(7)
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets........................................ $235,882 $235,882
Total debt.......................................... 90,683 35,082
Stockholders' equity................................ 125,828 181,429
</TABLE>
8
<PAGE>
- --------
(1) General and administrative related party is for contractual advisory and
other fees paid to HFS pursuant to an advisory services contract. The
Company and HFS agreed to terminate, effective as of December 31, 1996,
this advisory services contract, which requires the Company to make annual
payments of $1.5 million to HFS through 2019. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(2) Includes a $14.2 million non-cash provision for losses on gaming assets for
the nine-month period ended September 30, 1996. Without this provision, the
Company would have reported pro forma operating income of $7.7 million for
the nine-month period ended September 30, 1996.
(3) Pro forma net loss does not include extraordinary loss on early
extinguishment of debt in the amount of approximately $1.5 million
reflected in historical statement of operations for the nine-months ended
September 30, 1996.
(4) EBITDA before gaming expenses represents earnings before extraordinary
items, losses on gaming assets and gaming development costs, interest
expense, provision for income taxes (if applicable) and depreciation and
amortization (plus depreciation, amortization and interest expense of joint
venture interests in the amount of $1.6 million and $1.6 million for the
nine-month periods ended September 30, 1996 and 1995, respectively, and
$2.2 million for the period ended December 31, 1995) and excludes interest
income on cash investments. EBITDA is used by the Company for the purpose
of analyzing its operating performance, leverage and liquidity. Such data
are not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or as an
alternative to cash flows as a measure of liquidity.
(5) EBITDA margin before gaming expenses represents EBITDA before gaming
expenses divided by total revenues.
(6) The pro forma balance sheet data give effect to the Canadian Acquisition
and related borrowings that occurred on October 1, 1996.
(7) Adjusted to reflect the sale of 4,500,000 shares of Common Stock offered
hereby at the Offering Price and the application of the estimated net
proceeds therefrom (after deduction of the underwriting discounts and
commissions and estimated expenses of the Offering) as described in "Use of
Proceeds."
9
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, before
purchasing the shares of Common Stock offered hereby.
EXPANSION RISKS
The Company's strategy includes increasing the number of its hotels through
the acquisition and the redevelopment of existing hotels and development of
new hotels. The Company's ability to expand depends on a number of factors,
including the selection and availability of suitable locations at acceptable
prices, the hiring and training of sufficiently skilled management and
personnel and the availability of financing. There can be no assurance that
financing, or desirable locations for acquisitions or new development, will be
available or, if available, will be on terms acceptable to the Company.
Acquisition Risks: Expansion by acquisition of hotels entails risks that
investments will fail to perform in accordance with expectations and that the
anticipated costs of renovation or conversion will prove inaccurate, as well
as general investment risks associated with any new real estate investment. In
connection with acquired properties, the Company will incur additional costs
relating to renovation and, if applicable, rebranding activities and operating
expenses, which could adversely affect the Company's financial performance.
Newly opened hotels generally begin with lower occupancy and room rates and
improve those rates over time.
Development Risks: Expansion by development of new hotels is subject to a
number of risks, including site acquisition cost and availability, risks of
construction delay, inclement weather and labor or material shortages or cost
overruns, risks that properties will not achieve anticipated occupancy levels
or sustain expected room rate levels and commencement risks such as receipt of
zoning, occupancy and other required governmental permits and authorizations,
which in each case could adversely affect the Company's financial performance.
Redevelopment Risks: The redevelopment of hotels involves risks associated
with construction and renovation of real property, including the possibility
of construction cost overruns and delays due to various factors (including
receipt of regulatory approvals, inclement weather and labor or material
shortages) and market or site determination after acquisition or renovation.
The operations at the hotels under redevelopment can be substantially
curtailed during portions of the redevelopment activity.
There can be no assurance that the Company's expansion strategy will be
implemented successfully. The Company's inability to successfully implement
its expansion plans would limit the Company's ability to grow its revenue
base. Furthermore, there can be no assurance that suitable hotel acquisition
candidates or development sites will be located, that hotel acquisitions can
be consummated successfully or that acquired or developed hotels can be
operated profitably or integrated successfully into the Company's operations.
LODGING INDUSTRY RISKS
The lodging industry in general may be adversely affected by such factors as
changes in national and regional economic conditions (particularly in
geographic areas in which the Company has a high concentration of hotels),
changes in local market conditions, oversupply of hotel space or a reduction
in local demand for rooms and related services, competition in the hotel
industry, changes in interest rates, the availability of financing and other
factors relating to the operation of hotels.
Operating Risks: Operating factors affecting the Company and the lodging
industry generally include (i) competition from other hotels, motels and
recreational properties, (ii) demographic changes, (iii) the recurring need
for renovations, refurbishment and improvements of hotels and increased
expenses related to hotel security, (iv) restrictive changes in zoning and
similar land use laws and regulations, or in health, safety, disability and
environmental laws, rules and regulations, (v) changes in government
regulations that influence or determine wages, prices or construction costs,
(vi) changes in the characteristics of hotel locations, (vii) the inability to
secure property and liability insurance to fully protect against all losses or
to obtain such insurance at reasonable
10
<PAGE>
costs, (viii) changes in real estate tax rates and other operating costs, (ix)
changes or cancellations in local tourist, athletic or cultural events, (x)
changes in travel patterns that may be affected by increases in transportation
costs or gasoline prices, changes in airline schedules and fares, strikes,
weather patterns or relocation or construction of highways, (xi) increases in
operating expenses and litigation as a result of injuries to guests, and (xii)
changes in brand identity and reputation. Unexpected or adverse changes in any
of the foregoing factors could have a material adverse effect on the Company's
business, assets, financial condition or results of operations.
Cyclicality: The hotel industry is subject to periods of cyclical growth and
downturn. In the past, the hotel industry has experienced cyclical downturns
resulting from, among other things, overbuilding in the industry and sluggish
general economic conditions in the United States. There can be no assurance
that downturns or prolonged adverse conditions in the hotel industry, in real
estate or capital markets or in national or local economics will not have a
material adverse impact on the Company. In addition, the Company's hotels are
located throughout the United States and Canada, but the Company has a
geographic concentration of hotels in the State of California. As a result,
the Company's cash flow may be affected by economic conditions and demand for
hotel rooms within the State of California.
Seasonality: The hotel industry is seasonal in nature. Room occupancy rates
at the Company's hotels are affected by normally recurring seasonal patterns
and, in most locations in the United States and Canada, are higher in the late
spring through early fall months (May through October) than during the balance
of the year, with the lowest occupancy rates occurring in the first quarter of
the year. As a result, the Company expects to experience seasonal lodging
revenue patterns similar to the hotel industry with the summer months, due to
the increase in leisure travel, producing a higher revenue than other periods
during the year.
IMPORTANCE OF FRANCHISOR RELATIONSHIPS
Substantially all of the Company's hotels are operated under the Travelodge
brand name pursuant to franchise agreements with affiliates of HFS. The
Company expects that substantially all of the hotels that it acquires or
develops in the future will be operated under hotel brands franchised by major
hotel franchisors. While the Company believes that franchise arrangements
offer the Company competitive advantages over non-franchised lodging
properties, the value of a brand name under which the Company's hotels operate
and, as a result, the Company's business as a whole, could be adversely
affected by a number of factors relating to the franchisor of that brand over
which the Company has no control. These risks include the general reputation
of the brand and the success of the franchisor's marketing efforts. In
addition, pursuant to the terms of an applicable franchise agreement, a
franchisor can terminate the agreement if, among other things, its quality
standards are not maintained or if payments due are not made in a timely
fashion. If any of the franchise agreements were terminated by the franchisor,
the Company could explore entering into a franchise agreement with another
franchisor. There can be no assurance, however, that a desirable replacement
relationship would be available. In addition, under the franchise agreements
covering the Company's Travelodge hotels, the franchisor controls the
marketing and promotional aspects of the Travelodge brand. The Company's
program to revitalize the Travelodge brand name through increased promotional
expenditures is dependent upon the cooperation of HFS as franchisor of the
Travelodge name.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company has begun to expand its hotel operations in Mexico and Canada.
As a result, the Company's operations may be affected adversely as a result of
political changes or instability, general economic conditions, the imposition
of regulations relating to the ownership of hotel properties or real estate or
the franchising of hotel properties, the imposition of taxes, and other
charges on international business activities, in Mexico or Canada, and the
fluctuations in the value of the U.S. dollar against the Canadian dollar or
the Mexican peso, as the case may be, or restrictions on international
currency transactions.
RISKS OF NEW MANAGEMENT TEAM
The Company's senior management team, including the Chief Executive Officer,
the President, the Chief Operating Officer and the Chief Financial Officer,
have been appointed only recently and have had only a limited
11
<PAGE>
opportunity to work as a management team. As a result, there can be no
assurance that the Company's management team will be successful in managing the
operations of the Company or be able to effectively implement the Company's
business and expansion strategy. See "Management."
RELIANCE ON CURRENT MANAGEMENT
Although the Company's management team includes individuals with substantial
experience in operating, managing, developing and acquiring hotels and real
estate properties, the Company relies upon the services and expertise of
Richard L. Fisher, the Company's Chairman and Chief Executive Officer, Martin
L. Edelman, a Director and the Company's President, Ronald E. Jackson, its
Chief Operating Officer and Kenneth J. Weber, its Chief Financial Officer. The
occurrence of any event which would cause the Company to lose the services of
any of Messrs. Fisher, Edelman, Jackson or Weber could have a material adverse
effect on the Company. The Company has purchased $5 million key-man life
insurance policies covering each of Messrs. Fisher and Edelman, and $2 million
key-man life insurance policies covering each of Messrs. Jackson and Weber.
There is no assurance, however, that the Company will continue to maintain such
insurance policies in effect or that any proceeds thereof would be sufficient
to compensate the Company for the loss of services of any of Messrs. Fisher,
Edelman, Jackson or Weber. See "Management--Directors and Executive Officers."
In addition to the substantial amounts of time that Messrs. Fisher and Edelman
devote to the Company's business activities, both Messrs. Fisher and Edelman
engage in other business activities. Neither Mr. Fisher nor Mr. Edelman has an
employment agreement with the Company. See "Management."
RELATIONSHIP WITH HFS
In addition to the Company's relationship with HFS as the franchisor of the
Travelodge brand name under which substantially all of the Company's hotels
operate, $75 million of the Company's Credit Facility (as defined in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Credit Facilities--General") is guaranteed by HFS. The amount and
availability of the Credit Facility could be adversely affected by adverse
changes in the financial condition of HFS. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
CONFLICTS OF INTEREST
Three members of the Company's Board of Directors also serve as directors of
HFS. This commonality of directors could result in various conflicts of
interest with respect to the administration of the ongoing relationships
between HFS and the Company. In particular, conflicts may arise with respect to
various agreements, such as franchise agreements, entered into between the
Company and HFS. No assurance can be given that all conflicts will be resolved
in favor of the Company and its stockholders.
RISKS ASSOCIATED WITH OWNING REAL ESTATE
The Company's investments will be subject to varying degrees of risk
generally incident to the ownership of real estate. These risks include, among
others, changes in national, regional and local economic conditions, local real
estate market conditions, changes in interest rates and in the availability,
cost and terms of financing, the potential for uninsured casualty and other
losses, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements,
particularly in older structures, civil unrest, acts of God, including
earthquakes and other natural disasters (which may result in uninsured losses),
acts of war and adverse changes in zoning laws and other regulations, many of
which are beyond the control of the Company. In addition, real estate
investments are relatively illiquid, which means that the ability of the
Company to vary its portfolio of hotels in response to changes in economic and
other conditions may be limited. If the Company must sell an investment, there
can be no assurance that the Company will be able to dispose of it in the time
period it desires or that the sale price of any investment will recoup or
exceed the amount of the Company's investment.
RISK OF EXPIRATION OF GROUND LEASES
Approximately 67% of the Company's hotels are located on property covered by
ground leases with unaffiliated third parties. These hotels in the aggregate
contributed approximately 53% of the Company's pro
12
<PAGE>
forma hotel operating profits (hotel revenue less hotel operating expense,
rent, property taxes, franchise and marketing fees excluding depreciation) and
a greater percentage of its revenues during the nine-month period ended
September 30, 1996, assuming the Travelodge Acquisition and the Canadian
Acquisition had occurred on January 1, 1995. Of those hotels, the hotels
located on ground leases scheduled to expire during each of the five-year
periods ending December 31, 2001, December 31, 2006, December 31, 2011 and
thereafter contributed approximately .6%, 8.5%, 13.0% and 30.4%, respectively,
of the Company's pro forma hotel operating profits (hotel revenue less hotel
operating expense, rent, property taxes, franchise and marketing fees excluding
depreciation) during the nine-month period ended September 30, 1996. Although
the Company intends to attempt to obtain renewals of the ground leases or the
purchase of the real property from the lessor when it considers renewal or
purchase to be advantageous, there can be no assurance that the Company will be
able to do so. The Company's failure to renew these ground leases or purchase
the real property from the lessor could adversely affect the Company's
financial performance.
COMPETITION
The hotel industry is highly competitive. The success of a hotel in its
market, in large part, is dependent upon its ability to compete in such areas
as reasonableness of room rates, quality of accommodations, service level and
convenience of location. The Company's hotels compete with existing hotel
facilities in their geographic markets, as well as future hotel facilities that
may be developed in proximity to the existing hotels. The Company's hotels
generally operate in areas that contain numerous competitors. The Company's
hotels compete with numerous other hotels, motels and other lodging
establishments in their market areas. Chains such as Days Inn and Howard
Johnson, both of which are franchised by HFS, Comfort Inns, Fairfield Inns,
Hampton Inns, La Quinta, Motel 6 and Red Roof Inns are direct competitors of
the Company's limited-service Travelodge brand hotels and Ramada, Holiday Inn
and Quality Inns are direct competitors of the Company's full-service hotels.
Demographic, geographic or other changes in one or more of the Company's
markets could impact the convenience or desirability of the sites of certain
hotels, which would adversely affect the operations of those hotels. There can
be no assurance that new or existing competitors will not significantly lower
rates or offer greater convenience, services or amenities or significantly
expand or improve facilities in a market in which the Company's hotels compete,
thereby adversely affecting the Company's operations. See "Business--
Competition." In addition, some of the Company's competitors have a larger
network of locations and greater resources than the Company. These competitors
may generally be able to accept more risk than the Company can prudently
manage, including risks with respect to the geographic proximity of its
investments. Competition may generally reduce the number of suitable hotel
acquisition opportunities offered to the Company and increase the bargaining
power of property owners seeking to sell, which could adversely affect the
Company's financial performance.
CONTROL BY PRINCIPAL STOCKHOLDERS
After consummation of the Offering, CL Associates and FSNL will beneficially
own 4,904,930 shares of the Company's Common Stock, representing 35.1% (33.5%
if the U.S. Underwriters' over-allotment option is exercised in full) of the
outstanding shares of Common Stock, and will have voting and investment power
with respect to such stock. Accordingly, CL Associates and FSNL will retain
effective control, subject to the terms of the Stock Purchase Agreement (as
defined in "Certain Transactions--Stock Purchase Agreement"), over the election
of Directors of the Company and most corporate actions, as well as the outcome
of most issues submitted to the Company's stockholders. Certain conflicts of
interest may arise between CL Associates, FSNL and their affiliates and the
Company. Such conflicts could arise with respect to business dealings between
CL Associates, FSNL and their affiliates and the Company and other corporate
matters. However, pursuant to the Stock Purchase Agreement, CL Associates and
FSNL have agreed to certain limitations on their activities and certain limits
on the exercise of their control over the Company after the Closing. See
"Certain Transactions--Relationships with CL Associates and FSNL."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have a total of 13,976,600
shares of Common Stock outstanding (based on the number of shares outstanding
on November 20, 1996). The 4,904,930 shares of
13
<PAGE>
Common Stock held by CL Associates and FSNL, each of whom may be deemed to be
an "affiliate" of the Company, are "restricted" securities within the meaning
of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"
or "Act"). Generally, under Rule 144, a person, including a person who may be
deemed an "affiliate" of the Company, who has held restricted shares for two
years may sell such shares, subject to certain volume limitations and other
restrictions, without registering them under the Act. The Company, its
directors and executive officers have agreed that during the period commencing
on the date hereof and ending 90 days after the date of this Prospectus (the
"90 Day Lock-up Period"), and CL Associates and FSNL have agreed that during
the period commencing on the date hereof and ending 180 days after the date of
this Prospectus (the "180 Day Lock-up Period"), without the prior written
consent of Morgan Stanley & Co. Incorporated ("Morgan Stanley") on behalf of
the Underwriters, they will not, subject to certain exceptions, sell or
otherwise dispose of any shares of Common Stock. See "Shares Eligible for
Future Sale." In addition, the Company's directors and executive officers have
agreed that during the 90 Day Lock-up Period, and CL Associates and FSNL have
agreed that during the 180 Day Lock-up Period, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, they will not make any
demand for or exercise any right with respect to the registration of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock. Rule 144 generally also permits sales of restricted shares,
without any volume limitations, by a person who has not been an "affiliate" of
the Company for at least three months preceding the sale of such shares and who
has held those restricted shares for at least three years. Pursuant to a
registration rights agreement with the Company (the "Registration Rights
Agreement"), CL Associates and FSNL have certain rights to require the Company
to register some or all of the shares of Common Stock held by them. See
"Certain Transactions--Registration Rights Agreement" and "Shares Eligible for
Future Sale." No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sales, will have on
the market price of the shares of Common Stock from time to time. The sale of
substantial amounts of shares of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock. See "Shares Eligible for Future Sale."
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 has taken actions to
comply with the ADA, no assurance can be given that a material ADA claim will
not be asserted against the Company. These and other initiatives could
adversely affect the Company, as well as the lodging industry in general. The
Company is also subject to dramshop statutes or equivalent common law in some
jurisdictions that give an injured person the right to recover damages from any
establishment that wrongfully served alcoholic beverages to an intoxicated
person who causes the injury. The Company believes that its insurance coverage
with respect to any such liquor liability is adequate. The Company has hotels
that are subject to alcohol sales regulations and/or dramshop statutes in
Canada and the following states: California, Florida, Georgia, New Jersey, New
York, Oregon, Pennsylvania and Texas.
DIVIDEND POLICY
The Company has never paid any dividends on the Common Stock and does not
anticipate paying dividends on the Common Stock in the foreseeable future. In
addition, the Company's Credit Facility prohibits the payment of dividends on
the Common Stock. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
ENVIRONMENTAL MATTERS
Various United States Federal, state and local, Canadian and Mexican laws and
regulations impose liability on present and former real property owners and
operators for the cost of cleaning up or removing contamination
14
<PAGE>
caused by hazardous or toxic materials. Under certain of these laws and
regulations, liability may be imposed without regard to fault or legality of
the original actions, and may be joint and several with other responsible
parties. Consequently, the Company could be responsible for payment of the full
amount of the liability, whether or not any other responsible party is also
liable. The presence of contamination at, adjacent to or near, a property also
can affect the valuation of that property or the ability of the owner to sell,
lease or obtain financing for the property and may in certain circumstances
form the basis for liability to third persons for personal injury or other
damages. Some of the Company's hotels are located on or near properties, such
as gasoline stations, on which activities have been conducted which have or may
have released petroleum products or other hazardous substances into the soil or
groundwater. The Company is aware of soil contamination, which the Company
believes was caused by unrelated third parties, at several of its hotel sites
in the United States and Canada. The Company has not received any notices of
liability in connection with such contamination. See "Business--Environmental
Considerations." Based on its present knowledge, the Company does not believe
that environmental matters are likely to have a material adverse effect on the
Company's business, assets, financial condition or results of operations.
However, due to the absence of complete information, possible future changes in
laws and regulations, possible future changes in the condition of the Company's
properties, and other factors, no assurance can be given that environmental
matters will not have a material adverse effect on the Company's business,
assets, financial condition or results of operations.
DIVESTITURE AND LOSS OF VOTING RIGHTS
Because the Company was formerly engaged in investing in casino gaming
activities, the Company's certificate of incorporation includes provisions that
may have the effect of permitting the Company to redeem or require a
stockholder of the Company to divest its shares of Common Stock or forfeit its
voting rights in certain circumstances where such stockholder's ownership of
Common Stock would adversely affect the Company's ability to secure requisite
gaming-related approvals or comply with certain other governmental
requirements. These provisions may be waived with the consent of the Company's
Board of Directors. See "Description of Capital Stock."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
4,500,000 shares of Common Stock in the Offering (after deduction of the
underwriting discounts and commissions and estimated expenses of the
Offering), are estimated to be approximately $55.6 million at the Offering
Price. The Company intends to use the net proceeds to repay indebtedness
borrowed under the Credit Facility. The Company's borrowings under the Credit
Facility, with accrued interest, totalled approximately $77 million on October
1, 1996, bear interest at the weighted average rate of approximately 5% per
annum and mature in August 2002. All of the indebtedness to be repaid with the
net proceeds of the Offering was incurred within the twelve months prior to
the date of this Prospectus and was utilized to finance a portion of the
purchase price and related expenses of the Travelodge Acquisition and Canadian
Acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
The Common Stock commenced trading on the NASDAQ National Market on November
14, 1994 under the symbol "NAGC." From January 1996 until August 8, 1996, the
Common Stock traded under the symbol "NALC" and, since August 8, 1996, has
traded under the symbol "CHRT." The following table sets forth for the periods
indicated the high and low sale prices of the Common Stock as reported on the
NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1994
Fourth Quarter (commencing November 14, 1994)................ $19 1/8 $ 9 1/2
1995
First Quarter................................................ $14 1/4 $ 8 1/4
Second Quarter............................................... $ 11 $ 8
Third Quarter................................................ $10 1/2 $ 7 1/8
Fourth Quarter............................................... $12 1/2 $ 8 1/2
1996
First Quarter................................................ $14 3/4 $10 1/2
Second Quarter............................................... $17 1/2 $ 13
Third Quarter................................................ $18 1/2 $12 7/8
Fourth Quarter (through November 20, 1996)................... $17 3/4 $12 3/4
</TABLE>
As of November 20, 1996, there were 136 holders of record of Common Stock. A
recent reported last sale price of the Common Stock on the NASDAQ National
Market is set forth on the cover of this Prospectus.
DIVIDEND POLICY
The Company has never paid any dividends on the Common Stock. The Company
expects to retain its earnings for the development and expansion of its
business and the repayment of indebtedness and does not anticipate paying
dividends on the Common Stock in the foreseeable future. Any future dividend
policy will be determined by the Company's Board of Directors, and the payment
of any dividend in the future will be based upon conditions then existing,
including the Company's earnings, financial condition and capital
requirements, as well as such economic and other factors as the Board of
Directors may deem relevant at the time. In addition, the Company's Credit
Facility prohibits the payment of dividends on the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of September 30, 1996, giving effect to the Canadian Acquisition and
related borrowings which occurred on October 1, 1996, and as adjusted to give
effect to the sale of 4,500,000 shares of Common Stock offered hereby at the
Offering Price and the application of the estimated net proceeds therefrom
(after deduction of the underwriting discounts and commissions and estimated
expenses of the Offering). See "Use of Proceeds." For additional information,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and the Company's pro forma financial statements, the
notes thereto, and other financial and statistical information included
elsewhere or incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................... $ 84,655 $ 29,054
Stockholders' equity:
Preferred stock, $1.00 par value--10,000,000
authorized, none issued and outstanding............... -- --
Common Stock, $.01 par value--100,000,000 authorized;
9,467,750 issued and outstanding, 13,967,750 issued
and outstanding, as adjusted(1)....................... 95 140
Additional paid-in capital............................. 161,521 217,077
Accumulated deficit.................................... (35,874) (35,874)
Foreign currency translation adjustment................ 86 86
-------- --------
Total stockholders' equity........................... 125,828 181,429
-------- --------
Total capitalization..................................... $210,483 $210,483
======== ========
</TABLE>
- --------
(1) Excludes an aggregate of 2,000,000 shares of Common Stock reserved for
issuance under the Company's Stock Option Plan as of September 30, 1996,
including 1,623,000 shares as to which options were then outstanding, of
which 45,000 were exercisable on such date. Also excludes 398,480 shares
reserved for issuance under HFS' 1992 Incentive Stock Option Plan as of
September 30, 1996, including 398,480 shares as to which options were then
outstanding, of which 308,720 were exercisable on such date. In November
1996, the number of shares reserved for issuance under the Company's Stock
Option Plan was increased to 3,000,000 shares and options to purchase
514,000 shares of Common Stock were granted.
17
<PAGE>
CHARTWELL LEISURE INC.
SELECTED FINANCIAL DATA
Until January 1996, the Company was engaged solely in the gaming business.
Therefore, the Company's historical financial information, as of, and for the
years ended, December 31, 1995, 1994 and 1993 does not reflect any operating
results from its hotel operations. The following selected financial data
relating to the Company have been derived from the historical financial
statements as of, and for the years ended, December 31, 1995, 1994 and 1993
and as of, and for the nine-month periods ended, September 30, 1996 and 1995.
Data for periods prior to 1996 do not reflect the results of the Travelodge
Acquisition, which occurred on January 23, 1996, and none of the following
data reflect the results of the Canadian Acquisition, which occurred on
October 1, 1996. For these reasons, the Company believes that the following
information is not indicative of the Company's current business. The
information in these tables is qualified by and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements of the Company and notes thereto
included herein and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
REVENUE:
Hotel revenue............... $ 54,111 $ -- $ -- $ -- $ --
Management fee and other in-
come....................... 2,942 -- -- -- --
Equity in earnings of uncon-
solidated hotel joint ven-
tures...................... 5,104 -- -- -- --
-------- -------- -------- -------- --------
Total revenue............. 62,157 -- -- -- --
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Hotel operating expense..... 22,451 -- -- -- --
General and administrative.. 10,936 2,062 2,756 2,742 --
Marketing, franchise & res-
ervation fees.............. 5,619 -- -- -- --
Maintenance and property
taxes...................... 4,296 -- -- -- --
Rent........................ 3,842 -- -- -- --
Depreciation and amortiza-
tion....................... 6,615 -- -- -- --
Other....................... 3,219 -- -- -- --
Minority interest........... 978 -- -- -- --
General and administrative
related party(1)........... 1,147 2,464 3,247 339 581
Gaming development costs.... -- 14,953 15,482 2,414 --
Provision for losses on gam-
ing assets................. 14,240 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses 73,343 19,479 21,485 5,495 581
-------- -------- -------- -------- --------
OPERATING LOSS(2)........... (11,186) (19,479) (21,485) (5,495) (581)
INTEREST INCOME (EXPENSE)--
NET........................ (2,719) 3,138 4,012 1,347 128
GAIN ON SALE OF SECURITIES.. -- -- -- 1,044 --
-------- -------- -------- -------- --------
LOSS BEFORE INCOME TAX
EXPENSE AND EXTRAORDINARY
ITEM....................... (13,905) (16,341) (17,473) (3,104) (453)
INCOME TAX EXPENSE (BENE-
FIT)....................... 213 709 709 (1,273) (186)
-------- -------- -------- -------- --------
LOSS BEFORE EXTRAORDINARY
ITEM....................... (14,118) (17,050) (18,182) (1,831) (267)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT..... (1,477) -- -- -- --
-------- -------- -------- -------- --------
NET LOSS.................... $(15,595) $(17,050) $(18,182) $ (1,831) $ (267)
======== ======== ======== ======== ========
PER SHARE INFORMATION:
Loss before extraordinary
item....................... $ (2.12) $ (3.34) $ -- $ -- $ --
Extraordinary item.......... (.22) -- -- -- --
-------- -------- -------- -------- --------
Net Loss.................... $ (2.34) $ (3.34) $ (3.57) $ (0.37) $ (0.05)
======== ======== ======== ======== ========
Weighted average common
shares outstanding......... 6,651 5,112 5,099 5,003 5,001
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................ $158,229 $ 80,967 $ 87,074 $ 98,895 $ 12,238
Total debt.................. 18,259 -- -- -- --
Stockholders' equity........ 125,828 78,696 86,522 96,979 12,041
</TABLE>
- --------
(1) General and administrative related party is for contractual advisory and
other fees paid to HFS pursuant to an advisory services contract. The
Company and HFS agreed to terminate, effective as of December 31, 1996,
this advisory services contract, which requires the Company to make annual
payments of $1.5 million to HFS through 2019. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(2) Includes a $14.2 million non-cash provision for losses on gaming assets
for the nine-month period ended September 30, 1996. Without this
provision, the Company would have reported operating income of $3.0
million for the nine-month period ended September 30, 1996.
18
<PAGE>
CHARTWELL LEISURE INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Condensed Consolidated Balance Sheet as of September
30, 1996 is presented as if the Canadian Acquisition from Capital Properties
Limited Partnership ("CPLP") of 20 hotels and a one-half interest in an
additional hotel and the sale of 4,500,000 shares of Common Stock offered
hereby resulting in approximately $55.6 million in net proceeds to the Company
to be used to repay pro forma borrowings incurred to finance the Travelodge
Acquisition and the Canadian Acquisition outstanding under the Company's line
of credit at September 30, 1996 had occurred on September 30, 1996. The Pro
Forma Condensed Consolidated Statements of Operations for the year ended
December 31, 1995 and the nine months ended September 30, 1996 and September
30, 1995 are presented as if the Travelodge Acquisition of all of the
outstanding stock of Forte Hotels, Inc. ("Forte Hotels"), the assets of which
consisted of 18 hotel properties (one of which was subsequently sold) and
interests in 97 joint venture properties, the Canadian Acquisition, the CL
Associates/FSNL Investment and the Offering had occurred on January 1, 1995.
The Travelodge Acquisition and the Canadian Acquisition have been accounted
for using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed will be recorded at their estimated fair values that are
subject to further refinement. Management does not expect that the final
allocation of the purchase prices for the Travelodge Acquisition and the
Canadian Acquisition will differ materially from the preliminary allocations.
The Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the historical audited financial statements and related notes
thereto of Chartwell Leisure Inc. (formerly National Lodging Corp.),
Travelodge and CPLP. These Pro Forma Condensed Consolidated Financial
Statements are not necessarily indicative of the results that would actually
have occurred had the transactions been consummated at the dates indicated,
nor are they necessarily indicative of future operating results or financial
position of the Company.
The Pro Forma Condensed Consolidated Statements of Operations do not reflect
the effect of certain cost savings and revenue enhancements that management
believes may be realized following the Travelodge Acquisition and the Canadian
Acquisition. These savings are expected to be realized primarily through the
cessation of pursuing gaming development ventures, elimination of duplicative
corporate overhead and changes to the Company's corporate structures.
Reference in the Company's historical financial statements to the
"Travelodge/Thriftlodge" results of operation are referred to herein as
Travelodge.
19
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS CONSOLIDATED ADJUSTMENTS
HISTORICAL HISTORICAL COMPLETED COMPLETED FOR PRO FORMA
CHARTWELL CPLP TRANSACTIONS TRANSACTIONS OFFERING CONSOLIDATED
---------- ---------- ------------ ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash $
equivalents........... $ 17,802 $ 1,051 $(67,405)(1) $ 17,319 -- $ 17,319
65,871 (2)
Accounts receivable--
net................... 5,689 1,982 -- 7,671 -- 7,671
Loan receivable--net... 1,314 -- -- 1,314 -- 1,314
Receivable from joint
ventures--net......... 1,999 -- -- 1,999 -- 1,999
Prepaid and other
current assets........ 984 964 -- 1,948 -- 1,948
-------- ------- -------- -------- ------- --------
Total Current Assets... 27,788 3,997 (1,534) 30,251 -- 30,251
INVESTMENTS............ 2,225 -- -- 2,225 -- 2,225
LOANS RECEIVABLE--Net.. 11,310 -- -- 11,310 -- 11,310
JOINT VENTURE
INTERESTS............. 16,934 2,931 (1,064)(1) 18,801 -- 18,801
PROPERTY AND
EQUIPMENT--Net........ 83,710 72,251 7,072 (1) 163,033 -- 163,033
MANAGEMENT CONTRACTS... 9,101 -- (6,000)(1) 3,101 -- 3,101
OTHER ASSETS........... 7,161 -- -- 7,161 -- 7,161
-------- ------- -------- -------- ------- --------
TOTAL ASSETS............ $158,229 $79,179 $ (1,526) $235,882 $ -- $235,882
======== ======= ======== ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and
accrued expenses...... $ 10,426 $ 4,945 $ -- $ 15,371 $ -- $ 15,371
Current portion of
long-term debt........ 880 90,543 (85,395)(1) 6,028 -- 6,028
-------- ------- -------- -------- ------- --------
Total current
liabilities........... 11,306 95,488 (85,395) 21,399 -- 21,399
LONG-TERM DEBT.......... 17,379 1,463 (58)(1) 84,655 (55,601)(3) 29,054
65,871 (2)
OTHER LIABILITIES....... 107 -- -- 107 -- 107
-------- ------- -------- -------- ------- --------
Total liabilities...... 28,792 96,951 (19,582) 106,161 (55,601) 50,560
MINORITY INTEREST....... 3,609 284 -- 3,893 -- 3,893
STOCKHOLDERS' EQUITY
Common stock........... 95 -- -- 95 45 (3) 140
Paid-in-capital........ 161,521 -- -- 161,521 55,556 (3) 217,077
Accumulated deficit.... (35,874) -- -- (35,874) -- (35,874)
Foreign currency
translation
adjustment............ 86 -- -- 86 -- 86
CPLP net deficit....... -- (18,056) 18,056 (1) -- -- --
-------- ------- -------- -------- ------- --------
Total stockholders'
equity................ 125,828 (18,056) 18,056 125,828 55,601 181,429
-------- ------- -------- -------- ------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... $158,229 $79,179 $ (1,526) $235,882 $ -- $235,882
======== ======= ======== ======== ======= ========
</TABLE>
20
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
CONSOLIDATED CONSOLIDATED ADJUSTMENTS
HISTORICAL HISTORICAL COMPLETED COMPLETED FOR PRO FORMA
CHARTWELL CPLP TRANSACTIONS TRANSACTIONS OFFERING CONSOLIDATED
---------- ---------- ------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Hotel revenue.......... $ 54,111 $25,688 $ (916)(4) $ 82,562 $ -- $82,562
3,679 (10)
Management fee and
other income.......... 2,942 2,847 (80)(4) 4,491 -- 4,491
(1,352)(5)
134 (10)
Equity in earnings for
unconsolidated hotel
joint ventures........ 5,104 50 76 (10) 5,230 -- 5,230
-------- ------- ------- -------- ------ -------
Total revenue.......... 62,157 28,585 1,541 92,283 -- 92,283
-------- ------- ------- -------- ------ -------
OPERATING EXPENSES:
Hotel operating ex-
pense................. 22,451 11,921 (349)(4) 35,802 -- 35,802
1,779 (10)
General and administra-
tive.................. 10,936 2,249 (4)(4) 13,922 -- 13,922
(27)(5)
768 (10)
Marketing, franchise
and reservation fees.. 5,619 2,689 (105)(4) 8,772 -- 8,772
414 (10)
155 (11)
Maintenance and prop-
erty taxes............ 4,296 2,846 (164)(4) 7,365 -- 7,365
387 (10)
Rent................... 3,842 277 (10) 4,119 -- 4,119
Depreciation and amor-
tization.............. 6,615 2,505 (53)(4) 9,499 -- 9,499
2,361 (6)
(2,505)(6)
560 (10)
16 (12)
Other.................. 3,219 950 (70)(4) 2,966 -- 2,966
(1,325)(5)
192 (10)
Minority interest...... 978 -- 27 (10) 1,005 -- 1,005
General and
administrative-related
party(A).............. 1,147 -- -- 1,147 -- 1,147
Provision for losses on
gaming assets......... 14,240 -- -- 14,240 -- 14,240
-------- ------- ------- -------- ------ -------
Total operating ex-
penses................ 73,343 23,160 2,334 98,837 -- 98,837
-------- ------- ------- -------- ------ -------
OPERATING INCOME
(LOSS)(B).............. (11,186) 5,425 (793) (6,554) (6,554)
INTEREST EXPENSE........ (4,631) (5,998) 266 (4) (5,941) 2,085(17) (3,856)
(873)(7)
5,556 (8)
(19)(9)
(53)(10)
(189)(13)
INTEREST INCOME......... 1,912 -- (121)(14) 1,791 -- 1,791
-------- ------- -------- ------ -------
INCOME (LOSS) BEFORE TAX
EXPENSE................. (13,905) (573) 3,774 (10,704) 2,085 (8,619)
INCOME TAX EXPENSE...... 213 -- -- 213 -- 213
-------- ------- ------- -------- ------ -------
NET INCOME (LOSS)(C).... $(14,118) $ (573) $ 3,774 $(10,917) $2,085 $(8,832)
======== ======= ======= ======== ====== =======
PER SHARE INFORMATION:
NET LOSS............... $ (2.12) -- -- $ (1.11) -- $ (0.61)
======== ======= ======= ======== ====== =======
WEIGHTED AVERAGE SHARE
OUTSTANDING............ 6,651 -- 3,217 (7) 9,868 4,500(17) 14,368
OTHER DATA:
EBITDA before gaming
expenses(D)............ $ 10,948 $ 8,056 $ (244) $ 18,760 $ -- $18,760
======== ======= ======= ======== ====== =======
</TABLE>
- -------
(A) General and administrative related party is for contractual advisory and
other fees paid to HFS pursuant to an advisory services contract. The
Company and HFS agreed to terminate, effective as of December 31, 1996,
this advisory services contract, which requires the Company to make annual
payments of $1.5 million to HFS through 2019. See "Management Discussion
and Analysis of Financial Condition and Results of Operations."
(B) Includes a $14.2 million non-cash provision for losses on gaming assets
for the nine-month period ended September 30, 1996. Without this
provision, the Company would have reported pro forma operating income of
$7.7 million for the nine-month period ended September 30, 1996.
(C) Pro forma net loss does not include loss of early extinguishment of debt
in the amount of approximately $1.5 million reflected in the historical
statements of operations for the nine-months ended September 30, 1996.
(D) EBITDA before gaming expenses represents earnings before extraordinary
items, losses on gaming assets and gaming development costs, interest
expense, provision for income taxes (if applicable) and depreciation and
amortization (plus depreciation, amortization and interest expense of
joint venture interests in the amount of $1.6 million for the nine-month
period ended September 30, 1996) and excludes interest income on cash
investments. EBITDA is used by the Company for the purpose of analyzing
its operating performance, leverage and liquidity. Such data are not a
measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative
to cash flows as a measure of liquidity.
21
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS CONSOLIDATED ADJUSTMENTS
HISTORICAL HISTORICAL HISTORICAL COMPLETED COMPLETED FOR PRO FORMA
CHARTWELL TRAVELODGE CPLP TRANSACTIONS TRANSACTIONS OFFERING CONSOLIDATED
---------- ---------- ---------- ------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Hotel revenue.......... $ -- $51,391 $24,609 $(1,412)(4) $ 74,588 $ -- $ 74,588
Management fee and
other income.......... -- 2,356 2,878 (145)(4) 4,057 -- 4,057
(1,032)(5)
Equity in earnings of
unconsolidated hotel
joint ventures........ -- 4,684 4 -- 4,688 -- 4,688
-------- ------- ------- ------- -------- ------ --------
Total revenue.......... -- 58,431 27,491 (2,589) 83,333 83,333
-------- ------- ------- ------- -------- ------ --------
OPERATING EXPENSES:
Hotel operating
expense............... -- 22,364 11,514 (423)(4) 33,455 -- 33,455
General and
administrative........ 2,062 9,951 2,172 (222)(4) 13,974 -- 13,974
11 (5)
Marketing, franchise
and reservation fees.. -- 3,525 2,597 (148)(4) 8,390 -- 8,390
2,416 (11)
Maintenance and
property taxes........ -- 4,358 2,749 (339)(4) 6,768 -- 6,768
Rent................... -- 3,425 3,425 -- 3,425
Depreciation and
amortization.......... -- 6,563 2,665 (67)(4) 9,119 -- 9,119
2,375 (6)
(2,665)(6)
248 (12)
Other.................. -- 2,386 1,433 (1,043)(5) 2,162 -- 2,162
(614)(4)
Minority interest...... -- 850 -- -- 850 -- 850
General and
administrative-related
party(A).............. 2,464 -- -- (1,125)(15) 1,339 -- 1,339
Gaming development
costs................. 14,953 -- -- -- 14,953 -- 14,953
-------- ------- ------- ------- -------- ------ --------
Total operating
expenses.............. 19,479 53,422 23,130 (1,596) 94,435 -- 94,435
-------- ------- ------- ------- -------- ------ --------
OPERATING INCOME
(LOSS)................. (19,479) 5,009 4,361 (993) (11,102) (11,102)
INTEREST EXPENSE........ -- (649) (6,146) 227 (4) (5,231) 2,085(17) (3,146)
(487)(7)
5,703 (8)
(212)(9)
(2,542)(13)
(1,125)(15)
INTEREST INCOME......... 3,138 631 -- (1,627)(14) 2,142 -- 2,142
-------- ------- ------- ------- -------- ------ --------
INCOME (LOSS) BEFORE TAX
EXPENSE................ (16,341) 4,991 (1,785) (1,056) (14,191) 2,085 (12,106)
INCOME TAX EXPENSE...... 709 -- -- -- 709 -- 709
-------- ------- ------- ------- -------- ------ --------
NET INCOME (LOSS)....... $(17,050) $ 4,991 $(1,785) $(1,056) $(14,900) $2,085 $(12,815)
======== ======= ======= ======= ======== ====== ========
PER SHARE INFORMATION:
NET LOSS............... $ (3.34) -- -- -- $ (1.64) -- $ (0.94)
======== ======= ======= ======= ======== ====== ========
WEIGHTED AVERAGE SHARE
OUTSTANDING........... 5,112 -- -- 4,000 (7) 9,112 4,500(17) 13,612
OTHER DATA:
EBITDA before gaming
expenses(B)........... $ (4,526) $13,066 $ 7,696 $(1,619) $ 14,617 $ -- $ 14,617
======== ======= ======= ======= ======== ====== ========
</TABLE>
- -------
(A) General and administrative related party is for contractual advisory and
other fees paid to HFS pursuant to an advisory services contract. The
Company and HFS agreed to terminate, effective as of December 31, 1996,
this advisory services contract, which requires the Company to make annual
payments of $1.5 million to HFS through 2019. See "Management Discussion
and Analysis of Financial Condition and Results of Operations."
(B) EBITDA before gaming expenses represents earnings before extraordinary
items, losses on gaming assets and gaming development costs, interest
expense, provision for income taxes (if applicable) and depreciation and
amortization (plus depreciation, amortization and interest expense of joint
venture interests in the amount of $1.6 million for the nine-month period
ended September 30, 1995) and excludes interest income on cash investments.
EBITDA is used by the Company for the purpose of analyzing its operating
performance, leverage and liquidity. Such data are not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flows as a
measure of liquidity.
22
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS CONSOLIDATED ADJUSTMENTS
HISTORICAL HISTORICAL HISTORICAL COMPLETED COMPLETED FOR THE PRO FORMA
CHARTWELL TRAVELODGE CPLP TRANSACTIONS TRANSACTIONS OFFERING CONSOLIDATED
---------- ---------- ---------- ------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Hotel revenue.......... $ -- $65,790 $31,067 $(1,605)(4) $ 95,252 $ -- $ 95,252
Management fee and
other income.......... -- 3,351 3,706 (118)(4) 5,623 -- 5,623
(1,316)(5)
Equity in earnings of
unconsolidated hotel
joint ventures........ -- 5,338 12 -- 5,350 -- 5,350
-------- ------- ------- ------- -------- ------ --------
Total revenue.......... -- 74,479 34,785 (3,039) 106,225 -- 106,225
-------- ------- ------- ------- -------- ------ --------
OPERATING EXPENSES:
Hotel operating
expense............... -- 28,904 14,839 (552)(4) 43,191 -- 43,191
General and
administrative........ 2,756 13,059 2,800 (276)(4) 17,023 -- 17,023
(1,316)(5)
Marketing, franchise &
reservation fees...... -- 4,459 3,348 (181)(4) 10,737 -- 10,737
3,111 (11)
Maintenance and
property taxes........ -- 5,537 3,542 (459)(4) 8,620 -- 8,620
Rent................... -- 4,700 -- -- 4,700 -- 4,700
Depreciation and
amortization.......... -- 8,385 3,537 (89)(4) 11,794 -- 11,794
3,167 (6)
(3,537)(6)
331 (12)
Other.................. -- 2,693 1,696 (641)(4) 3,748 -- 3,748
Minority interest...... -- 1,073 15 1,088 -- 1,088
General and
administrative related
party(A).............. 3,247 -- -- (1,500)(15) 1,747 -- 1,747
Gaming development
costs................. 15,482 -- -- 15,482 -- 15,482
-------- ------- ------- ------- -------- ------ --------
Total operating
expenses.............. 21,485 68,810 29,777 (1,942) 118,130 -- 118,130
-------- ------- ------- ------- -------- ------ --------
OPERATING INCOME
(LOSS)................. (21,485) 5,669 5,008 (1,097) (11,905) -- (11,905)
INTEREST EXPENSE........ -- (785) (8,195) 302 (4) (6,895) 2,780(17) (4,115)
(650)(7)
7,605 (8)
(282)(9)
(3,390)(13)
(1,500)(15)
INTEREST INCOME......... 4,012 838 -- (2,170)(14) 2,680 -- 2,680
-------- ------- ------- ------- -------- ------ --------
INCOME (LOSS) BEFORE TAX
EXPENSE................ (17,473) 5,722 (3,187) (1,182) (16,120) 2,780 (13,340)
INCOME TAX EXPENSE...... 709 2,288 -- (2,288)(16) 709 -- 709
-------- ------- ------- ------- -------- ------ --------
NET INCOME (LOSS)....... $(18,182) $ 3,434 $(3,187) $(1,106) $(16,829) $2,780 $(14,049)
======== ======= ======= ======= ======== ====== ========
PER SHARE INFORMATION:
NET LOSS............... $ (3.57) -- -- -- $ (1.85) -- $ (1.03)
======== ======= ======= ======= ======== ====== ========
WEIGHTED AVERAGE SHARE
OUTSTANDING........... 5,099 -- -- 4,000 (7) 9,099 4,500(17) 13,599
OTHER DATA:
EBITDA before gaming
expenses(B)........... $ (6,003) $16,050 $ 9,247 $(1,741) $ 17,553 $ -- $ 17,553
======== ======= ======= ======= ======== ====== ========
</TABLE>
- --------
(A) General and administrative related party is for contractual advisory and
other fees paid to HFS pursuant to an advisory service's contract. The
Company and HFS agreed to terminate, effective as of December 31, 1996,
this advisory services contract, which requires the Company to make annual
payments of $1.5 million to HFS through 2019. See "Management Discussion
and Analysis of Financial Condition and Results of Operations."
(B) EBITDA before gaming expenses represents earnings before extraordinary
items, losses on gaming assets and gaming development costs, interest
expense, provision for income taxes (if applicable) and depreciation and
amortization (plus depreciation, amortization and interest expense of joint
venture interests in the amount of $2.2 million for the period ended
December 31, 1995) and excludes interest income on cash investments. EBITDA
is used by the Company for the purpose of analyzing its operating
performance, leverage and liquidity. Such data are not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flows as a
measure of liquidity.
23
<PAGE>
CHARTWELL LEISURE INC. & SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA BALANCE SHEET ADJUSTMENTS
1. The acquisition costs of the Canadian Acquisition have been allocated as
follows:
<TABLE>
<S> <C>
Total cash consideration........................................ $64,207
Transaction fee................................................. 3,198
-------
67,405
Allocation of management contracts related to hotels acquired in
the Canadian Acquisition. Historical Travelodge management
contracts include management contracts relating to the
properties acquired in the Canadian Acquisition. As a result of
the acquisition of these properties, management contracts were
reduced by $6,000 and property and equipment increased by
$6,000.......................................................... 6,000
-------
73,405
Short-term historical debt not assumed in the acquisition....... (85,395)
Long term debt not assumed in the acquisition................... (58)
Canadian Acquisition net deficit eliminated..................... 18,056
-------
Excess of purchase price over book value of net assets acquired
allocated to hotel properties, joint venture interest, and
equipment based on relative fair value.......................... $ 6,008
=======
</TABLE>
The Company allocated $1,064 from joint venture interest to property and
equipment representing the fair value of the joint venture interest acquired.
The Company may be obligated to make certain payments to CPLP's constituent
partners, based on a formula which considers future earnings of the properties
acquired in the Canadian Acquisition. Such payments if and when such amounts
are determinable will be allocated to properties to the extent of fair value
and amortized over the remaining useful life of the properties. The Company
would not have been required to make any such payments on a pro forma basis for
the nine months ending September 30, 1996, September 30, 1995, and for the year
ended December 31, 1995.
2. The pro forma adjustment represents the cash amount of the loan proceeds
from borrowings under the Credit Facility used to finance the Canadian
Acquisition.
3. The pro forma adjustment represents the proposed sale of 4,500 shares of
Common Stock at the Offering Price, generating $55,601 used to paydown pro
forma outstanding borrowings at September 30, 1996. The majority of the debt
outstanding resulted from the Canadian Acquisition.
CPLP PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
4. The pro forma adjustment reflects the elimination of a hotel included in
the historical statements of the Canadian Acquisition that was not acquired by
the Company.
5. The pro forma adjustment reflects the elimination of management fee income
of historical Travelodge and the related management expense of historical CPLP
for the management of the Canadian Acquisition properties. The income and
related expense was $1,352 for the nine months ended September 30, 1996, $1,032
for the nine months ended September 30, 1995, and $1,316 for the year ended
December 31, 1995.
24
<PAGE>
6. The pro forma adjustment represents the change in depreciation as a result
of the allocation of the purchase price to the CPLP property and equipment.
Hotel property and equipment are being depreciated on a straight-line basis.
Buildings are being depreciated over a 30-year life and furniture and equipment
over a five-year life.
<TABLE>
<CAPTION>
FOR THE NINE-
MONTHS
ENDED FOR THE YEAR
SEPTEMBER 30, ENDED DECEMBER 31,
---------------- ------------------
1996 1995 1995
------- ------- ------------------
<S> <C> <C> <C>
Historical CPLP Depreciation......... $(2,505) $(2,665) $(3,537)
Pro Forma Depreciation based on
allocation of fair value............ 2,361 2,375 3,167
</TABLE>
7. The pro forma adjustment represents the increase in interest expense for
the net increase in the line of credit. The adjustment accounts for the
interest expense on the $67.4 million outstanding, less the $54.4 million net
proceeds of the stock issuance in connection with the CL Associates/FSNL
Investment. The additional interest expense was $873 for the nine months ended
September 30, 1996, $487 for the nine months ended September 30, 1995, and $650
for the year ended December 31, 1995.
8. The pro forma adjustment represents elimination of historical interest
expense related to the historical CPLP debt that was not assumed in the
acquisition. The reduction in interest expense was $5,556 for the nine months
ended September 30, 1996, $5,703 for the nine months ended September 30, 1995,
and $7,605 for the year ended December 31, 1995.
9. The pro forma adjustment represents the amortization of deferred loan
costs incurred under the Credit Facility. Such costs are amortized over the
six-year life of the Credit Facility. The incremental amortization was $19 for
the 22 days included in the nine months ended September 30, 1996, $212 for the
nine months ended September 30, 1995, and $282 for the year ended December 31,
1995.
TRAVELODGE PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
10. The pro forma adjustment represents the addition of 22 days of operating
activity for the period ended September 30, 1996 for the Travelodge
Acquisition. The Travelodge Acquisition was consummated on January 23, 1996.
11. The pro forma adjustment represents royalty expense equal to 4% of gross
room revenues pursuant to a franchise agreement executed with the owner of the
Travelodge/Thriftlodge trademarks. Incremental royalty expense was $155 for the
22 days included in the nine months ended September 30, 1996, $2,416 for the
nine months ended September 30, 1995, and $3,111 for the year ended December
31, 1995.
12. The pro forma adjustment reflects the incremental depreciation for the
Travelodge Acquisition as a result of the allocation of $31.4 million in excess
purchase price to the acquired properties based on their relative fair market
value. Hotel property and equipment are depreciated on a straight line basis
over a blended life of 25 years. Incremental depreciation was $16 for the 22
days included in the nine months ended September 30, 1996, $248 for the nine
months ended September 30, 1995, and $331 for the year ended December 31, 1995.
13. The pro forma adjustment represents the increase in interest expense due
to the increase in the line of credit of $60 million to finance the Travelodge
Acquisition. The increase in interest expense was $189 for the 22 days included
in the nine months ended September 30, 1996, $2,542 for the nine months ended
September 30, 1995, and $3,390 for the year ended December 31, 1995.
14. The pro forma adjustment represents the elimination of interest income on
the $38 million of the Company's cash used for the Travelodge Acquisition. The
decrease in interest income was $121 for the 22 days
25
<PAGE>
included in the nine months ended September 30, 1996, $1,627 for the nine
months ended September 30, 1995, and $2,170 for the year ended December 31,
1995.
15. The pro forma adjustment reflects the reclassification from general and
administrative related party to interest expense for the fee for the HFS
Guarantee. The amount reclassified was $1,125 for the nine months ended
September 30, 1995, and $1,500 for the year ending December 31, 1995.
16. The pro forma adjustment reflects the elimination of income tax expense
for historical Travelodge.
PENDING STOCK TRANSACTIONS STATEMENT OF OPERATIONS PRO FORMA ADJUSTMENT
17. The pro forma adjustment reflects the decrease in interest expense as a
result of the assumed issuance of 4,500 shares of Common Stock at the Offering
Price used to decrease the outstanding debt by $55,601, on the Credit Facility
of the Company. The decrease in interest expense was $2,085 for the nine months
ended September 30, 1996 and September 30, 1995 and $2,780 for the year ended
December 31, 1995.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
The Company was engaged in the development of casino gaming facilities until
the third quarter of 1995, when the Company announced a decision by its Board
of Directors to curtail future gaming investments and focus on investments and
acquisitions in non-gaming industries. In December 1995, the Company's Board
of Directors decided that the Company should pursue a new strategic direction
with a focus on becoming a hotel owner and operator. Also in December 1995,
the Company's Board of Directors approved the sale to CL Associates of 904,930
newly issued shares of the Company's Common Stock, representing approximately
16.6% of the Company's Common Stock outstanding after giving effect to the
issuance, for a total purchase price of $8,483,719, or $9.375 per share.
On January 23, 1996, the Company completed the Travelodge Acquisition,
thereby acquiring the outstanding common stock of Forte Hotels for $98.4
million plus expenses, less certain working capital adjustments totaling
approximately $3.1 million. In related transactions on January 23, 1996, prior
to consummation of the Travelodge Acquisition, HFS and Motels of America, Inc.
acquired from Forte Hotels the Travelodge franchise system and 19 motel
properties, respectively, for an aggregate purchase price of $71.6 million.
The principal assets of Forte Hotels acquired by the Company consisted of fee
and leasehold interests in 18 wholly owned hotels (one of which was
subsequently disposed of), and joint venture interests in 97 other hotel
properties. The Company financed $60 million of the purchase price and related
expenses of the acquisition with proceeds from a bank revolving credit
facility and $38.4 million with existing cash. HFS provided advisory services
in connection with the acquisition for which the Company paid a $2.0 million
fee.
On August 8, 1996, the Company completed the sale to CL Associates and FSNL
of four million newly issued shares of the Company's Common Stock for a total
purchase price of $57 million, or $14.25 per share. As a result of the CL
Associates/FSNL Investment, CL Associates and FSNL acquired in the aggregate
approximately 52% of the outstanding Common Stock of the Company.
On October 1, 1996, the Company completed the Canadian Acquisition, thereby
acquiring from CPLP 20 hotels and a one-half interest in an additional hotel
that represent approximately 3,500 guest rooms, which are hotels located
throughout Canada and franchised under the "Travelodge" brand name. The
Company paid approximately $70 million to purchase substantially all of CPLP's
existing bank debt and to pay certain specified closing costs (including real
estate taxes and transfer taxes), as well as its assumption of liability for
identified trade payables and property specific bank debt, aggregating
approximately $7 million, and the allocation of contracts to manage the CPLP
properties with a fair value of $6.0 million acquired in the Travelodge
Acquisition. In addition, the Company will be obliged to make certain
contingent payments to CPLP's constituent partners following a cumulative,
compounded, 13% per annum preferred return to the Company. In connection with
the acquisition of CPLP on October 1, 1996, the Company borrowed approximately
$66 million under its Credit Facility.
In connection with the Canadian Acquisition, the Company entered into a
development agreement (the "Development Agreement") with NRG Management
Services Ltd. ("NRG"), an affiliate of Royco Hotels and Resorts, Ltd.
("Royco"), pursuant to which NRG has agreed to identify new hotel properties
for acquisition and development in Canada on behalf of the Company. The
Development Agreement provides that the Company pay to NRG approximately
$588,000 through October 1997, and approximately $370,000 during each of the
years ended October 1998 and October 1999. The Development Agreement is
terminable at will by either party after October 1, 1997. No effect has been
given to the payment of the fees pursuant to the Development Agreement in the
pro forma financial statements of the Company included herein or incorporated
by reference in this Prospectus. See "Business--External Growth
Opportunities--Travelodge Acquisition."
While the Company's focus throughout 1996 has been on owning and operating
hotels, management has continued to evaluate the recoverability of the
Company's gaming assets and has recorded provisions for losses on gaming
assets to continue to carry such assets at their estimated net realizable
value. As a result of loss provisions recorded of $14.2 million in the nine
months ended September 30, 1996, the carrying value of the
27
<PAGE>
Company's remaining gaming assets equals $9.1 million. These assets include
loans of $6.9 million to a casino that is performing in accordance with its
contractual terms and other investments (which are not producing earnings)
totalling $2.2 million at September 30, 1996. The winding down of the gaming
assets has had a significant negative effect on operations in 1996. As a
result of the $14.2 million provision for losses on gaming assets, the Company
reported an operating loss of $11.2 million for the nine-months ended
September 30, 1996. Without the non-cash losses on gaming assets, the Company
would have reported operating income of $3 million for the same period.
Management believes that gaming-related assets at September 30, 1996 are
stated at the lower of cost or estimated net realizable value. The continued
uncertainty surrounding the ability of the $2.2 million of gaming investments
referred to above to generate positive cash flow results in the potential for
future write-downs to present these assets at their estimated net realizable
value in subsequent periods. Based on the relatively small remaining
investment in gaming assets, management believes that future operations will
not be impacted in a significant way by the Company's remaining gaming
investments.
In November 1996, the Company and HFS agreed to terminate, effective as of
December 31, 1996, their advisory contract (the "Corporate Services
Agreement") that requires the Company to make annual payments of $1.5 million
to HFS through 2019. The Company is required and expects to receive consent
from its lenders under the Credit Facility prior to the effective date of the
termination of the Corporate Services Agreement. In connection with the
termination of the Corporate Services Agreement, the Company has agreed to pay
to HFS $9.5 million, of which $2.5 million will be paid in cash and the
balance will be paid in the form of a $7 million promissory note payable over
seven years commencing on January 1, 1999. The promissory note will bear
interest at 6% per year payable in semi-annual installments commencing on July
1, 1997. During the fourth quarter of 1996, the Company will record the $9.5
million operating expense associated with the termination of the Corporate
Services Agreement, and, commencing in 1997, the Company will no longer incur
the $1.5 million annual charge associated with this contract. See "Certain
Transactions--Corporate Services Agreement." No effect has been given to the
termination of the Corporate Services Agreement in the pro forma financial
statements of the Company included herein or incorporated by reference in this
Prospectus.
As part of the Company's repositioning of its existing hotels, it is
reviewing the potential to increase revenues at selected hotels by rebranding
them to more appropriate franchise affiliations. Pursuant to the terms of the
franchise agreements with affiliates of HFS, the Company is obligated to pay
franchise termination fees to affiliates of HFS where it terminates a hotel
from the Travelodge system unless it enters into a franchise agreement with
another HFS hotel franchise affiliate. Any such termination fees will be
recorded as an operating expense during the period in which the hotel is
terminated from the Travelodge system. Upon the conversion of the Travelodge
in San Diego, California to a Hilton, the Company will be obligated to pay
$750,000 in franchise termination fees over a five-year period. During the
fourth quarter of 1996, the Company will record the $750,000 operating expense
associated with such termination.
The Company believes that comparisons of its operating results during the
period ended September 30, 1996 to prior periods should take into account
these changes in the Company's primary business.
RESULTS OF OPERATION
Pro Forma Nine-Month Periods Ended September 30, 1996 and September 30, 1995
The pro forma financial data includes expenses associated with the Company's
gaming business that include provisions for losses on gaming assets of $14.2
million for the nine-month period ended September 30, 1996 and gaming
development costs of $14.9 million for the period ending September 30, 1995.
On a pro forma basis the Company incurred operating losses of $6.5 million and
$11.1 million for the nine-month period ended September 30, 1996 and 1995,
respectively. Excluding losses on gaming assets and gaming development costs,
the Company would have reported pro forma operating income of $7.7 million and
$3.9 million for such nine-month periods. The pro forma financial data does
not include any potential eventual cost savings or revenue enhancements that
management believes may be realized following the complete consolidation of
the Forte Hotels and CPLP operations. The pro forma financial information is
not necessarily indicative of the results that would have occurred had the
transactions been consummated at the dates indicated, nor are they necessarily
indicative of future operating results of the Company.
28
<PAGE>
Pro forma hotel revenues increased by $8.0 million, or 10.7%, from $74.6
million in 1995 to $82.6 million in 1996. Occupancy (excluding joint venture
partner interests in joint ventures) increased 1.5% to 68.5% and ADR
(excluding joint venture partner interests in joint ventures) increased 7.6%
to $54.68 for the first nine months of 1996 compared to the first nine months
of 1995. Since completing the Travelodge Acquisition on January 23, 1996, the
Company has initiated its rebranding of certain properties, which has had a
positive impact on both occupancy and rates. For example, in July 1996, the
Company converted the 475-room Travelodge hotel at Kennedy Airport in New York
to a Ramada Plaza hotel, and in November 1996, the Company converted the 236-
room Travelodge hotel in Portland, Oregon to a Ramada Plaza hotel. Further,
occupancy at the Company's hotels during the first nine months of 1996 over
the first nine months of 1995 increased at a faster rate than occupancy levels
for the hotel industry for that period. As a result of the increases in
occupancy and rates, REVPAR (excluding joint venture partner interests in
joint ventures) increased to $35.62 or 10% over the comparable nine-month
period in 1995. The number of properties on a pro forma basis resulted in a
net decrease of two during this period, which had a negligible impact on the
REVPAR increase on a same hotel basis.
Because unconsolidated joint ventures comprise a significant amount of the
Company's hotel properties, the Company includes equity in earnings of
unconsolidated joint ventures in its revenues as part of its operations.
Pro forma hotel operating expenses only increased by $2.3 million or 7.0%,
from $33.5 million in 1995 to $35.8 million in 1996 while hotel revenue
increased by 10.7%. As a percentage of hotel revenue, operating expenses
improved to 43.4% in 1996 from 44.9% in the nine months ended September 30,
1995 due primarily to tighter cost controls at the properties.
Pro forma general and administrative expenses consist primarily of
management expenses such as operations management, finances and hotel support
services and general corporate expenses. General and administrative expenses
increased negligibly in 1996 as compared to the same period in 1995.
Pro forma marketing, franchise and reservation fee expense increased by $.4
million or 4.6%, from $8.4 million in 1995 to $8.8 million in 1996 primarily
due to higher franchise fees and marketing expenses as a result of the
increase in hotel revenue. The pro forma marketing, franchise and reservation
fees do not reflect the approximately $3 million budgeted by the Company for
marketing individual hotels.
Net interest expense on a pro forma basis increased during the nine-month
period ended September 30, 1996 as compared to the same period in 1995. The
increase in net interest expense was due to a decrease in interest income in
1996 as a result of the lesser amount of cash available for investment as
compared to 1995.
Gaming development costs of $14.9 million during the nine months ended
September 30, 1995 relate to costs associated with terminated gaming
acquisitions, losses on sales of assets and writedowns of gaming assets.
During the nine months ended September 30, 1996, the Company recorded $14.2
million in non-cash provisions for losses on gaming assets to present such
assets at estimated net realizable value.
No effect has been given to the termination of the Corporate Services
Agreement in the pro forma financial statements of the Company included herein
or incorporated by reference in this Prospectus.
As a result of the Company's historical losses no benefit for income taxes
has been recorded and the Company has a deferred tax asset of $13.8 million
with a 100% valuation allowance. To the extent that Chartwell earns a profit,
the Company may be able to release some or all of the tax valuation allowance.
Pro forma EBITDA before gaming expenses increased by $4.2 million or 28.8%,
from $14.6 million in 1995 to $18.8 million in 1996 due primarily to an
increase in hotel revenue compared to the prior period.
Historical Nine-Month Periods Ended September 30, 1996 and September 30, 1995
Since completing the Travelodge Acquisition on January 23, 1996, the
Company's operations have been focused on the lodging business. Therefore, the
results of operations for the nine-month period ended September 30, 1996 are
not comparable to the prior years' periods when the Company was engaged in the
development of prospective gaming facilities. Therefore, substantially all the
categories of revenue and expense (other than gaming development costs and
provisions for gaming losses) are related to the ownership and management of
29
<PAGE>
hotel properties in 1996 with no comparative amounts for 1995. Accordingly,
the Company's operating results for the nine-month period ended September 30,
1996 from operations other than lodging activities and 1995 (when the Company
did not engage in lodging activities) consist of modest investment revenue. In
addition, during the first nine months of 1996, the Company's interest expense
was $4.6 million on acquisition debt while the Company had no interest-bearing
debt load in 1995. Gaming development costs expense for the nine-month period
ended September 30, 1995 primarily consisted of writedowns of gaming assets
and related expenses associated with terminated transactions. In the nine-
month period ended September 30, 1996, in connection with the Company's
ongoing periodic evaluation of its gaming assets, the Company provided $14.2
million in non-cash reserves on its gaming assets to account for estimated
impairment on the value of these investments. These losses were based on the
Company's evaluation of the ability to generate cash flow, which have been
negatively impacted by the environment for alternative gaming venues and the
inability to obtain gaming licenses in certain cases. The Company's provision
related to the following investments:
a) The Boomtown, Inc. investment approximates $4.8 million prior to the
writedown. The Company is leasing a casino and barge in Biloxi, Mississippi
to an unrelated third party under a 25 year lease. Rental income is equal
to 16% of the facility's EBITDA net of marketing fees payable to HFS.
Historically, the Company has not received cash flow after the marketing
fees. The Company does not anticipate receiving cash flow during the
remaining term of the lease and believes that the value after 25 years may
be negligible. As a result, the Company has fully reserved against this
investment as of June 30, 1996.
b) The Company has a 19.9% limited partnership interest in Prescott
Convention Center Limited Partnership ("PCC"). PCC owns a hotel and a
convention center in Prescott, Arizona with a leased casino. Historically,
the Company has not received net distributions after marketing fees payable
to HFS and based on discussions with the general partner does not
anticipate receiving net distributions in the future. As a result the
Company has fully reserved approximately $4.8 million for this investment
as of September 30, 1996 through the provision for losses on gaming assets.
c) Century Casinos, Inc. common stock was written down to the market
value of the stock which was $150,000 at September 30, 1996. A $75,000
writedown was included in the provision for losses on gaming assets in the
second quarter to reflect the writedown to market value. During September
1996, 100,000 shares were sold in the amount of $130,000 for a loss of
$45,000. Management expects to sell the remaining 100,000 shares during the
fourth quarter of 1996.
d) The Odyssey Gaming Corporation's investment approximates $3.8 million
prior to the writedown and consists of non-voting preferred stock
convertible into common stock representing a 20% interest in Odyssey Gaming
Corporation. As of June 30, 1996 Odyssey has no assets and was
automatically dissolved by the Delaware Secretary of State for failure to
pay its taxes and file annual reports. The Company has fully reserved
against this investment as of June 30, 1996.
e) The Alpha warrants were written down by $830,000 to fair value
utilizing the Black-Scholes option valuation model at December 31, 1995 and
a comparison to the fair market value of similar marketable securities
issued by Alpha Hospitality Corp. at September 30, 1996.
In the second quarter of 1995, the Company expensed $1.8 million of
professional and loan commitment fees associated with the terminated Par-A-
Dice transaction, which involved the proposed acquisition of Par-A-Dice Gaming
Corporation, an operator of a riverboat casino in East Peoria, Illinois, and
expensed a $1.0 million valuation allowance established for the Company's
investment in Century Casinos, Inc. common stock following the State of
Indiana's June 1995 unfavorable decision towards Century's proposed casino in
Switzerland County, Indiana. The Company expensed approximately $1.4 million
of professional fees, primarily in the first quarter of 1995, incurred in
connection with the Company's proposed merger with Boomtown, Inc. that was
terminated in April 1995.
LIQUIDITY AND CAPITAL RESOURCES
On January 23, 1996, the Company completed the Travelodge Acquisition for
approximately $98.4 million, plus expenses, less certain working capital
adjustments totalling approximately $3.1 million. In a related transaction
prior to consummation of the Travelodge Acquisition, HFS and Motels of
America, Inc. acquired from Forte Hotels the Travelodge franchise system and
19 hotel properties, respectively, for an aggregate
30
<PAGE>
purchase price of $71.6 million. The principal assets of Forte Hotels acquired
by the Company consisted of fee and leasehold interests in 18 wholly owned
hotels (one of which was subsequently disposed of) and joint venture interests
in 97 additional hotel properties. The Company financed $60 million of the
purchase price and related expenses of the Travelodge Acquisition with
proceeds from the Company's former credit facility with Chemical Bank and
Bankers Trust Company and $38.4 million with existing cash.
On January 23, 1996, the Company caused a $15.0 million standby letter of
credit to be issued in favor of Bank of America National Trust and Savings
Association to secure borrowings under the Company's loan agreement with that
bank.
On February 14, 1996, the Company entered into an agreement with CL
Associates and FSNL to sell four million newly issued shares of the Company's
common stock to CL Associates and FSNL for $57 million. This transaction was
completed on August 8, 1996. CL Associates and FSNL own approximately 52% of
the outstanding stock of the Company. HFS provided advisory services in
connection with the transaction for which the Company paid a fee of $1.14
million.
The Company completed the Canadian Acquisition by paying approximately $70
million to purchase substantially all of CPLP's existing bank debt and to pay
certain specified closing costs (including real estate and transfer taxes) and
by assuming the liability for identified trade payables and property specific
bank debt, aggregating approximately another $7 million.
In connection with the Canadian Acquisition, the Company became obligated to
make certain payments to the unit holders of CPLP in future years pursuant to
a Future Payments Agreement (the "Future Payments Agreement"). Generally, the
Company is obligated to pay to CPLP a percentage of net cash flow ("Remaining
Cash Flow") generated by the hotels acquired from CPLP (the "CPLP Hotels")
remaining after all expenses have been paid and the Company has received a
cumulative, compounded, 13% per annum preferred return on its net cash
investment (approximately $70 million as of October 31, 1996) in the CPLP
Hotels (the "Chartwell Preferred Return"). The Company is required to pay CPLP
(i) 100% of Remaining Cash Flow up to C$600,000 ($441,177), (ii) 16% of the
next C$1.8 million ($1.3 million) of Remaining Cash Flow after C$600,000
($441,177) and (iii) 25% of Remaining Cash Flow in excess of C$2.4 million;
provided further, the Company is obligated to pay to the unit holders of CPLP
a minimum payment of C$200,000 ($147,059) and C$400,000 ($294,118) during 1997
and 1998, respectively. The Company is also required to pay an amount equal to
25% of the net capital proceeds realized by the Company from any sales and
refinancings of any CPLP Hotel, after payment to the Company of its investment
in the CPLP Hotels, the Chartwell Preferred Return and transaction costs.
The Company is able to terminate its obligation to make these payments to
CPLP at any time after December 31, 2000, but no later than October 1, 2008,
upon making a termination payment of an amount based on the cash flow
generated by the CPLP Hotels during the prior 12 months but, in any event, no
less than C$800,000 ($588,235), calculated in accordance with the terms of the
Future Payments Agreement.
No payment from the Company to CPLP would have been due on a pro forma basis
for the fiscal year ended December 31, 1995 (or the nine months ended
September 30, 1996) under these arrangements.
The Company has launched a major capital improvement program to increase
room and occupancy rates by improving the quality of its properties. As part
of this program, the Company expects to upgrade the interior and exterior of
all properties that do not meet corporate standards. By mid-1997, the Company
intends to have invested approximately $30 million in capital improvements
(including $8 million to be invested by the Company's joint venture partners).
All but $4 million of this amount will be invested in the U.S. properties,
representing approximately 31% of the acquisition cost per room of those
properties. These investments are in addition to amounts budgeted for regular
capital maintenance. As of October 31, 1996, the Company had spent
approximately $1.5 million out of the total $30 million budgeted for capital
expenditures. Once this capital initiative is completed, the Company intends
to maintain a regular program of capital improvements, including the
renovation and refurbishment of certain of its existing hotels. The program is
expected to enhance the competitiveness of its Travelodge hotels and increase
profitability. The Company intends to finance this capital expenditure program
with borrowings under the Credit Facility and excess cash on hand.
31
<PAGE>
In connection with the Canadian Acquisition, the Company entered into a
development agreement with NRG, pursuant to which NRG has agreed to identify
new hotel properties for acquisition and development in Canada on behalf of
the Company. The Development Agreement provides that the Company pay to NRG
approximately $588,000 and approximately $370,000 during each of the years
ended October 1998 and October 1999. The Development Agreement is terminable
at will by either party after October 1, 1997. No effect has been given to the
payment of the fees pursuant to Development Agreement in the pro forma
financial Statements of the Company included herein or incorporated by
reference in this Prospectus. See "Business--External Growth Opportunities--
Travelodge Acquisition."
The Company is a party to a development advance agreement, dated as of
October 1996, pursuant to which HFS will make a $2.8 million development
advance to the Company in December 1996. The Company is required and expects
to receive consent from its lenders under the Credit Facility prior to the
effective date of the development advance agreement. The development advance
must be repaid by the Company, without interest, on December 31, 2000, but the
amount required to be repaid will be reduced to the extent that hotels
acquired or constructed by the Company become HFS franchised hotels under
franchise agreements of ten years or longer using any HFS brand other than
Wingate Inn. The development advance will be reduced on a dollar-for-dollar
basis through December 31, 2000 for each dollar in initial and recurring
royalty fees payable to HFS under those new franchise agreements.
The Company is a 50% partner in Chartwell de Mexico along with Grupo Piasa.
Chartwell de Mexico is to be funded with up to $20 million in capital
contributions, $10 million of which will be contributed by the Company and $10
million of which will be contributed by Grupo Piasa.
Credit Facilities
General: HFS has agreed to extend up to $75 million in guarantees, security
and other credit enhancements to secure the Company's credit facilities until
February 28, 2003. Pursuant to this agreement, HFS has guaranteed $75 million
of the Company's borrowings under the Credit Facility. See "Certain
Transactions--Relationships With HFS."
The Company is a party to a Credit Facility among the Company, Chartwell
Canada Corp., which is a subsidiary of the Company ("Chartwell Canada"), The
Chase Manhattan Bank, as Administrative Agent, The Bank of Nova Scotia, as
Syndication Agent, and the Banks from time to time parties thereto (the
"Credit Facility"). The Credit Facility provides that the Company may borrow
up to $150 million under a revolving credit commitment (the "Commitment"),
which may be utilized for the incurrence of revolving credit loans or the
issuance of letters of credit. An amount of up to C$95 million ($69.9 million)
of the Commitment is available to be borrowed by Chartwell Canada or Bear
Financial Corp. ("Bear"), which is also a subsidiary of the Company, as a
Subfacility under the Credit Facility (the "Canadian Subfacility"). The
Company is jointly and severally liable for all borrowings by Chartwell Canada
or Bear under the Canadian Subfacility. HFS has guaranteed $75 million of the
Company's obligations under the Credit Facility. As of October 1, 1996
approximately U.S. $11 million aggregate principal amount of revolving loans
and C$90 million (approximately U.S. $66 million) aggregate principal amount
of revolving loans were outstanding under the Credit Facility. In addition, as
of October 1, 1996, the Company had incurred obligations under the Credit
Facility of approximately $15 million representing borrowings for letters of
credit. All outstanding obligations under the Credit Facility mature in August
2002.
Borrowings under the Credit Facility are available to the Company to finance
the acquisition of hotel properties and to finance the Company's working
capital and general corporate requirements. Borrowings under the Canadian
Subfacility were used to finance the acquisition of hotels from CPLP and to
pay the fees and expenses related to the Canadian Acquisition.
Revolving loans denominated in US dollars under the Credit Facility are
available as base rate loans or Eurodollar loans. Revolving loans denominated
in Canadian dollars under the Credit Facility are available as Eurodollar
loans. Interest on the outstanding principal amount of each base rate loan is
payable at an annual rate
32
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equal to the highest of (A) .5% in excess of the Federal Reserve reported
certificate of deposit rate, (B) .5% in excess of the federal funds rate or
(C) the prime lending rate of The Chase Manhattan Bank. Interest on the
outstanding principal amount of each Eurodollar loan is payable at an annual
rate equal to the sum of the applicable margin (which is within a range of
.40% to .875% based on the principal amount of revolving loans and letters of
credit outstanding) plus the Eurodollar rate. The Company is obligated to pay
a commitment fee on the unutilized portion of the Credit Facility at an annual
rate of .2% to .375% depending on the principal amount of revolving loans and
letters of credit outstanding. The Company is also obligated to pay a fee in
respect of each outstanding letter of credit equal to the applicable margin on
the stated amount of the letter of credit, plus an additional fee equal to the
higher of (A) $500 and (B) a rate per annum agreed to in writing by the
Company and the issuing bank of the letter of credit.
The aggregate revolving credit commitment will reduce by $7.5 million in
1998 and 1999 and $10 million each year thereafter. To the extent outstanding
borrowings exceed the resulting commitment amount, principal will be required
to be repaid. The revolving credit commitment amount also will be reduced and,
to the extent outstanding borrowings exceed the resulting commitment amount,
principal will be repaid upon the occurrence of certain events specified in
the Credit Facility. In addition, the Credit Facility is subject to
termination upon a change of control as defined in the Credit Facility or if
CL Associates or FSNL dispose of any of their shares of Common Stock.
The Credit Facility contains covenants restricting, with certain exceptions,
the Company and its subsidiaries and joint ventures from: (i) creating,
incurring or assuming any liens; (ii) merging or consolidating or disposing of
its assets, or acquiring assets from any other person; (iii) changing the
nature of their respective businesses; (iv) incurring indebtedness other than
existing indebtedness, subordinated indebtedness not to exceed $50 million to
finance permitted acquisitions and other permitted indebtedness specified in
the Credit Facility; (v) paying dividends or making restricted payments; and
(vi) modifying the agreements relating to the Company's indebtedness and
preferred stock or its corporate charter documents.
In addition, the Company's ability to borrow under the Credit Facility is
subject to customary conditions and covenants, including that there not exist
a material adverse change in the Company's operating performance. The Credit
Facility also requires that the Company, in certain cases on a stand-alone
basis and in other cases on a consolidated basis with its subsidiaries and
joint ventures, satisfy certain financial ratio coverage tests, including
maintenance of net worth, minimum interest coverage, minimum current ratio,
and maximum leverage coverages.
Bank of America Loan Agreement: The Company has a loan agreement with Bank
of America National Trust and Savings Association ("B of A"). That loan
agreement (the "B of A Loan Agreement") permits the Company and certain of the
joint ventures through which it owns hotels to make revolving credit
borrowings in an aggregate amount of up to $10 million and provides for an
uncommitted credit facility, which is available at the sole discretion of B of
A, in an aggregate amount of up to $5 million. Borrowings under the B of A
Loan Agreement may be made until December 31, 1996. Revolving credit
borrowings under the B of A Loan Agreement may be made, at the option of the
Company, as short-term borrowings, which have a maximum maturity of six
months, or medium-term borrowings, which have a maximum maturity of five
years. Short-term borrowings bear interest, at the option of the Company, at
the B of A prime rate, 1/2 of 1% in excess of the B of A offshore rate or 3/4
of 1% in excess of the B of A CD rate. Medium-term borrowings bear interest at
the B of A prime rate plus 1% per annum. The borrowings under the B of A Loan
Agreement are secured by a $15 million standby letter of credit issued under
the credit facility. The Company is obligated to pay a commitment fee at an
annual rate of .1875% on the unutilized portion of the B of A Loan Agreement.
Borrowings under the B of A Loan Agreement were approximately $6.3 million at
September 30, 1996.
CASH FLOWS
Cash provided by (used in) operating activities was $7.7 million for the
nine months ended September 30, 1996 compared to $(6.9) million for the nine
months ended September 30, 1995. The change relates primarily to the change in
the Company's focus to the lodging industry from the gaming business that
produced operating cash flow and the elimination of gaming development costs.
33
<PAGE>
Cash (used in) provided by investing activities was ($103.0) million for the
nine months ended September 30, 1996 compared to $5.8 million for the nine
months ended September 30, 1995. This change related primarily to the
Travelodge Acquisition and related costs offset by the receipt of principal
payments on loans.
Cash provided by financing activities was $61.6 million for the nine months
ended September 30, 1996 compared to no cash for the nine months ended
September 30, 1995. This change resulted from net borrowing proceeds and
proceeds from the sale of stock to CL Associates and FSNL.
IMPACT OF INFLATION
The primary source of revenue of the Company is gross room revenue of
lodging facilities. The Company does not believe that an increase in the rate
of inflation would have an unfavorable impact on its operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which became effective for the Company beginning January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
SEASONALITY
The hotel industry is seasonal in nature. Room occupancy rates at the
Company's hotels are affected by normally recurring seasonal patterns and, in
most locations in the United States and Canada, are higher in the late spring
through early fall months (May through October) than during the balance of the
year, with the lowest occupancy rates occurring in the first quarter of the
year. As a result, the Company expects to experience seasonal lodging revenue
patterns similar to the hotel industry with the summer months, due to the
increase in leisure travel, producing a higher revenue than other periods
during the year.
34
<PAGE>
BUSINESS
Chartwell is an opportunistic acquiror of diversified hotel properties that
it believes provide the potential for cash flow and earnings growth,
principally through rebranding, repositioning, reimaging and remarketing.
Chartwell owns, directly or with joint venture partners, 134 hotel properties
in both the full-service and limited-service segments, including approximately
11,580 guest rooms, located in 26 states and six Canadian provinces. In the
full-service segment, Chartwell operates 27 hotels aggregating approximately
5,430 guest rooms that contributed 57% of Chartwell's gross room revenues
(including gross room revenues of unconsolidated joint ventures) during the
nine-month period ended September 30, 1996 on a pro forma basis. Chartwell's
remaining 107 hotels, consisting of approximately 6,150 rooms, operate in the
limited-service segment, principally under the Travelodge brand.
Chartwell was spun off from HFS in 1994 and until late 1995 was engaged in
the business of investing in casino gaming facilities. In December 1995, an
investment group primarily consisting of members of the Fisher Brothers family
and a limited liability company owned principally by a trust for the benefit
of Gordon Getty and members of his family acquired a 16.6% equity interest in
Chartwell by purchasing newly issued shares of Common Stock. In connection
with that purchase, Richard L. Fisher, a member of the Fisher Brothers family,
was elected to Chartwell's Board of Directors and to the chairmanship of
Chartwell's executive committee. At the same time, Chartwell's Board of
Directors decided to redirect the focus of Chartwell's business from gaming to
lodging and Chartwell agreed to acquire full and partial interests in 115
Travelodge hotels, consisting of approximately 8,000 guest rooms, from Forte
Hotels, Inc. for approximately $98 million (a cost of approximately $13,000
per guest room after accounting for joint venture interests and other assets
acquired).
In connection with the closing of the Travelodge Acquisition in January
1996, Chartwell agreed in principle to issue four million shares of Common
Stock for an aggregate purchase price of $57 million to an expanded investment
group, consisting of CL Associates and a trust for the benefit of Charles de
Gunzburg, Mr. Fisher was elected Chairman and Chief Executive Officer of
Chartwell, a new senior management team was assembled, and Mr. Fisher and that
new management team began to implement Chartwell's current strategy. Since
that time, Chartwell has (i) increased revenue per available room for the nine
months ended September 30, 1996 by approximately 10% (excluding joint venture
partner interests in joint ventures) compared to the same period in 1995 at
the hotels acquired in the Travelodge Acquisition, (ii) acquired 21 Travelodge
hotels in Canada (including a one-half interest in a joint venture) totalling
approximately 3,500 guest rooms, for approximately $77 million (a cost of
approximately $22,000 per guest room), (iii) obtained the 30-year exclusive
master franchise licenses for the Travelodge brand in Canada and Mexico, and
(iv) formed a joint venture with Grupo Piasa, a diversified Mexican real
estate and development company, for the purpose of developing and operating
Travelodge hotels throughout Mexico. Chartwell has curtailed future activities
in the gaming industry and, during the nine-month period ended September 30,
1996, derived no operating revenues from gaming.
Many of Chartwell's Travelodge properties are situated in premier locations,
such as San Francisco's Fisherman's Wharf, San Diego's Harbor Island and Walt
Disney World Village, where development of new hotels is limited by
significant barriers to entry, including availability of financing, strict
zoning regulations and limited, high-cost development sites. Chartwell's
limited-service hotels generally do not provide full-service management-
intensive facilities and services, such as in-house restaurants or cocktail
lounges, banquet centers, conference rooms, room service, recreational
facilities or other services and facilities that Chartwell believes its
targeted customers do not typically value. By omitting these facilities and
services, Chartwell believes that its Travelodge properties are able to
deliver a product that addresses both its customers' needs and price
expectations. Chartwell is the largest owner of Travelodge hotels in North
America. Travelodge, a franchise brand owned by HFS, is the fourth largest
limited-service hotel chain in North America in number of rooms with over 500
hotel properties and approximately 43,000 guest rooms. The Travelodge brand is
designed to attract the economy-conscious leisure and business traveler
seeking room quality and hotel locations that are generally comparable to
those of mid-price hotels, but at lower average room rates. In Canada,
Travelodge is primarily a full-service hotel chain.
35
<PAGE>
COMPETITIVE STRENGTHS
Chartwell believes that its primary competitive strengths include the
following:
. Experienced Management Team. Chartwell's senior management team has
substantial hotel acquisition, development and operations experience.
Richard L. Fisher, the Chairman of the Board and Chief Executive Officer
of Chartwell, and Martin L. Edelman, the President of Chartwell, are also
partners, and are actively involved, in a series of private partnerships
that own a portfolio consisting of 68 hotel properties aggregating
approximately 11,500 guest rooms and various mortgage loans to other
hotels. In addition, Mr. Fisher is a principal of Fisher Brothers, one of
the largest owners of commercial real estate in New York City and Mr.
Edelman is an attorney who has negotiated and advised clients in the
acquisition and development of hotels for more than 15 years.
. Brand and Market Flexibility. Chartwell's flexible acquisition,
development and repositioning strategy permits Chartwell to own and
operate hotels in different market segments and under different franchise
brands. This strategy enables Chartwell to capture opportunities to
reposition properties in an optimal manner.
. Significant Borrowing Capacity. After giving effect to the use of
proceeds of the Offering, Chartwell will continue to have approximately
$115 million under its $150 million committed line of credit. In
addition, HFS has agreed to guarantee up to $75 million of borrowings
under this credit facility through February 2003, providing Chartwell
with a favorable borrowing rate under the facility. Management believes
that Chartwell's availability under its line of credit, together with the
HFS Guarantee, provide Chartwell with significant borrowing capacity to
fund its growth through the acquisition, development and repositioning of
hotels.
. Strategic Relationship with HFS. Since the spin-off of Chartwell from
HFS, Chartwell has continued its strategic relationship with HFS.
Chartwell is the largest franchisee of HFS' Travelodge brand; three of
Chartwell's directors are directors of HFS, including Henry R. Silverman,
the Chairman of the Board and Chief Executive Officer of HFS; Chartwell's
President is a director of HFS and a member of its executive committee;
and HFS has provided the HFS Guarantee.
. Owner and Operator of Hotels. Chartwell owns and operates, directly or
with joint venture partners, all of its hotels. Chartwell believes that
this commitment to hotel equity ownership, together with its experienced
in-house hotel management team, enables Chartwell to ensure the
achievement of consistent, high quality standards at its hotels, which
has contributed to improved hotel operating performance. Chartwell
believes that this commitment allows it to maximize control over its
hotels and to capture the benefits from their improved operating
performance.
GROWTH STRATEGY
Chartwell's new senior management team has implemented multiple strategies
to increase cash flow, earnings and shareholder value by (i) internal growth
through an extensive capital investments program, of rebranding and
repositioning of its existing hotels and of reimaging and remarketing of the
Travelodge brand name, while controlling costs and (ii) external growth
through increasing and diversifying Chartwell's hotel portfolio by selectively
acquiring and developing hotels in different market segments and geographic
regions.
INTERNAL GROWTH OPPORTUNITIES: Chartwell believes that the hotels it
acquired in the Travelodge Acquisition and the Canadian Acquisition, and
the Travelodge brand as a whole, were allowed to significantly underperform
their potential and believes that capital investments and operational
changes designed to bring the performance of these hotels up to industry
averages or higher offer the potential for significant earnings growth at
these hotels.
. Capital Investments: The Company believes that the hotels it acquired in
the Travelodge Acquisition and the Canadian Acquisition offer the
opportunity for significant increases in REVPAR through a capital
expenditures program. The Company has launched an extensive capital
improvement program to increase room and occupancy rates by improving the
quality of its properties. As part of this program, the Company expects
to upgrade the interior and exterior of all properties that do not meet
corporate
36
<PAGE>
standards. In addition, the Company intends to redesign the architectural
layout of its Travelodge hotels to provide them with a "curb appeal"
necessary to compete in the limited-service market. The Company estimates
that at least 103 of its Travelodge hotels are candidates for its capital
improvement program. By mid-1997, the Company intends to have completed
approximately $30 million in capital improvements (including $8 million
to be invested by the Company's joint venture partners). Approximately
$25 million of this amount will be invested in the hotels acquired in the
Travelodge Acquisition, representing approximately 31% of the acquisition
cost per room of those hotels. These investments are in addition to
amounts budgeted for regular capital maintenance. As of October 31, 1996,
the Company had invested only approximately $1.5 million out of the $30
million budgeted for capital expenditures. See "Business--Hotel
Properties." Once this capital initiative is completed, the Company
intends to maintain a regular program of capital improvements, including
the renovation and refurbishment of certain of its existing hotels. The
Company believes that this program will enhance the competitiveness of
its Travelodge hotels to fully expand the potential offered by their
locations.
. Strategic Repositioning and Redevelopment of Current Hotels: Chartwell
believes there is significant potential to increase REVPAR at selected
hotels by repositioning those hotels through renovation and refurbishment
as well as rebranding to more appropriate franchise affiliations. The
Company believes that many of its Travelodge hotels would satisfy market
demand through expanding the size of the hotel. For example, Chartwell
intends to add approximately 200 guest rooms at the Travelodge at Walt
Disney World Village (subject to approval by The Walt Disney Company) and
approximately 100 guest rooms at the Fisherman's Wharf Travelodge,
subject to local zoning approval. See "Business--Fisherman's Wharf Retail
Arcade." The Company believes that in conjunction with its capital
improvements program, a number of its current hotels will become more
competitive and increase revenues by brand repositioning through
conversion to another leading national franchise affiliation and/or
expanding the size of the hotel. Since the Travelodge Acquisition,
Chartwell has converted both the 476-room Travelodge hotel at Kennedy
Airport in New York and the 236-room Travelodge hotel in Portland, Oregon
to Ramada Plaza hotels and expects to convert the 207-room Travelodge
hotel in San Diego, California to a Hilton hotel. The Company continues
to evaluate and assess the strategic advantages of brand repositioning of
all of its hotels in order to enhance the performance of its hotels.
. Reimaging and Remarketing the Travelodge Brand Name: HFS has implemented
a program in cooperation with Chartwell to revitalize the Travelodge
brand name, which includes (i) the proposed expenditure of approximately
$5.5 million budgeted by HFS through December 31, 1997 for marketing the
Travelodge brand name, (ii) the reintroduction of the Sleepy Bear mascot
and (iii) the introduction of a program that will reward guests with
"Travel Miles," exchangeable for gifts. In addition, Chartwell has
budgeted approximately $3 million for marketing individual hotels,
generally in their local markets.
EXTERNAL GROWTH OPPORTUNITIES:
. Acquisition of Hotels: Chartwell seeks to continue the acquisition of
underperforming hotels or portfolios of hotels throughout North America
that are candidates for improved operating performance by implementing
Chartwell's growth strategy of refurbishing, rebranding, repositioning,
and reimaging underperforming hotels. Chartwell is uniquely positioned
through its expertise, industry contacts and financial resources to
pursue this acquisition strategy across all hotel market segments and
geographic regions.
Chartwell seeks to capitalize on its strength as a hotel owner/operator
and its significant borrowing capacity by continuing to pursue the
acquisition of hotels or portfolios of hotels that meet one or more of the
investment criteria outlined below. The Company believes that its executive
officers' experience in the hotel industry will enable the Company to
acquire hotels that will maximize current returns to its stockholders. The
Company employs five professionals who devote significant portions of their
time to hotel acquisitions.
Travelodge Acquisition: On January 23, 1996, the Company completed the
acquisition of all of the outstanding shares of Common Stock of Forte
Hotels from Forte USA, Inc. for approximately $98 million, net of working
capital adjustments and including expenses. The principal assets of Forte
Hotels consisted of
37
<PAGE>
fee and leasehold interests in 18 hotel properties (one of which was
subsequently disposed of) and joint venture interests in 97 additional
hotel properties (the "Acquired Forte Properties") constituting in the
aggregate approximately 8,000 guest rooms. The Company's interest in the
approximately 8,000 guest rooms comprising the Travelodge Acquisition were
acquired at a cost per guest room of $13,000 (after accounting for joint
venture interests and other assets acquired). Substantially all of the
Acquired Forte Properties operate under the names "Travelodge" and
"Thriftlodge" pursuant to franchise agreements acquired by HFS or entered
into with HFS in connection with the Travelodge Acquisition. See
"Business--Franchise Agreements." In connection with the Travelodge
Acquisition, the Company also acquired the lease on Forte Hotels' corporate
headquarters in El Cajon, California, and a 50% profits interest in the
hotel management operations of Royco, a hotel management company based in
Calgary, Canada which manages Canadian hotel properties. See "Business--
Canadian Acquisition." In a related transaction prior to consummation of
the Travelodge Acquisition, HFS and Motels of America, Inc. acquired
directly from Forte Hotels the Travelodge franchise system and 19 hotel
properties, respectively, for an aggregate purchase price of $71.6 million.
In connection with the Travelodge Acquisition, the Company also acquired
a retail arcade that adjoins its 250-room Travelodge hotel located at
Fisherman's Wharf, San Francisco and a 255-car parking garage. The hotel
and retail complex, which occupies an entire city block, overlooks the San
Francisco Bay. The retail arcade consists of approximately 20,000 square
feet of ground floor frontage located on San Francisco's Jefferson Street.
Currently, the arcade is fully-leased to 14 shops and restaurants. In
connection with the Company's development plan, the Company, subject to
local zoning approval, intends to expand the retail space an additional
30,000 square feet. The Company occupies the premises under a 74-year
master land lease expiring in February 2035 with an annual rent fixed until
termination at $80,000. In 1995 and the nine-month period ended September
30, 1996, the arcade generated approximately $2.0 million and $1.4 million,
respectively, in net operating income.
Canadian Acquisition: On October 1, 1996, the Company purchased from CPLP
20 hotels and a one-half interest in an additional hotel, which represent
approximately 3,500 guest rooms, located throughout Canada. These hotels
operate under the Travelodge brand name and are managed by Royco. The
Company accomplished the Canadian Acquisition by paying approximately $70
million, in order to purchase substantially all of CPLP's existing bank
debt and to pay certain specified closing costs (including real estate
taxes), and by assuming the liability for identified trade payables and
property specific bank debt, aggregating approximately another $7.4
million. The approximately 3,500 guest rooms comprising the Canadian
Acquisition were acquired by the Company at an acquisition cost per room of
approximately $22,000. In addition, the Company will be obligated to make
certain contingent payments to CPLP following a preferred return to the
Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." The Canadian
Acquisition contributed approximately 30% of the Company's total revenues
on a pro forma basis during the nine-month period ended September 30, 1996.
See "Selected Pro Forma Consolidated Financial Statements." Of the $70
million payment, substantially all was financed by bank borrowings under
the Credit Facility. In connection with the Canadian Acquisition, the
Company entered into a 30-year master franchise agreement with HFS pursuant
to which the Company is entitled to develop and operate, or to franchise
others to develop and operate, lodging facilities in Canada under the
Travelodge and Thriftlodge brand names. See "Certain Transactions--
Relationships With HFS--Canadian Master License." Also in connection with
the Canadian Acquisition, the Company entered into a management services
and franchise development agreement (the "MSFDA") with Royco. Royco manages
the Company's Canadian hotels and future hotels acquired by the Company in
Canada. Subject to the Company's review, Royco may manage hotels on its
own account. Under the MSFDA, Royco is also responsible for assisting the
Company in developing new Travelodge and Thriftlodge lodging facilities in
Canada under the Canadian Master License. As compensation for its services
under the MSFDA, Royco receives 50% of the profits generated from these
management and franchise development operations. The MSFDA also provides
for the payment to Royco of additional fees under certain circumstances,
including, upon the satisfaction of fixed performance goals and the
termination of the agreement. The term of the MSFDA commenced on September
30, 1996 and
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<PAGE>
expires on December 31, 2006. The Company has the option to renew the MSFDA
for three additional terms of ten years each. Upon the expiration of the
MSFDA, or in the event the agreement is terminated, Royco has the option to
acquire the Company's interest under the Canadian Master License. Under its
terms, the Canadian Master License is assignable by the Company to Royco.
Upon the termination or expiration of the MSFDA, Royco shall have the
option to purchase the Canadian Master License from the Company.
Other Acquisitions: In addition to the Travelodge Acquisition and
Canadian Acquisition, in May 1996 the Company acquired a 112-room Ramada
and a 101-room Shoney in Brunswick, Georgia, which the Company intends to
reposition, refurbish and convert into a 213-room "Gold Key" designated
Ramada. The Company also intends to develop an additional 80-room hotel at
the Brunswick site. Acquisitions entail risks that acquired hotels will
fail to perform in accordance with expectations and that estimates of the
cost of improvements necessary to reposition hotels will prove inaccurate,
as well as general investment risks associated with any new real estate
investment. In addition, future trends in the hotel industry may make
future acquisitions economically impractical. Moreover, there can be no
assurance that the Company will be able to acquire hotels that meet its
investment criteria or that any such hotels' operations can be successfully
improved. See "Risk Factors--Expansion Risks." The Company has a $150
million line of credit and believes that its limited leverage, together
with HFS' agreement to guarantee up to $75 million of the Company's credit
facilities, will allow the Company to finance a significant acquisition
program.
. Selected Development of Hotels: Selected development of new hotels is a
key part of Chartwell's external growth program.
Management believes that attractive opportunities exist for the
development of new full-service and limited-service hotels in certain
markets of the United States, Canada and Mexico. Consistent with its
development strategy of diversifying and expanding its hotel portfolio,
since the Travelodge Acquisition, the Company has purchased development
sites in Santa Fe, New Mexico and Irving, Texas. The Company is currently
developing a 100-room Fairfield Suites at its Santa Fe development site.
The project, which is located adjacent to the historic district of Santa
Fe, is scheduled for completion in late 1997 and will also include the
construction of two free-standing casual-style restaurants and is expected
to include the development of an additional hotel. The other development
site in Irving, Texas will consist of a 112-room Wingate Inn located at the
north entrance of the Dallas/Fort Worth International Airport. The hotel is
scheduled for completion in the fourth quarter of 1997.
The Company currently has entered a contract to purchase a development
site in Phoenix, Arizona. The Company anticipates that most of its newly-
developed hotels will be franchised under major franchise brands such as
Hampton Suites(R), Wingate Inn and Hilton Garden Inn(R). If the Company
purchases the Phoenix property, management expects that the development of
these sites would result in an additional 100 guest rooms. Like
acquisitions, new project development is also subject to numerous risks,
including risks of construction delays or cost overruns that may increase
project costs. Accordingly, there can be no assurance that the Company will
be able to develop hotels that meet its investment criteria, site selection
process or that any hotels can be successfully developed. See "Risk
Factors--Expansion Risks."
Chartwell de Mexico: On July 12, 1996, the Company entered into a joint
venture with a wholly owned subsidiary of Grupo Piasa for the purpose of
developing and operating, or franchising others to operate, lodging
facilities in Mexico under the Travelodge and Thriftlodge brand names.
Grupo Piasa is a non-core business development arm of Grupo Acerero del
Norte, a large privately-owned holding company controlled by the Autrey and
Ancira families. Their investments include a controlling interest in AHMSA,
a major Mexican steel company, as well as extensive holdings in mining,
energy and chemicals. Through Chartwell de Mexico, the Company intends to
develop up to 30 Travelodge facilities throughout Mexico and to establish
Travelodge as the dominant limited service brand in Mexico's emerging
market. The Company's joint venture with Grupo Piasa represents the most
significant step by the Company in pursuing its development strategy.
Chartwell de Mexico is to be funded with up to $20 million in capital
contributions, of which half are to be contributed by the Company.
Chartwell de Mexico's development strategy is to seek development locations
near major metropolitan markets, airports and commercial centers
39
<PAGE>
and to construct hotels to attract the economy-conscious business and
leisure traveler. The Company believes that there is a significant demand
in the Mexican market for an American franchise hotel brand. The Company
will provide the joint venture with access to such an established brand
through the Travelodge franchise. The Company intends to capitalize on
Grupo Piasa's extensive Mexican resources and industry contacts to access
acquisition opportunities not readily available to the market in general.
Chartwell de Mexico, in association with Wings, a Mexican casual dining
restaurant chain, intends to permit Wings to construct and lease from the
Company restaurant facilities in close proximity to its hotels in order to
afford its guests convenient dining facilities. On September 18, 1996, the
joint venture entered into a 30-year exclusive master franchise agreement
with HFS, pursuant to which the joint venture is entitled to franchise
others to develop and operate, lodging facilities in Mexico under the
Travelodge and Thriftlodge brand names. Chartwell de Mexico is obligated
under the Mexican Master License to develop a fixed number of hotel suites
or resort lodging guest rooms by December 31 of each year through 2006.
LODGING INDUSTRY
According to Smith Travel Research, the United States and Canadian lodging
industries are currently experiencing a significant recovery from an extended
period of unprofitable performance in the late 1980's and early 1990's. The
Company believes that this broad industry recovery will contribute to growth
in occupancy, room rates and revenue at its hotels (and hotels subsequently
acquired by the Company). The industry downturn in the late 1980's and early
1990's resulted from a dramatic increase in the supply of hotel rooms, which
resulted from the development of new hotels, because of the availability of
financing from banks, savings and loans, insurance companies, high yield bonds
and various tax incentives, that significantly outpaced growth in demand. The
hotel industry began its recovery in 1992. According to Smith Travel Research,
occupancy rates for the U.S. lodging industry were 61.7%, 63.0%, 64.6% and
65.2% for 1992, 1993, 1994 and 1995, respectively, reflecting increases in
guest room demand of 3% from 1991 to 1992, 3.2% from 1992 to 1993, 4% from
1993 to 1994 and 2.7% from 1994 to 1995 and increases in guest room supply of
1.3%, 1.0%, 1.4% and 1.7% during those same periods. The Company believes
these improved lodging fundamentals have created a favorable environment for
internal growth at its hotels and for acquisitions. However, historical
industry performance may not be indicative of future results. See "Risk
Factors--Risks of the Lodging Industry." The following table presents
occupancy, ADR and REVPAR for all U.S. hotels, all full-service and limited-
service U.S. hotels and all full-service Canadian hotels for the periods
indicated.
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED
AUGUST 31, YEAR ENDED DECEMBER 31,
------------- ----------------------------------
1996 1995 1995 1994 1993 1992 1991
OCCUPANCY ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
All U.S. hotels ............. 67.6% 66.9% 65.2% 64.6% 63.0% 61.7% 60.7%
U.S. hotels (full-service)... 69.1% 68.1% 66.7% 66.1% 64.5% 63.3% 62.0%
U.S. hotels (limited-serv-
ice)........................ 68.0% 68.4% 66.3% 66.1% 65.1% 64.1% 64.0%
Canadian hotels (full-serv-
ice)........................ 67.9% 67.3% 66.1% 64.6% 61.1% 59.9% 60.7%
ADR (IN U.S. DOLLARS)
All U.S. hotels.............. $71.55 $67.14 $67.46 $64.34 $61.97 $59.90 $59.01
U.S. hotels (full-service)... 86.62 80.49 81.10 77.08 74.13 71.82 71.03
U.S. hotels (limited-serv-
ice)........................ 52.75 49.32 49.25 46.55 44.45 42.82 42.09
Canadian hotels (full-serv-
ice)........................ 71.29 66.73 66.49 63.34 61.85 63.45 65.51
REVPAR (IN U.S. DOLLARS)
All U.S. hotels.............. $48.39 $44.88 $44.02 $41.56 $39.03 $36.95 $35.81
U.S. hotels (full-service)... 59.83 54.84 54.09 50.95 47.81 45.44 44.03
U.S. hotels (limited-serv-
ice)........................ 35.88 33.72 32.68 30.78 28.94 27.46 26.93
Canadian hotels (full-serv-
ice), Inc................... 48.43 44.89 43.96 40.90 37.79 37.98 39.79
</TABLE>
Source: Smith Travel Research, Inc. Smith Travel Research has not provided any
form of consultation, advice or counsel regarding any aspect of, and is in no
way associated with, the Offering. According to Smith Travel Research, the
"full-service" category in the U.S. and Canada includes hotels that offer in-
house restaurant facilities while the "limited service" category includes
hotels that do not have restaurants.
40
<PAGE>
HOTEL PROPERTIES
The Company owns fee and leasehold interests in 39 hotel properties
(totalling approximately 6,200 rooms) and joint venture interests in 95
additional hotel properties (totalling approximately 5,400 rooms). Where the
properties are operated as a joint venture or partnership, the Company is, in
most instances, the 50% general partner. The Company's hotels are located in
26 states and six Canadian provinces, with a particular concentration in the
states of California, Washington, Oregon, Nevada, Arizona and Florida, as well
as the Province of Ontario. The states and provinces in which those hotels are
located, the nature of the Company's ownership interest in those hotels, the
number of rooms in each state, the brand affiliation of those hotels and
whether those hotels are scheduled to undergo renovations and improvements to
their (i) exterior design, (ii) guest rooms, (iii) mechanical systems and (iv)
building envelope and roof, in accordance with the Company's capital
improvement program, are set forth in the following table:
41
<PAGE>
THE COMPANY'S HOTELS
<TABLE>
<CAPTION>
RENOVATION/CAPITAL IMPROVEMENT PROGRAM
------------------------------------------
EXTERIOR/ BUILDING
# OF FRANCHISE OWNED/ CURB GUEST ROOM MECHANICAL ENVELOPE/
HOTEL LOCATION ROOMS BRAND JV APPEAL RENOVATIONS SYSTEMS ROOF
----- ----------- ----- ------------- -------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Full-Service:
San Francisco Wharf
Hotel (1) CA 250 Travelodge JV/78% x x x x
San Diego Harbor Island CA 207 Travelodge Owned x x x
Walt Disney World (2) FL 325 Travelodge Owned x x x
Brunswick GA 213 Ramada/Shoney Owned x x x x
Mt. Laurel NJ 229 Travelodge Owned x x x x
J.F.K. NY 476 Ramada Plaza Owned x x x
Portland OR 236 Ramada Plaza Owned x x x
Houston TX 205 Travelodge Owned
Edmonton West Alberta 226 Travelodge Owned x x x x
Edmonton South Alberta 222 Thriftlodge JV/50%
Calgary Macleod Trail Alberta 220 Travelodge Owned x x x x
Calgary Int'l Airport Alberta 203 Travelodge Owned x x x
Vancouver Airport B. Columbia 160 Travelodge Owned x x
Winnepeg Manitoba 156 Travelodge Owned x
Toronto Ontario 228 Travelodge Owned
Mississauga Ontario 225 Travelodge Owned x x x x
Toronto North Ontario 184 Travelodge Owned x x x
Ottawa/Parliament Hill Ontario 175 Travelodge Owned x x x x
Kitchener Ontario 172 Travelodge Owned x x x x
Windsor Downtown Ontario 160 Travelodge Owned x x x
Scarborough Ontario 158 Travelodge Owned x x x
London Ontario 144 Travelodge Owned x x x x
Sudbury Ontario 140 Travelodge Owned x x x
Ottawa East Ontario 129 Travelodge Owned x x x x
Burlington Ontario 116 Travelodge Owned x x x x
Ingersoll Ontario 98 Travelodge Owned x x
Laval Quebec 175 Travelodge Owned x x x x
----------- -----
TOTAL FULL-SERVICE 27 HOTELS 5,432
Limited-Service:
Athens AL 60 Travelodge Owned x x x
Flagstaff AZ 49 Travelodge JV/50%
Yuma AZ 48 Travelodge JV/50% x x
Williams AZ 41 Travelodge JV/45% x
Mesa AZ 39 Travelodge JV/50% x
San Francisco Airport
North CA 197 Travelodge Owned x x x x
Palm Springs CA 158 Travelodge JV/50% x x x
Monterey
Fairgrounds/Carmel CA 103 Travelodge JV/80% x x x
Mission Valley CA 101 Travelodge JV/25% x x x x
San Francisco Central CA 84 Travelodge JV/50% x x x
San Francisco Downtown CA 80 Travelodge JV/50% x x x
Visalia Thriftlodge CA 77 Thriftlodge JV/50%
San Diego Airport CA 72 Travelodge JV/62.5% x x
Sacramento Downtown CA 71 Travelodge Owned x x x x
</TABLE>
- --------
(1) The Company, subject to local zoning approval, intends to expand the
retail space at the Travelodge Fisherman's Wharf hotel by 30,000 square
feet to 50,000 total square feet of retail space and to add approximately
100 guest rooms to the 250-room hotel.
(2) The Company intends to add approximately 200 guest rooms to the 325-room
Travelodge at Walt Disney World Village subject to approval by The Walt
Disney Company.
42
<PAGE>
<TABLE>
<CAPTION>
RENOVATION/CAPITAL IMPROVEMENT PROGRAM
------------------------------------------
EXTERIOR/ BUILDING
# OF FRANCHISE OWNED/ CURB GUEST ROOM MECHANICAL ENVELOPE/
HOTEL LOCATION ROOMS BRAND JV APPEAL RENOVATIONS SYSTEMS ROOF
----- -------- ----- ----------- -------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Beach Downtown CA 63 Travelodge JV/50% x x x x
Lake Tahoe South CA 59 Travelodge JV/50% x
San Francisco Airport
South CA 58 Travelodge JV/50% x x
Anaheim CA 57 Travelodge Owned x x
Santa Cruz CA 55 Travelodge JV/50% x x x
Monterey Downtown CA 49 Travelodge JV/50% x x x
Rancho Bernardo CA 49 Travelodge JV/50% x
Lake Tahoe City CA 47 Travelodge JV/50% x x
Eureka CA 46 Travelodge JV/25% x x
San Diego Airport/
Pt. Loma CA 45 Travelodge JV/25%
La Jolla Beach CA 44 Travelodge JV/50% x
Santa Rosa Downtown CA 43 Travelodge JV/50% x
Hollywood Inn CA 39 Independent JV/50% x
Milpitas CA 39 Travelodge JV/50%
San Luis Obispo CA 39 Travelodge JV/50%
El Cajon Valley
Thriftlodge CA 38 Thriftlodge Owned x x x x
Ontario CA 33 Travelodge JV/50%
Paso Robles CA 31 Travelodge JV/50% x x
Santa Rosa CA 31 Travelodge JV/50% x
Berkeley CA 30 Travelodge JV/50% x x
Cabrillo Central CA 30 Independent JV/50% x x
La Jolla Cove CA 30 Travelodge JV/50% x
San Diego Thriftlodge
Downtown CA 30 Thriftlodge JV/25% x x x
Bayview Thriftlodge CA 29 Thriftlodge JV/57.8% x x
Golden Gate CA 29 Travelodge JV/25% x x
Mojave CA 29 Independent JV/10%
Palo Alto CA 29 Travelodge JV/50%
Santa Monica CA 29 Travelodge JV/25% x x x
Balboa Park CA 28 Travelodge JV/25% x
Burbank CA 28 Travelodge JV/50%
Oceanside CA 28 Travelodge JV/50%
Presidio CA 27 Travelodge JV/58.3% x
Ghirardelli Square CA 25 Travelodge JV/62.5% x x x x
Eagle Rock
(Eagle Rock Inn) CA 24 Independent JV/50%
San Diego Harborside CA 24 Independent Owned x x
San Diego Uptown
Welcome Inn CA 24 Independent JV/25% x
Santa Barbara City
Center CA 23 Travelodge JV/25% x x x
Santa Barbara Beach CA 19 Travelodge JV/50% x x
Embarcadero--Harbor CA 18 Travelodge JV/50%
Durango Lodge CO 39 Independent JV/50% x x
Ocala FL 68 Travelodge JV/50% x x
Tallahassee FL 58 Travelodge Owned x x x
Clearwater FL 48 Travelodge JV/50%
Gainesville (Gainesville
Lodge) FL 38 Independent JV/50% x x x
Sarasota Thriftlodge FL 28 Thriftlodge JV/25%
Lake Park GA 78 Travelodge JV/49% x x
Atlanta Downtown GA 71 Travelodge JV/50% x x
Mason City IA 47 Thriftlodge JV/50% x
Boise ID 48 Travelodge JV/50% x
Chicago O'Hare IL 95 Travelodge JV/37.5% x x x
Quincy IL 68 Travelodge JV/75% x x x
Terre Haute IN 57 Travelodge JV/50%
Lawrence KS 68 Travelodge JV/87.5% x
Louisville KY 96 Travelodge JV/50% x x
Alexandria LA 70 Travelodge Owned x x x x
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
RENOVATION/CAPITAL IMPROVEMENT PROGRAM
------------------------------------------
EXTERIOR/ BUILDING
# OF FRANCHISE OWNED/ CURB GUEST ROOM MECHANICAL ENVELOPE/
HOTEL LOCATION ROOMS BRAND JV APPEAL RENOVATIONS SYSTEMS ROOF
----- ------------ ------ ----------- -------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lafayette Center LA 61 Travelodge JV/50% x
Natick MA 68 Travelodge JV/50% x x
Bedford MA 42 Travelodge JV/50% x x
Missoula MT 60 Travelodge JV/50% x
Billings MT 38 Travelodge JV/50%
South Sioux City NE 61 Travelodge JV/50% x
Santa Fe NM 48 Travelodge JV/50% x x
Las Vegas South Strip NV 128 Travelodge Owned
Las Vegas Strip NV 100 Travelodge JV/48.8%
Reno NV 98 Travelodge Owned x x x
Las Vegas Downtown NV 58 Travelodge JV/50%
Cincinnati OH 71 Travelodge JV/62.5% x x
Zanesville Thriftlodge OH 54 Thriftlodge JV/50% x x
Ashtabula OH 48 Travelodge JV/37.5%
Portland Thriftlodge OR 77 Thriftlodge JV/50%
Roseburg OR 40 Travelodge JV/25% x
Lancaster PA 58 Travelodge JV/50% x x x
Chambersburg PA 51 Travelodge JV/50% x
El Paso City Central TX 108 Travelodge JV/50%
San Antonio Alamo TX 81 Travelodge JV/93.3% x x x
Ogden UT 78 Travelodge JV/37.5% x
Salt Lake City Center UT 60 Travelodge JV/50% x
Salt Lake City Temple
Square UT 55 Travelodge JV/37.5%
Space Needle WA 88 Travelodge JV/50% x x
University (Seattle) WA 74 Travelodge JV/50% x x
Seattle City Center WA 73 Travelodge JV/75% x x x x
Omak Thriftlodge WA 59 Thriftlodge Owned
Bellevue WA 54 Travelodge JV/50% x
Yakima WA 48 Travelodge JV/50% x x
Moses Lake WA 40 Travelodge JV/50% x
Walla Walla WA 39 Travelodge JV/50% x
Mercer Island WA 35 Travelodge JV/75% x
Ephrata WA 28 Travelodge JV/50% x
Kamloops B. Columbia 68 Travelodge JV/50% x
Revelstoke Lodge B. Columbia 42 Travelodge JV/50%
Oshawa/Whitby Ontario 120 Travelodge Owned x x
North Bay Ontario 100 Travelodge Owned x x
Regina East Saskatchewan 183 Travelodge Owned x x x
------------ ------
TOTAL LIMITED-SERVICE 107 HOTELS 6,149
------
TOTAL COMPANY 134 HOTELS 11,581
======
</TABLE>
All but 21 of the Company's hotels are Travelodge properties. Virtually all
of the Company's hotel properties operate under the "Travelodge" brand name,
although 10 operate under the affiliated "Thriftlodge(R)" brand name. The
Company's hotels operated under the Travelodge brand name are generally of
higher quality and provide a higher level of service than the Company's hotels
operated under the Thriftlodge brand name. The Travelodge branded properties
generally contain between 50 and 150 rooms and provide laundry services,
complimentary newspapers, cable television with a premium movie channel, and
in-room coffee service. The price per room for the limited-service Travelodge
branded properties generally ranges from $40 to $60 per night. The Thriftlodge
branded properties generally contain up to 75 rooms and provide fewer services
than the Travelodge branded properties. The price per room for the Thriftlodge
branded properties generally ranges from $25 to $45 per night. References
herein to "Travelodge" properties include both Travelodge and Thriftlodge
unless the context otherwise requires. The hotels currently owned by the
Company that are not operated as Travelodges or Thriftlodges are operated
under the franchise brands Ramada Plaza, Ramada or Shoney's(R) or as
independent hotels.
44
<PAGE>
The Company's Travelodge hotels are designed to attract the economy-
conscious business and leisure traveler seeking room quality and hotel
locations that are generally comparable to those of mid-price hotels, but at
lower average room rates. The Travelodge branded properties generally do not
provide full-service management-intensive facilities and services, such as in-
house restaurants or cocktail lounges, banquet centers, conference rooms, room
service, recreational facilities or other services and facilities that the
Company believes its targeted customers do not typically value. By omitting
these facilities and services, the Company believes that its Travelodge
properties are able to deliver a product that addresses both its customers'
needs and price expectations.
OPERATIONS AND MANAGEMENT
Chartwell pursues a strategy of centralized control over its operations.
Management believes that this strategy reduces operating costs and allows the
Company to implement its business strategy more effectively while controlling
operating costs at its hotels.
In connection with its new strategic direction into the lodging industry,
the Company hired Ronald E. Jackson as its Chief Operating Officer on July 23,
1996. With more than 20 years' experience in the lodging industry, Mr.
Jackson's operating expertise was viewed by the Company as complementary to
the hotel acquisition and development expertise of Messrs. Fisher and Edelman.
Since joining the Company's management team, and with the encouragement of the
Company's joint venture partners, one of Mr. Jackson's primary
responsibilities has been to create and implement a formal operations and
management structure.
Operations and Supervisory Staff:
U.S. Operations: The Company or one of its joint venture partners directly
manages each of the hotels in the United States. The Company does not utilize
outside hotel managers who do not have an ownership interest in the hotel.
Currently, each of the Company's hotels has its own on-site management and
staff. On-site employees are supervised by regional managers at the Company's
limited-service hotels and by a general manager at the Company's full-service
hotels who in turn is supervised by the Vice President of Hotels or the Vice
President of Motels, each of whom reports to the Vice President of Operations,
who reports to Mr. Jackson.
The Vice President of Operations is based at the Company's headquarters in
New York and is charged with overseeing the Company's management of its
limited- and full-service hotel portfolio. The Company's Vice President of
Hotels is responsible for operations at the Company's eight full-service
hotels. In turn, each of those eight hotels is managed on-site by a general
manager who runs the day-to-day hotel operations and reports to the Vice
President of Hotels. The Company's Vice President of Motels is responsible for
the Company's U.S. limited-service hotels. Assisting the Vice President of
Motels are five regional managers, each of whom is in charge of approximately
20 limited-service properties. The Company's five regional managers are
located in San Diego, California, San Francisco, California, Irmo, South
Carolina, Seattle, Washington and Cincinnati, Ohio. In furtherance of
management's direct approach to the operations of its hotels, each regional
manager maintains his office in one of the Company's limited-service
properties. At the property level, each limited-service hotel is managed on-
site by a general manager who lives on the property, runs the day-to-day hotel
operations and reports to one of the five regional managers. Of Chartwell's
U.S. limited-service joint venture properties, 58 are managed on-site by the
Company's joint venture partners, while the balance are managed by Company
employees. All of Chartwell's wholly owned limited-service properties are
managed by Company employees.
The on-site hotel management teams focus on providing guest services. This
team consists of a general manager and, depending on the hotel's size and
market positioning, also managers of sales and marketing, food and beverage,
front desk services, housekeeping and engineering. The Company's operating
objective is to exceed guest expectations by providing quality services and
comfortable accommodations at the lowest cost consistent with each hotel's
market position. On-site hotel management is responsible for efficient expense
controls and uses operating standards established by the Company. Within
parameters established in the operating and capital planning process, on-site
management possesses authority on operating issues such as guest
45
<PAGE>
services, marketing strategies, hiring practices and incentive programs. Each
hotel's management team is empowered to take all necessary steps to ensure
guest satisfaction within established guidelines. The on-site management team
receives direct support from the Company's centralized corporate department
with accounting and finance, payroll, data processing and management
information services, interior design, purchasing, hotel operations, human
resources, recruiting and training, legal, advertising, insurance and
telecommunications. The Company or one of its joint venture partners directly
manages all of its hotels in the United States and does not utilize outside
hotel managers.
Canadian Operations: In Canada, 21 (including a one-half interest in a joint
venture) of the Company's 24 hotels are managed by Royco. Royco's management
team consists of a president of operations, a vice president of operations,
two regional managers and support staff. See "Business--External Growth
Opportunities--Canadian Acquisition."
Hotel Development Staff: The Company's development staff consists of a
Director of Development and three support staff members. The development team,
in accordance with the Company's development strategy, is responsible for
finding new sites suitable for hotel development, negotiating with franchisors
in flagging new properties and finding hotels suitable for acquisition. See
"Business--External Growth Opportunities--Selected Development of Hotels."
The Company's construction department, which is headed by a Vice President
of Construction, is responsible for implementing the Company's capital
improvements program, designing and developing new hotel projects,
refurbishing and replacing fixtures and equipment at the hotels and
contracting for construction at new hotel development projects. The
construction department, together with the Vice President of Hotels and the
Vice President of Motels, is responsible for implementing the Company's
"Prideful Maintenance" and "No Chipped Paint" programs that were designed to
encourage the Company's on-site general managers to make preventative
maintenance expenditures. See "Business--Growth Strategy--Capital
Investments." Chartwell's construction staff includes an architect who is
responsible for designing curb-side appeal improvements as well as for working
with outside architects in developing prototypes and new common design
features at the Company's Travelodge hotels. See "Business--Growth Strategy--
Strategic Repositioning and Redevelopment of Current Hotels." Complementing
the construction department is the Company's engineering department which
conducts regular visits to each hotel property in order to perform rigorous
inspections of the Company's hotels. The Company also has a risk control
manager who conducts audits of the hotels in order to improve risk management,
which is critical to decreasing the company's insurance costs.
Human Resources: The cornerstone of the Company's operations management is
its human resources department. Headed by a manager located in New York and
Vice President of Human Resources located in El Cajon, California, the
Company's human resources department is responsible for implementing the
"Prideful People" program that is designed to train its employees in sales,
housekeeping, front desk services and leadership in order to ensure guest
satisfaction and customer loyalty.
MARKETING AND PROMOTIONS
The Company does not market its hotel properties on a company-wide level.
Instead, it relies on HFS, as the franchisor of the Travelodge chain, and the
franchisors of its other brands, to market the franchise brands under which
the Company operates its hotels. Through the Travelodge brand franchise
association, to which the Company appoints two members of the 12-member board,
and the Company's close relationship with HFS, the Company is able to make
recommendations to HFS' Travelodge sales and marketing department. For 1997,
the Company has been informed by HFS that it has budgeted approximately $5.5
million for marketing the Travelodge brand.
On a local level, the Company's hotels generally advertise in their
individual markets and some of the Company's hotels with greater than 70 guest
rooms employ small marketing staffs to carry on their local advertising and
marketing programs. In addition, each on-site general manager typically makes
regular calls to
46
<PAGE>
local companies and organizations in an effort to promote the good will
associated with that particular hotel in the community. The Company's two
regional sales and marketing directors also provide sales and marketing
consultation to both the regional managers and directly to the on-site general
managers. In cooperation with the regional sales and marketing staff, each on-
site general manager is encouraged to develop and implement an individualized
short and intermediate-term marketing plan. For 1997, the Company has budgeted
approximately $3 million for marketing individual hotels generally in their
local markets.
HFS intends to implement a program in cooperation with the Company to
revitalize the Travelodge brand name. Through promotional expenditures that
highlight the affordable price, convenient location and consistent quality
identified with the Travelodge brand, HFS intends to expand Travelodge's share
of the leisure travel market. A core aspect of this strategy is HFS'
reintroduction of the Sleepy Bear mascot for the Travelodge brand--at one
time, a well-recognized symbol of the Travelodge chain. In 1997, HFS expects
to introduce a "Travel Miles" program that will reward guests with "Travel
Miles," exchangeable for gifts that include Sleepy Bear merchandise and free
overnight guest rooms.
GROUND LEASES
Approximately 67% of the Company's hotels are located on property covered by
ground leases with unaffiliated third parties. These hotels contributed
approximately 53% of the Company's pro forma hotel net operating profits
(hotel revenue less hotel operating expense, rent, property taxes, franchise
and marketing fees excluding depreciation) and a greater percentage of its
revenues generated for such hotels, assuming the Travelodge Acquisition and
Canadian Acquisition occurred on January 1, 1995 during the nine-month period
ended September 30, 1996. All of these leases are net leases. Generally, the
leases have fixed base rents of between $300 and $1,000 per month. In
addition, the Company or the joint venture, as the case may be, is obligated
to pay as rent a percentage, typically 7 1/2%, of its gross receipts that are
in excess of an annual threshold amount, typically between $48,000 and
$150,000. Gross receipts are typically defined as total revenue received by
the joint venture, excluding sales from vending machines, newspapers, soda and
telephone calls.
The following table sets forth the number of ground leases scheduled to
expire in each of the five-year periods ended December 31, 2001, December 31,
2006, December 31, 2011 and thereafter and the Company's pro forma hotel net
operating profits, generated for such hotels for the nine-month period ended
September 30, 1996, assuming the Travelodge Acquisition and the Canadian
Acquisition occurred on January 1, 1995.
<TABLE>
<CAPTION>
YEAR OF EXPIRATION: PRESENT-2001 2002-2006 2007-2011 2012-2063
------------------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Total Number of Ground
Leases(1)................ 5 20 30 34
Limited-service hotels.. 5 20 29 29
Full-service hotels..... -- -- 1 5
Hotel Net Operating
Profit(2)................ .6% 8.5% 13.0% 30.4%
</TABLE>
(1) Assumes the renewal of ground leases for eight hotels which may be renewed
at the option of the Company.
(2) Hotel revenue less hotel operating expenses, rent, property taxes,
franchise and marketing fees excluding depreciation.
Upon termination of a ground lease, the hotel located on the leased property
will become the property of the lessor. The Company intends to attempt to
negotiate renewals of the ground leases or the purchase of the real property
from the lessor where it considers it to be advantageous to do so, but there
can be no assurance that the Company will be able to do so. See "Risk
Factors--Risk of Expiration of Ground Leases."
47
<PAGE>
JOINT VENTURE AGREEMENTS
Ninety-five of the Company's hotels are operated as joint ventures. The
Company's percentage interests in these joint ventures vary, but the Company
holds a 50% interest in 64 hotels and holds a joint venture interest greater
than 50% in eleven hotels.
For approximately one-third of these hotel properties, the Company acts as
the day-to-day business manager of the property. For the balance of these
hotel properties, the day-to-day business decisions of joint ventures are
generally made by the Company's partner. Significant business decisions that
fall outside the scope of day-to-day decisions are made jointly by the Company
and the Company's joint venture partner. See "Business--Operations and
Management." In addition to profits and losses under the joint venture, the
day-to-day managerial partner typically receives a management fee equal to a
percentage of the gross room revenues received from the operation of the
hotel.
FRANCHISE AGREEMENTS
All but ten of the Company's hotels are operated under franchise licenses
with HFS and other nationally recognized hotel companies. The Company
anticipates that most of the additional hotels in which it invests will be
operated under franchise licenses. The Company believes that the public's
perception of quality associated with a franchisor is an important feature in
the operation of a hotel. Franchisors provide a variety of benefits for
franchisees, which include national advertising, publicity, and other
marketing programs designed to increase brand awareness, training of
personnel, continuous review of quality standards, and centralized reservation
systems.
The Travelodge Franchise: The Company's Travelodge properties operate under
franchise agreements with an affiliate of HFS as the owner of the Travelodge
franchise systems. HFS acquired those franchise systems in connection with the
Travelodge Acquisition. See "Certain Transactions--Relationships with HFS."
The franchise agreements covering the Travelodge properties which are
wholly-owned by the Company require monthly payment by the Company of a
royalty fee of 4% of the property's gross room revenues plus a marketing fee
also currently set at 4% of gross room revenues. The marketing fee may be
changed from time to time by the franchisor. These franchise agreements have
scheduled terms of 20 years but may be terminated by the Company prior to
their scheduled expiration upon the payment of liquidated damages by the
Company. The Company entered into a license agreement (the "Omnibus License
Agreement") with an affiliate of HFS as licensor covering the Company's
Travelodge properties that are owned by joint ventures. Under the Omnibus
License Agreement, the Company is required to pay a license fee equal to 4% of
gross room revenues multiplied by the Company's percentage interest in each of
the hotel properties owned by joint ventures in which the Company acquired an
interest, plus an additional amount, generally equal to 4.5% of gross room
revenues, for national marketing and reservation services provided by HFS. The
Omnibus License Agreement has a term of 20 years but may be terminated by the
Company with respect to any particular joint venture prior to the scheduled
expiration. Also, if any particular joint venture is terminated, then the
franchisor may terminate the Omnibus License Agreement with respect to that
particular property. In either case, the Company is required to pay liquidated
damages upon the early termination of the Omnibus License Agreement with
respect to any individual joint venture. No liquidated damages are due if a
joint venture is terminated under the Omnibus License Agreement and becomes a
licensee or franchisee of another HFS hotel brand.
The amount of liquidated damages payable by the Company upon termination of
the franchise agreements covering any property equals five times the amount of
the royalty fees payable in respect of that property during the twelve months
most recently preceding the termination if the termination occurs before the
end of the fourth year of the franchise agreement. If the termination occurs
thereafter, the amount of liquidated damages scales down annually, reaching
two times the amount of the royalty fees payable in respect of that property
during the twelve months most recently preceding the termination if the
termination occurs after the sixth year of the franchise agreement. The
franchise agreements are subject to cancellation in the event of a default,
including the failure to operate the hotel in accordance with the quality
standards of the franchisor.
48
<PAGE>
The Company's franchise agreements authorize the operation of a hotel under
the "Travelodge" or "Thriftlodge" name at the specific location where the
hotel is located and require that the hotel be operated in accordance with
standards specified by the franchisor. The franchise agreements grant the
franchisor a right of first refusal, exercisable for 30 days, if the Company
proposes to sell, lease or sublease the franchised hotel and require the
franchisor's consent to the transfer of the franchised hotel or of any
interest in the subsidiary or joint venture that is a direct party to the
franchise agreement. The Company's franchise agreements do not contain any
territorial protection and, therefore, do not prohibit the franchisor from
franchising competing properties in close proximity to the Company's property.
Other Franchises: The Company's other franchise agreements also generally
specify certain management, operating, recordkeeping, accounting, reporting,
and marketing standards and procedures with which the Company must comply. The
franchise agreements obligate the Company to comply with each franchisor's
standards and requirements with respect to training of operational personnel,
safety, maintaining specified insurance, and the types of services and
products ancillary to guest room services that may be provided by the Company.
The loss of a license for a hotel would, in most instances, result in the
rebranding of the hotel, which might cause a loss of established customer good
will and reduced revenues. The Company believes that the loss of a license for
any individual hotel would not have a material adverse effect on the Company's
financial condition and results of operations. The Company believes it will be
able to renew its current licenses or obtain replacements of a comparable
quality.
COMPETITION
The hotel industry is highly competitive. The Company's hotels compete with
numerous other hotels, motels and other lodging establishments in their market
areas. Chains such as Days Inn and Howard Johnson, both of which are
franchised by HFS, Comfort Inns, Fairfield Inns, Hampton Inns, La Quinta,
Motel 6 and Red Roof Inns are direct competitors of the Company's limited-
service Travelodge brand hotels and Ramada, Holiday Inn and Quality Inns are
direct competitors of the Company's full-service hotels. There is no single
competitor or group of competitors of the Company's hotels that is dominant in
the lodging industry. Competitive factors in the industry include
reasonableness of room rates, quality of accommodations, degree of service and
convenience of locations.
Demographic, economic and geographic changes in any of the Company's markets
could impact the convenience or desirability of the sites of certain hotels in
that market, which would adversely affect the operations of the Company's
hotels in that market. There can be no assurance that new or existing
competitors will not significantly lower rates or offer greater convenience,
services or amenities or significantly expand or improve facilities in a
market in which the Company's hotels compete, thereby adversely affecting the
Company's operations. Competition may generally reduce the number of suitable
hotel acquisition opportunities offered to the Company and increase the
bargaining power of property owners seeking to sell, which could adversely
affect the Company's financial performance.
The Company may be competing for investment opportunities with entities that
have substantially greater financial resources than the Company. These
entities may generally be able to accept more risk that the Company can
prudently manage. Competition may generally reduce the number of suitable
investment opportunities offered to the Company and increase the bargaining
power of property owners seeking to sell.
SEASONALITY
The hotel industry is seasonal in nature. Room occupancy rates at the
Company's hotels are affected by normally recurring seasonal patterns and, in
most locations in the United States and Canada, are higher in the late spring
through early fall months (May through October) than during the balance of the
year, with the lowest occupancy rates occurring in the first quarter of the
year. As a result, the Company expects to experience seasonal
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lodging revenue patterns similar to the hotel industry as a whole with the
summer months, due to the increase in leisure travel, producing a higher
revenue than other periods during the year.
REGULATION
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. The Company does not expect that the recently enacted increases in
the federal minimum wage rate to significantly affect its operations. Under
the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although the Company has taken actions to
comply with the ADA, no assurance can be given that a material ADA claim will
not be asserted against the Company. These and other initiatives could
adversely affect the Company, as well as the lodging industry in general. The
Company is also subject to dramshop statutes or equivalent common law in some
jurisdictions that give an injured person the right to recover damages from
any establishment that wrongfully served alcoholic beverages to an intoxicated
person who causes the injury. The Company believes that its insurance coverage
with respect to any such liquor liability is adequate. The Company has hotels
that are subject to alcohol sales regulations and/or dramshop statutes in
Canada and the following states: California, Florida, Georgia, New Jersey, New
York, Oregon, Pennsylvania and Texas.
ENVIRONMENTAL CONSIDERATIONS
The Company's hotels are subject to United States Federal, state and local,
Canadian and Mexican environmental laws and regulations. Certain of these laws
may require a current or previous owner or operator of real estate to clean up
designated hazardous or toxic substances affecting the property. In addition,
the owner or operator may be held liable to a government entity or to third
parties for damages or costs incurred by such parties in connection with such
contamination. Some of the Company's hotels are located on or near properties,
such as gasoline stations, on which activities have been conducted which have
or may have released petroleum products or other hazardous substances into the
soil or groundwater. The Company is aware of soil contamination, which the
Company believes was caused by unrelated third parties, at several of its
hotel sites in the United States and Canada. The Company has not received any
notices of liability in connection with such contamination. Based on its
present knowledge, the Company does not believe that environmental matters are
likely to have a material adverse effect on the Company's business, assets,
financial condition or results of operations. However, due to the absence of
complete information, possible future changes in laws and regulations,
possible future changes in the condition of the Company's properties and other
factors, no assurance can be given that environmental matters will not
ultimately have a material adverse impact on the Company's business, assets,
financial condition or results of operations.
GAMING OPERATIONS
The Company continues to hold investments in casinos located in Mississippi
and Arizona, and in various gaming-related businesses, but is not engaged in
the business of operating casinos. These investments represented approximately
1.4% of the Company's total assets on September 30, 1996. The Company does not
intend to make any further investments in the gaming industry. During the
nine-month period ended September 30, 1996, the Company derived no revenues
from gaming operations.
The Company is subject to regulation by each state in which it holds
investments that conduct activities in the gaming business, and to a certain
extent under Federal law. Generally, the Company is required to obtain a
gaming license for each location where it will conduct gaming operations, and
each of the Company's officers, directors, managers and principal shareholders
are subject to strict scrutiny and approval by the gaming commission or other
regulatory body of each state or jurisdiction in which the Company may conduct
gaming operations. The Company believes that, because it now holds only a
limited number of gaming-related assets, gaming regulations do not have a
significant effect on its business.
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EMPLOYEES
As of September 30, 1996 (as adjusted to give effect to the Canadian
Acquisition and related borrowings that occurred on October 1, 1996), the
Company employed approximately 2,400 persons, of whom approximately 90% were
compensated on an hourly basis. Approximately 550 of the Company's employees
are currently represented by labor unions and the Company has never
experienced any organized work stoppage. Management considers its employee
relations to be satisfactory.
TRADEMARKS
Below are national trade names utilized by the Company pursuant to license
arrangements with national franchisors:
MARRIOTT(R) AND FAIRFIELD SUITES(R) ARE REGISTERED TRADEMARKS OF MARRIOTT
INTERNATIONAL, INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF
THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
MARRIOTT OR FAIRFIELD SUITES FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS
NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY MARRIOTT INTERNATIONAL, INC. (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK
OFFERED HEREBY.
RAMADA PLAZA(R) AND RAMADA(R) ARE REGISTERED TRADEMARKS OF RAMADA, INC. OR
RAMADA FRANCHISE SYSTEMS, INC., WHICH HAVE NOT ENDORSED OR APPROVED THE
OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS
PROSPECTUS. A GRANT OF A RAMADA PLAZA OR A RAMADA FRANCHISE LICENSE FOR
CERTAIN OF THE ADDITIONAL HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY RAMADA, INC.
OR RAMADA FRANCHISE SYSTEMS, INC. (OR ANY OF THEIR AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY.
WINGATE INN(TM) IS A SERVICE MARK OF HOTEL FRANCHISING LIMITED PARTNERSHIP
d/b/a WINGATE INNS, L.P., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR
ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A
GRANT OF A WINGATE FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED
AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY HOTEL FRANCHISING LIMITED PARTNERSHIP d/b/a WINGATE INNS, L.P.
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE
COMMON STOCK OFFERED HEREBY.
TRAVELODGE(R) AND THRIFTLODGE(R) ARE REGISTERED TRADEMARKS OF TRAVELODGE
HOTELS, INC., WHICH HAS NOT ENDORSED OR APPROVED THE OFFERING OR ANY OF THE
FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A
TRAVELODGE OR THRIFTLODGE FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS NOT
INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL
OR ENDORSEMENT BY TRAVELODGE HOTELS, INC. (OR ANY OF ITS AFFILIATES,
SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE COMMON STOCK OFFERED HEREBY.
SHONEY'S(R) IS A REGISTERED TRADEMARK OF SHOLODGE, INC., WHICH HAS NOT
ENDORSED OR APPROVED THE OFFERING OR ANY OF THE FINANCIAL RESULTS OF THE
HOTELS SET FORTH IN THIS PROSPECTUS. A GRANT OF A SHONEY'S(R) FRANCHISE
LICENSE FOR CERTAIN OF THE HOTELS IS NOT INTENDED AS, AND SHOULD NOT BE
INTERPRETED AS, AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY SHOLODGE,
INC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR
THE COMMON STOCK OFFERED HEREBY.
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HILTON(R), HILTON INN(R), AND THE STYLIZED H(R) ARE REGISTERED TRADEMARKS OF
HILTON HOTELS CORPORATION ("HILTON HOTELS"). NEITHER HILTON INNS, INC. NOR
HILTON HOTELS NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR
EMPLOYEES (COLLECTIVELY, THE "HILTON ENTITIES") SHALL IN ANY WAY BE DEEMED AN
ISSUER OR UNDERWRITER OF THE SHARES OF COMMON STOCK OFFERED HEREBY NOR HAS ANY
OF THE HILTON ENTITIES ENDORSED OR APPROVED THE OFFERING. THE HILTON ENTITIES
HAVE NOT ASSUMED, AND SHALL NOT HAVE, ANY LIABILITY OR RESPONSIBILITY FOR ANY
FINANCIAL STATEMENTS OR OTHER FINANCIAL INFORMATION CONTAINED HEREIN OR ANY
PROSPECTUS OR ANY WRITTEN OR ORAL COMMUNICATIONS REGARDING THE SUBJECT MATTER
HEREOF.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Board of Directors is composed of nine members who are divided into
three classes serving staggered three-year terms. Currently, there is one
vacancy on the Board of Directors. The Directors and executive officers of the
Company, their ages as of September 30, 1996, their positions with the Company
and, where appropriate, their classes and terms as directors are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE OR POSITION HELD CLASS/TERM EXPIRATION
---- --- ----------------------- ---------------------
<C> <C> <S> <C>
Chairman of the Board and Chief
Richard L. Fisher 55 Executive Officer Class I/1998
Martin L. Edelman 55 Director and President Class III/1997
Ronald E. Jackson 53 Chief Operating Officer
Kenneth J. Weber 50 Chief Financial Officer
Executive Vice President--
Carl Winston 39 Operations
Executive Vice President,
Douglas H. Verner 42 General Counsel and Secretary
Stephen P. Holmes 39 Director Class II/1999
Michael J. Kennedy 59 Director Class II/1999
Henry R. Silverman 56 Director Class III/1997
Marc E. Leland 58 Director Class III/1997
Dr. Guido Goldman 59 Director Class I/1998
Rachel Robinson 74 Director Class II/1999
</TABLE>
DIRECTORS
The name, principal occupation for the last five years, selected
biographical information and period of service as a Director of the Company of
each Director are set forth below. Pursuant to a stockholders' agreement
discussed below, Messrs. Fisher and Leland are the designees of CL Associates
and Dr. Goldman is the designee of FSNL. See "Certain Transactions."
RICHARD L. FISHER has been the Chairman of the Board and Chief Executive
Officer of the Company since January 24, 1996, and a Director of the Company
since December 20, 1995. Mr. Fisher has been self-employed, engaged in private
investment activities, financial management and real estate ownership and
development, among other businesses, since prior to 1990. Mr. Fisher is a
principal of Fisher Brothers, one of the largest owners of commercial real
estate in New York City. Mr. Fisher is a limited partner in CL Associates, the
President, a director and a stockholder in the general partner of CL
Associates and a partner in various affiliates of CL Associates. Mr. Fisher is
also a member of the Board of Trustees of the University of Pennsylvania and
the Horace Mann School located in Riverdale, New York, the Board of Directors
of Lincoln Center for the Performing Arts and the National Advisory Board of
The Chase Manhattan Bank.
MARTIN L. EDELMAN has been a Director of the Company since November 22, 1994
and President of the Company since January 24, 1996. Mr. Edelman was the Vice
Chairman of the Board of Directors of the Company from December 1995 until
March 1996. He has also been a director of HFS and a member of its Executive
Committee since November 1993. Mr. Edelman has been of counsel to Battle
Fowler LLP, a New York City law firm that provides services to the Company,
since January 1994 and was a partner with that firm from 1972 through 1993.
Mr. Edelman also serves as a director of Presidio Capital Corp. and G. Soros
Realty, Inc. Mr. Edelman is a limited partner in CL Associates and a
stockholder in the general partner of CL Associates. Mr. Edelman is also a
founding member of the Board of Directors of the Jackie Robinson Foundation.
STEPHEN P. HOLMES has been a Director of the Company since September 1994.
Mr. Holmes has been Vice Chairman since 1996, a Director of HFS since June
1994 and was Executive Vice President and Chief Financial Officer of HFS from
July 1992 to July 1996 and was Executive Vice President, Chief Financial
Officer and Treasurer of the Company from November 1994 until February 1996.
Mr. Holmes is also currently a director of AMRE, Inc., a home remodeling and
improvement company. He was employed by The Blackstone Group
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("Blackstone"), a New York investment banking firm, from February 1990 through
September 1991 as a Vice President and a Managing Director.
MICHAEL J. KENNEDY has been a Director of the Company since November 22,
1994. Mr. Kennedy has been an attorney with his own law firm in New York City
since 1976.
HENRY R. SILVERMAN has been a Director of the Company since September 1994.
He has been Chairman of the Board and Chief Executive Officer of HFS since May
1990 and was the Chairman of the Board and Chief Executive Officer of the
Company from November 1994 until January 24, 1996. Mr. Silverman is a former
General Partner of Blackstone, having held such position from February 1990 to
December 1991. He was Senior Vice President, Business Development of Reliance
Group Holdings, Inc., an insurance, consulting and information services
company, from 1982 to 1990 and President and Chief Executive Officer of
Reliance Capital Group, Inc. from November 1983 until February 1990. Mr.
Silverman served as President and Chief Executive Officer of Telemundo Group,
Inc., a Spanish language television network, from 1986 to 1990. Mr. Silverman
was Chairman and Chief Executive Officer of Buckhead America Corporation
("Buckhead"), the former owner of the Days Inns hotel franchise system from
September 1984 until November 1989. Mr. Silverman was an officer of Buckhead
within two years of the time Buckhead filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code. Buckhead, which was formerly known as Days
Inns of America, Inc., is not affiliated with or otherwise related to the
Company.
MARC E. LELAND has been a Director of the Company since December 20, 1995.
Mr. Leland has been President of Marc E. Leland & Associates, engaged in
financial consulting and private investment activities, since 1984. Mr. Leland
is a Vice President and director of the general partner of CL Associates and a
general partner in FGT, L.P., which is a limited partner of CL Associates. Mr.
Leland was the Assistant Secretary of the Treasury for International Affairs
from 1981 to 1984. Mr. Leland is a director of Noble Drilling Corporation, a
company that provides contract drilling services for the oil and gas industry
worldwide.
DR. GUIDO GOLDMAN has been a Director of the Company since August 8, 1996.
Dr. Goldman is a Manager of FSNL, a trustee of a trust and the beneficiary of
another trust, both of which are members in FSNL. Dr. Goldman has been
Chairman of the Board and President of First Spring Corporation, engaged in
private asset management since 1985, and Director of the Program for the Study
of Germany and Europe at the Minda de Gunzburg Center for European Studies of
Harvard University since 1989 and the Director of the Minda de Gunzburg Center
for European Studies from 1969 to 1994. See "Certain Transactions--
Relationships with CL Associates and FSNL."
RACHEL ROBINSON has been a Director of the Company since August 8, 1996. Ms.
Robinson has been the Chairperson of the Jackie Robinson Foundation, a
charitable foundation that creates and administers scholarships for minority
youth, since 1973.
EXECUTIVE OFFICERS
The following sets forth the positions held with the Company and selected
biographical information for the executive officers of the Company who are not
Directors.
RONALD E. JACKSON is currently the Chief Operating Officer of the Company
and has held such office since August 15, 1996. From 1978 until 1993, Mr.
Jackson was the founder and owner of Sunbelt Hotels, Inc., Sunbelt Hotel
Management, Inc. and Houston Hotel Advertising, Inc. Mr. Jackson designed,
developed and operated over $100 million of hotel properties. In addition, Mr.
Jackson managed hotel properties under contract in 21 states throughout the
U.S. The Sunbelt group was sold to Lane Hospitality, Inc. in 1993 whereupon
Mr. Jackson remained as President of Lane Hospitality, Inc.'s Sunbelt Division
through July 1996. Mr. Jackson served on the Board of Directors of the
American Hotel Association, served as Chairman of the Houston Convention and
Visitors Bureau and is a member of the World President's Organization.
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KENNETH J. WEBER is currently the Chief Financial Officer of the Company and
has held such office since March 4, 1996. From September 1992 until February
1996, Mr. Weber was the Senior Vice President and Chief Financial Officer of
Omni Hotels, a company engaged in the ownership and management of hotels. He
was also the Senior Vice President and Chief Accounting Officer of Red Lion
Hotels, a company engaged in the ownership and management of hotels, from
January 1987 until September 1992. From 1973 to 1987, Mr. Weber held various
positions in the hospitality industry. Mr. Weber currently serves on the
Financial Officer Board of the American Hotel and Motel Association.
CARL WINSTON is currently the Executive Vice President-Operations of the
Company and has held such office since January 23, 1996. Mr. Winston was a
Vice President of Forte Hotels from December 1990 until January 1996. He was
also the Vice President of Operations for Motels of America from February 1985
to November 1990. Mr. Winston operated his own management and consulting firm
in 1984. Since 1980, Mr. Winston has managed 230 full- and limited-service
properties in 39 states and several Canadian provinces. Mr. Winston serves on
the American Hotel and Motel Association Economy Lodging Council.
DOUGLAS H. VERNER is currently the Executive Vice President, General Counsel
and Secretary of the Company and has held such offices since January 23, 1996.
Mr. Verner was the Senior Vice President, General Counsel and Secretary of
Forte Hotels from November 1984 until January 1996. He is also Chairman of the
Copyright Committee of the American Hotel and Motel Association.
COMMITTEES
The Board of Directors has three committees of the Board of Directors: the
Executive, Audit and Compensation Committees, as described below.
Executive Committee: The Executive Committee is currently comprised of Mr.
Fisher as Chairman and Messrs. Leland and Edelman. The Executive Committee is
authorized to exercise all the powers and authority of the Board of Directors
in the management of the business and affairs of the Company except those
powers reserved, by law or resolution, to the Board of Directors.
Audit Committee: The Audit Committee is currently comprised of Mr. Kennedy
and Ms. Robinson. The Audit Committee reviews and evaluates the Company's
internal accounting and auditing procedures, recommends to the Board of
Directors the firm to be appointed as independent accountants to audit the
Company's financial statements, reviews with management and the independent
accountants the Company's year-end operating results, reviews the scope and
results of the audit with the independent accountants, reviews with management
the Company's interim operating results, and reviews the non-audit services to
be performed by the firm of independent accountants and considers the effect
of such performance on the accountants' independence.
Compensation Committee: The Compensation Committee is currently comprised of
Mr. Kennedy and Ms. Robinson. The Compensation Committee reviews compensation
arrangements for executives, reviews and makes recommendations to the Board of
Directors regarding the adoption or amendment of employee benefit plans, and
administers the Company's employee stock option plans.
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CERTAIN TRANSACTIONS
RELATIONSHIPS WITH HFS
Prior to November 22, 1994, the Company was a wholly owned subsidiary of
HFS. On that date (the "Distribution Date"), HFS distributed all of the
Company's outstanding Common Stock to HFS' stockholders. In connection with
the Distribution, HFS transferred the assets and liabilities of its business
of financing and developing casino gaming and entertainment facilities (the
"Casino Development Business") to the Company and made cash capital
contributions to the Company aggregating $50 million. As a result of the
Distribution, the Company became a publicly traded corporation and ceased to
be a subsidiary of HFS.
In connection with the Distribution, and for purposes of (i) governing
certain of the ongoing relationships between HFS and the Company after the
Distribution, (ii) providing mechanisms for an orderly transition and (iii)
providing HFS with a means of participating in the economic benefits of future
gaming projects, HFS and the Company entered into each of the agreements
briefly described below. As indicated herein under the caption "Directors and
Executive Officers of the Company," certain of the Company's directors also
serve as directors and/or executive officers of HFS. Each of these directors
and executive officers also owns certain options to purchase shares of the
common stock of HFS.
Distribution Agreement: The Company and HFS entered into a Transfer and
Distribution Agreement (the "Distribution Agreement") to provide for, among
other things, the principal corporate transactions required to effect the
Distribution, the transfer to the Company of the Casino Development Business,
the allocation between HFS and the Company of certain liabilities, the capital
contributions made by HFS to the Company and certain other agreements
governing the relationship between HFS and the Company.
The Distribution Agreement also contains certain provisions relating to
employee compensation, benefits and labor matters and the treatment of options
to purchase HFS common stock held by employees of HFS that were outstanding at
the time of the Distribution. Among such provisions is an agreement by the
Company to reserve for future issuance and to issue up to 433,290 shares of
Common Stock to certain persons (including certain current and former
directors and executive officers of the Company) in connection with the
exercise of then-outstanding options to purchase shares of HFS common stock
that were granted pursuant to HFS' 1992 Stock Option Plan (which options were
adjusted in connection with the Distribution so that the holders of such
options are entitled, upon exercise thereof, to receive one share of Common
Stock for every 20 shares of HFS common stock purchased upon such exercise,
subject to further adjustment in certain circumstances). As of September 30,
1996, the Company had issued 35,060 of these shares of Common Stock in
connection with the exercise of HFS options. At the request of HFS, the
Company will be obligated to register the shares of Common Stock issuable in
connection with HFS' 1992 Stock Option Plan under the Securities Act of 1933.
Financing Agreement: Pursuant to a financing agreement (the "Financing
Agreement"), HFS has agreed to extend up to $75 million in guarantees,
security and other credit enhancements ("Future Guarantees") to secure the
Company's credit facilities ("Future Facilities") until February 28, 2003. The
terms and conditions of each Future Facility and each Future Guaranty are
required to be reasonably satisfactory to HFS. The terms of each Future
Guaranty are required to be those typical and customary for similar guarantees
and are required to comply with certain conditions. HFS is not required to
issue any Future Guarantees if: (x) the Company is in material breach of its
obligations under the financing agreement or under the corporate services
agreement between the Company and HFS; (y) the Company or any joint venture in
which the Company is a participant is in material breach of any franchise or
license agreement with HFS or any of its subsidiaries; or (z) there has been
any material adverse change in the consolidated financial condition of the
Company from December 31, 1995 or any event that could reasonably be expected
to result in such a material adverse change. Pursuant to the Financing
Agreement, HFS has guaranteed $75 million of the Company's $150 million Credit
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The Financing
Agreement requires the Company to pay HFS an annual fee equal to $1.5 million.
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Corporate Services Agreement: Pursuant to a Corporate Services Agreement,
HFS has provided to the Company advisory services in connection with business
acquisitions, financings, and other transactions by the Company. Under the
Corporate Services Agreement, the Company has paid HFS a fixed annual fee of
$1.5 million payable quarterly in advance. In November 1996, the Company and
HFS agreed to terminate the Corporate Services Agreement in exchange for
payment by the Company of $2.5 million and issuance of a $7 million promissory
note payable over seven years commencing on January 1, 1999, and with interest
payable at 6% per year in semi-annual installments commencing on July 1, 1997.
The Company is required and expects to receive consent from its lenders under
the Credit Facility prior to the effective date of the termination of the
Corporate Services Agreement.
Tax Sharing Agreement: Pursuant to a Tax Sharing and Indemnification
Agreement (the "Tax Sharing Agreement"), HFS and the Company have agreed that
(i) HFS shall pay, and indemnify the Company if necessary for, all federal,
state, local and foreign income taxes relating to the Casino Development
Business for any taxable period ending on or before the Distribution Date and
(ii) the Company shall pay, and indemnify HFS if necessary for, all federal,
state and local income taxes attributable to the Casino Development Business
for any taxable period ending after the Distribution Date or that arise as a
result of or in connection with the Distribution. Pursuant to the Tax Sharing
Agreement, HFS is also required to pay all other taxes attributable to periods
prior to the Distribution Date. The Tax Sharing Agreement further provides for
cooperation with respect to certain tax matters, the exchange of certain tax-
related information and the retention of records that may affect the income
tax liability of either party.
Travelodge Acquisition: The Company is a party to franchise agreements with
an affiliate of HFS, under which the Company uses the Travelodge and
Thriftlodge brand names at its properties. The franchise agreements covering
the Travelodge and Thriftlodge properties that are wholly owned by the Company
are between the Company and HFS, and require monthly payment by the Company of
a royalty fee of 4% of the property's gross room revenues plus a marketing fee
also currently set at 4% of gross room revenues. The marketing fee may be
changed from time to time by HFS. These franchise agreements have scheduled
terms of 20 years, but may be terminated by the Company prior to their
scheduled expiration upon the payment of liquidated damages by the Company.
The Company has also entered into the Omnibus License Agreement with an
affiliate of HFS, as licensor, covering the Company's Travelodge and
Thriftlodge properties that are owned by joint ventures. Under the Omnibus
License Agreement, the Company is required to pay a license fee equal to 4% of
gross room revenues multiplied by the Company's percentage interest in each of
the hotel properties owned by joint ventures in which the Company acquired an
interest, plus an additional amount, generally equal to 4.5% of gross room
revenues, for national marketing and reservation services provided by HFS. The
Omnibus License Agreement has a term of 20 years but may be terminated by the
Company with respect to any particular joint venture prior to the scheduled
expiration. Also, if any particular joint venture is terminated, then the
licensor may terminate the Omnibus License Agreement with respect to the
property owned by that joint venture. In either case, the Company is required
to pay liquidated damages upon the early termination of the Omnibus License
Agreement with respect to any individual joint venture. The amount of
liquidated damages payable by the Company upon termination of the franchise
agreement covering any wholly-owned property or the license agreement covering
any joint venture-owned property equals five times the amount of the royalty
fees payable in respect of that property during the 12 months most recently
preceding the termination, if the termination occurs before the end of the
fourth year of the franchise or license agreement. If the termination occurs
thereafter, the amount of liquidated damages scales down annually, reaching
two times the amount of the royalty fees payable in respect of that property
during the 12 months most recently preceding the termination if the
termination occurs after the sixth year of the franchise or license agreement.
Canadian Master License: The Company is a party to a master license
agreement (the "Canadian Master License") with Travelodge Hotels, Inc., a
subsidiary of HFS ("THI"). The Canadian Master License grants the Company an
exclusive 30-year license to franchise the Travelodge system throughout
Canada. The Company has agreed to pay $350,000 for the license over five
years. This payment also covers the initial fees for the first 20 Travelodge
franchises the Company grants. After 20 franchises, the Company will pay an
initial fee of C$1,500 to THI for each new franchise granted. The Company will
also pay to THI continuing royalty fees of 1% of franchisees' gross room
revenue (except for a group of 25 hotels, for which the Company will pay 2% of
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gross room revenue) and marketing fees (which vary from franchise to
franchise, but are a percentage of the franchisees' gross room revenue). The
Company has hired Royco to develop the Travelodge license in Canada. Upon the
termination or expiration of the MSFDA, Royco shall have the option to
purchase the Canadian Master License from the Company.
Mexican Master License: Chartwell de Mexico is a party to a master license
agreement (the "Mexican Master License") with THI. The Mexican Master License
grants Chartwell de Mexico an exclusive 30-year license to franchise the
Travelodge system throughout Mexico. Chartwell de Mexico has agreed that, once
it has entered into 30 franchise agreements covering hotels in Mexico, it will
pay to THI an amount equal to 1/3 of the initial franchise fees paid to
Chartwell de Mexico by the franchisees of those properties, net of any
franchise commissions paid by Chartwell de Mexico to salespersons in
connection therewith. Chartwell de Mexico is also obligated to pay to THI
continuing royalty fees of 2% of a franchisee's gross room revenue,
reservation fees of $9 for each reservation (with a cap of $750 per quarter
for hotels under 125 rooms, or 1.5% of gross room revenue for hotels having
125 rooms or more), and marketing fees of .5% of gross room revenues.
Chartwell de Mexico is obligated under the Mexican Master License to develop a
fixed number of hotel suites or resort lodging guest rooms by December 31 of
each year from 1997 to 2006.
Development Advance Agreement: The Company is a party to a development
advance agreement, dated as of October 1996, pursuant to which HFS will make a
$2.8 million development advance to the Company in December 1996. The Company
is required and expects to receive consent from its lenders under the Credit
Facility prior to the effective date of the development advance agreement. The
development advance must be repaid by the Company, without interest, on
December 31, 2000, but the amount required to be repaid will be reduced to the
extent that hotels acquired or constructed by the Company become HFS
franchised hotels under franchise agreements of ten years or longer using any
HFS brand other than Wingate Inn. The development advance will be reduced on a
dollar-for-dollar basis through December 31, 2000 for each dollar in initial
and recurring royalty fees payable to HFS under those new franchise
agreements.
Management Overlap and Conflicts of Interest: Messrs. Edelman, Holmes and
Silverman are directors of HFS. As a result, there is substantial overlap in
the boards of directors of the Company and HFS. Due to such commonality of
management, certain conflicts of interest may arise with respect to the
administration of the ongoing relationships between HFS and the Company. In
particular, such conflicts may arise with respect to the Financing Agreement,
as amended, and the various franchise agreements between the Company and HFS.
It is anticipated that these conflicts of interest, to the extent that they
arise, will be resolved by disinterested directors. The resolution of these
conflicts of interests may, however, be more difficult than would otherwise be
the case due to the level of commonality between the Company's and HFS' board
of directors.
RELATIONSHIPS WITH CL ASSOCIATES AND FSNL
The Company, CL Associates, FSNL and certain of their affiliates have the
relationships described below.
Pursuant to the Stock Purchase Agreement, under which CL Associates and FSNL
made the CL Associates/FSNL Investment, CL Associates and FSNL agreed to the
following restrictions on their activities:
Independent Directors: Each of the CL Associates and FSNL agreed to vote
its shares of Common Stock and to use its best efforts to elect and
maintain as independent directors on the Company's Board of Directors at
least two individuals who are not employees, officers, directors or
affiliates of CL Associates or FSNL, do not have any beneficial ownership
interest in CL Associates or FSNL, or any of their affiliates (other than
the Company) and are otherwise disinterested directors ("Independent
Directors"). If the aggregate number of shares of Common Stock held by CL
Associates and FSNL is reduced to below 35% of the total number of shares
of Common Stock then outstanding (but not solely as a result of dilution of
the percentage of shares of Common Stock held by them due to the issuance
of Common Stock by the Company) as a result of any sale or other transfer
of shares of Common Stock by CL Associates or FSNL, CL Associates and FSNL
are required to cause a sufficient number of their representatives on the
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Company's Board of Directors to resign so that the percentage of
directorships held by Independent Directors after that event is equal to
the percentage of shares of Common Stock owned by stockholders other than
CL Associates and FSNL (the "Required Percentage"); and CL Associates and
FSNL are required to cause any of their remaining representatives on the
Board of Directors to vote in favor of filling the resulting vacancies with
Independent Directors. Thereafter, CL Associates and FSNL are required to
vote their shares of Common Stock to cause the percentage of Independent
Directors to be no less than the Required Percentage.
Restrictions on Transfers of the Shares: Each of CL Associates and FSNL
has agreed that none of the shares purchased by them in the CL
Associates/FSNL Investment will be sold, pledged or otherwise transferred,
directly or indirectly, by it except (A) in connection with a merger or
consolidation of the Company in which all holders of Common Stock receive
the same consideration and which is (i) approved by a majority of the
Independent Directors, and (ii) is subject to the voting requirements
described below under the caption "Voting on Mergers, Liquidations and
Sales of Assets"; (B) after August 8, 1999, in a bona fide underwritten
public offering pursuant to an effective registration under the Act; (C) in
a sale, pledge or other transfer (a "Transfer") by either Chartwell or FSNL
after August 8, 1999, if after giving effect to that Transfer the aggregate
number of shares of Common Stock held by CL Associates, FSNL and their
affiliates is equal to or greater than 35% of the total number of shares of
Common Stock then outstanding and that Transfer is approved by a majority
of the Independent Directors; (D) in a Transfer by FSNL of any of the
shares it acquired as part of the CL Associates/FSNL Investment after
August 8, 2002, if after giving effect to that Transfer the aggregate
number of shares of Common Stock held by CL Associates, FSNL and their
affiliates is equal to or greater than 35% of the total number of shares of
Common Stock then outstanding, and that Transfer is made in a transaction
satisfying the manner of sale requirements for a "brokers' transaction"
under Rule 144 under the Securities Act, whether or not that sale is made
pursuant to Rule 144 (a "Brokers' Transaction"); (E) in a Transfer by FSNL
of any of the shares it acquired as part of the CL Associates/FSNL
Investment after August 8, 2002 at a time when the aggregate number of
shares of Common Stock held by CL Associates, FSNL and their affiliates is
already less than 35% of the total number of shares of Common Stock then
outstanding, if that Transfer is approved by a majority of the Independent
Directors and is made in a Brokers' Transaction; (F) in a Transfer by CL
Associates after August 8, 2002 at a time when CL Associates owns less than
5% of the total number of shares of Common Stock then outstanding and has
no representatives serving on the Board of Directors of the Company, if
that Transfer is made in a Brokers' Transaction; and (G) sales or other
transfers between CL Associates and FSNL.
Affiliate Transactions: CL Associates and FSNL have agreed that, for so
long as CL Associates, FSNL and their affiliates continue to own, in the
aggregate, at least 20% of the outstanding shares of Common Stock of the
Company, CL Associates and FSNL will not, and will not permit any of their
affiliates to, enter into any transaction or series of related
transactions, or grant or consent to, or otherwise permit, any amendment
to, supplement of or waiver under, any agreement or contract, with the
Company or any of its subsidiaries (any of the foregoing, an "Affiliate
Transaction") unless: (i) it has been determined by a committee of the
Company's Board of Directors comprised of one or more Independent Directors
(the "Independent Board Committee") that the Affiliate Transaction is in
the best interests of the Company and is on fair and reasonable terms, no
less favorable to the Company than terms that the Company and a non-
affiliated person in a similar situation would agree to in an arm's length
transaction; and (ii) if the Affiliate Transaction has a total value in
excess of $10,000, the Independent Board Committee has received a favorable
fairness opinion from an appropriate, independent party relating to the
transaction. These arrangements do not, however, limit the reasonable
compensation the Company may pay to its officers and directors, or restrict
the existing arrangement between the Company and CL Associates relating to
the family entertainment center located in Vicksburg, Mississippi, which
predated the Stock Purchase Agreement. See "Certain Transactions--
Relationships with CL Associates and FSNL--Vicksburg Facility."
Voting on Mergers, Liquidations and Sales of Assets: CL Associates and
FSNL have agreed that, if at any time prior to August 8, 2002, the Company
proposes to sell all or substantially all of its assets, to merge
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<PAGE>
or consolidate with any other entity, or to cause the liquidation or
dissolution of the Company (each, a "Triggering Event"), and the Company
submits the Triggering Event to a vote of its stockholders, then each of CL
Associates and FSNL will vote all of its respective shares of Common Stock
entitled to vote on that matter in favor of and against the Triggering
Event in the same proportion as the numbers of shares of Common Stock held
by stockholders of the Company other than CL Associates, FSNL and their
affiliates ("Nonaffiliated Shares") voted in favor of and against the
Triggering Event bear to the total number of Nonaffiliated Shares voted on
such Triggering Event. If any party commences a proxy contest or tender
offer relating to the Triggering Event in any manner, however, these voting
requirements will not apply, and each of CL Associates and FSNL will be
entitled to vote all of its shares of Common Stock in favor of or against
the Triggering Event, in its sole discretion.
Purchase of Additional Shares: CL Associates and FSNL have agreed that
none of CL Associates, FSNL or any of their affiliates will purchase or
otherwise acquire any additional shares of Common Stock or any securities
exercisable for or convertible into Common Stock (other than options
granted under a stock option plan of the Company having customary terms and
constituting reasonable compensation ("Excluded Stock Options") and shares
of Common Stock issued on the exercise of Excluded Stock Options) (the
"Acquired Stock"), from any person or entity (other than the Company or CL
Associates, FSNL or any of their affiliates) if the Acquired Stock would,
when aggregated with all of the other shares of Common Stock owned by CL
Associates, FSNL and their affiliates (other than shares acquired, or
subject to issuance, on the exercise of Excluded Stock Options), and
assuming the exercise or conversion of the Acquired Stock into Common
Stock, if applicable, result in the ownership by CL Associates, FSNL and
their affiliates of shares of Common Stock representing in excess of 55% of
the then-outstanding shares of Common Stock of the Company on a fully
diluted basis, assuming the exercise or conversion of all other outstanding
securities of the Company exercisable for or convertible into Common Stock,
unless: (i) CL Associates, FSNL or that affiliate, as the case may be,
offers to purchase the Acquired Stock from all of the holders thereof in
compliance with all applicable securities and other laws, rules and
regulations, (ii) the purchase is approved by the Independent Board
Committee, and (iii) the Independent Board Committee has received a
favorable fairness opinion from an appropriate, independent party relating
to the purchase. CL Associates and FSNL have also agreed that none of CL
Associates, FSNL or any of their affiliates will purchase or otherwise
acquire any Acquired Stock from the Company, unless: (i) the purchase is
approved by the Independent Board Committee, and (ii) the Independent Board
Committee has received a favorable fairness opinion from an appropriate,
independent party with respect to the purchase.
Restriction on Other Hotel Properties: CL Associates and FSNL have agreed
that, for so long as CL Associates, FSNL and their affiliates continue to
own, in the aggregate, at least 20% of the outstanding shares of Common
Stock of the Company or have any representatives serving on the Company's
Board of Directors, none of CL Associates, FSNL or any of their affiliates
shall acquire any interest in an existing hotel property or properties
(including by foreclosure on any mortgage acquired on or after January 1,
1996), or any interest in a hotel property or properties that are under
development or in any property that CL Associates, FSNL or that affiliate,
as the case may be, intends to develop as a hotel property. These
restrictions will not apply to acquisitions by any of CL Associates, FSNL
and their affiliates of hotels under development by affiliates of CL
Associates on the date of the Stock Purchase Agreement, redevelopment of
hotels owned by affiliates of CL Associates on January 1, 1996, or
acquisitions of hotels on which affiliates of CL Associates had liens on
January 1, 1996.
Registration Rights Agreement: Pursuant to a registration rights
agreement, each of CL Associates and FSNL (or its assignee) (the
"Initiating Holder") has the right at any time after August 8, 1999 to make
a written request for registration (a "Demand Registration Statement")
under the Act, for the resale by such Holder of all or part of such
Holder's Registrable Securities (defined below). CL Associates or its
assignees have the right to request two Demand Registration Statements and
FSNL or its assignees have the right to request one Demand Registration
Statement, provided, however, that neither CL Associates nor any of its
assignees have the right to request a Demand Registration Statement with
respect to less than 5% of the number of shares of Common Stock outstanding
at the time of the request. For purposes of the Registration Rights
Agreement, the term "Registrable Securities" means (i) the 4,904,930 shares
currently held by CL
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Associates and FSNL, and (ii) any other securities issued in exchange for,
upon conversion of, as a dividend on or otherwise in respect of any such
securities, and the term "Holder" means CL Associates, FSNL and any assignee
of CL Associates or FSNL who becomes a party to the Registration Rights
Agreement. The Company will pay all registration expenses in connection with a
Demand Registration Statement.
In addition, after August 8, 1999, if the Company proposes to register any
of its securities for its own account or the account of any of its
stockholders (other than certain registrations including a registration
relating solely to an employee benefit plan and certain exchanges of
securities with stockholders), the Holders have the right (the "Incidental
Registration Right"), upon a timely request, to have the resale of their
Registrable Securities covered by the registration. If, in either a Demand
Registration Statement or a registration statement filed in connection with
the exercise of an Incidental Registration Right, the shares of Common Stock
to be registered are to be distributed by means of an underwritten offering,
the underwriter may limit the number of shares of Common Stock to be
registered if in its judgment marketing factors require such a cutback.
Vicksburg Facility: Chartwell Leisure Associates L.P., an affiliate of CL
Associates and Messrs. Fisher, Edelman and Leland ("Chartwell Leisure
Associates L.P."), has entered into agreements with Pennants Vicksburg Family
Entertainment Park, Inc., a wholly owned subsidiary of Six Flags Theme Parks,
Inc., to develop and manage a family entertainment center in Vicksburg,
Mississippi (the "Vicksburg Facility") on land that is ground leased by
Chartwell Leisure Associates L.P. from affiliates of Rainbow Casino
Corporation (collectively, "Rainbow"). As an inducement to Chartwell Leisure
Associates L.P. to provide financing for the Vicksburg Facility, the Company
and Chartwell Leisure Associates L.P. share principal and interest payments on
a loan to Rainbow, with Chartwell Leisure Associates L.P.'s share ranging from
14% to 27%, of such payments, adjusted annually. Similarly, HFS and Chartwell
Leisure Associates L.P. share marketing fees from Rainbow with Chartwell
Leisure Associates L.P.'s share ranging from 20% to 27% of such payments,
adjusted annually. Chartwell Leisure Associates L.P. has agreed to share with
HFS 50% of the net cash flow payable to Chartwell Leisure Associates L.P. in
respect of the Vicksburg Facility, and HFS has agreed to share such amounts
pro rata with the Company based on the relative amounts paid by HFS and the
Company, respectively, to Chartwell Leisure Associates L.P. each year.
Chartwell Hotels: Chartwell Hotels Associates, a Delaware general
partnership, and Chartwell Hotels II Associates, a Delaware general
partnership, which are both affiliates of CL Associates and Messrs. Edelman,
Fisher and Leland (collectively, "Chartwell Hotels"), and their affiliate
Chequers Investment Associates, have acquired certain hotels and mortgages
secured by hotels from the Resolution Trust Corporation. In two transactions
with Chartwell Hotels, entered into in November 1992 and May 1993, and each
amended in December 1994, which have resulted in and will result in the
addition of hotels to HFS' franchise systems, HFS has advanced approximately
$10 million, and has agreed to advance up to an additional $4 million if
certain additional property conversions and other requirements are met, in
return for Chartwell Hotels' agreement to franchise the properties with one of
HFS' brands. Subject to the exceptions described below, all hotels owned by
Chartwell Hotels will pay royalties once they become part of HFS' franchise
systems, and a portion of these royalties will be credited toward the recovery
of HFS' $10 million advance. With the consent of HFS, Chartwell Hotels may
elect not to operate a hotel as an HFS franchised hotel, provided that it pays
HFS a percentage of gross room sales in lieu of royalties (the "Non-Franchised
Property Fee"). In addition, in the event that the improvement costs required
to upgrade any Chartwell Hotels property so that such property meets HFS'
franchise requirements exceed a threshold amount, the property will not be
required to be operated under an HFS brand but Chartwell Hotels will be
required to pay HFS a certain fee in connection with such property (the
"Unimproved Property Fee"). The entire amount of any Unimproved Property Fees
and Non-Franchised Property Fees will be credited toward the recovery of HFS'
$10 million advance. Each advance is required to be fully recovered over a
maximum five-year period following the advance. In addition, as individual
properties convert to HFS brands, HFS will make additional advances to the
franchisee of such properties to fund costs incurred in connection with the
conversion. Those advances are required to be repaid with interest by the
franchisee over a three-year period and that repayment has been guaranteed by
Chartwell Hotels.
Chartwell Hotels Associates and HFS are also parties to a letter agreement
dated January 1, 1994 terminating an agreement dated November 17, 1992 whereby
HFS had agreed to provide certain consulting
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services to Chartwell Hotels Associates. Under the termination letter dated
January 1, 1994, Chartwell Hotels Associates agreed to pay HFS a fee of $2
million, payable over five years, in full consideration of the termination of
those consulting arrangements.
Stockholders' Agreement: CL Associates and FSNL have entered into a
stockholders' agreement (the "Stockholders' Agreement") that provides that CL
Associates and FSNL will vote their shares of Common Stock to elect as a
Director of the Company one nominee selected by FSNL and any number of
nominees selected by CL Associates, and that FSNL will vote its shares of
Common Stock at all meetings of stockholders of the Company and in any written
consent in the manner directed by CL Associates. The Stockholders' Agreement
also provides for certain restrictions on the transfer of their shares of
Common Stock and on future acquisitions of shares of Common Stock by CL
Associates and FSNL. Until August 2002, FSNL is prohibited from transferring
its shares to persons other than CL Associates and certain other permitted
transferees identified in the Stockholders' Agreement. Additionally, under the
Stockholders' Agreement, FSNL is afforded certain "tag-along" rights
exercisable by it upon a sale of shares by CL Associates or upon a request by
CL Associates of a Demand Registration Statement pursuant to the Registration
Rights Agreement. CL Associates may sell its shares to FSNL and certain other
permitted transferees identified in the Stockholders' Agreement and to third
parties, provided that CL Associates allows for FSNL to "tag-along" in the
event of sale to any third party. CL Associates may also require FSNL to sell
its shares to a third party offering to purchase all of CL Associates' and
FSNL's shares of Common Stock.
New York Lease: The Company leases approximately 18,700 square feet of
office space located at 605 Third Avenue, New York, New York for a period of
ten years from an affiliate of CL Associates and an unaffiliated third party.
Under this lease, the Company is obligated to pay approximately $542,000 per
year for each of the first five years, and approximately $600,000 per year for
each of the last five years, of the term of the lease for the use of such
office space. The terms of this lease are, in the opinion of the Company,
substantially similar to the market terms that would be available from a third
party for a similar property.
RELATIONSHIPS WITH MR. EDELMAN
Mr. Edelman is of counsel to Battle Fowler LLP, a New York City law firm
that is representing the Company in various matters relating to the sale of
shares of Common Stock offered hereby and has represented the Company, HFS and
certain affiliates of Chartwell, including CL Associates, in the past with
respect to various legal matters. The Company expects to continue to engage
Battle Fowler LLP after the closing of the Offering.
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PRINCIPAL STOCKHOLDERS
The information set forth in the following table is furnished as of November
20, 1996 with respect to shares of Common Stock beneficially owned by (i) any
person (including any "group," as that term is used in Section 13(d)(3) of the
Exchange Act) who is known to the Company to be the beneficial owner of more
than 5% of the Company's outstanding Common Stock, (ii) each of the Company's
directors and each of its executive officers, and (iii) all of its directors
and executive officers as a group, and as adjusted at that date to reflect the
sale of the shares of Common Stock offered hereby. Such information (other
than with respect to directors and officers of the Company) is based on a
review of statements filed with the Commission pursuant to Sections 13(d),
13(f), and 13(g) of the Exchange Act with respect to the Company's Common
Stock. As of November 20, 1996, there were 9,476,600 shares of Common Stock
outstanding.
<TABLE>
<CAPTION>
NUMBER OF PERCENT PERCENT
SHARES OF CLASS OF CLASS
BENEFICIALLY BEFORE AFTER
OWNED OFFERING OFFERING
------------ -------- --------
FIVE PERCENT STOCKHOLDERS
- -------------------------
<S> <C> <C> <C>
Chartwell Leisure Associates L.P. II(1)..... 4,904,930 51.76%(2) 35.09%
222 Purchase Street, Suite 303
Rye, New York 10580
FSNL LLC(3)................................. 1,052,631 11.11% 7.53%
157 Church Street, 19th Floor
New Haven, Connecticut 06510
The Kaufmann Fund, Inc.(4).................. 602,500 6.36% 4.31%
140 East 45th Street, 43rd Floor
New York, New York 10017
George Weiss Associates, Inc.,.............. 474,800 5.01% 3.40%
George Weiss Associates, Inc.
Profit Sharing Plan Trust Dated 12/1/78,
and
IOU Limited Partnership(5)
One State Street
Hartford, CT 06103
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
<S> <C> <C> <C>
Richard L. Fisher(6)........................ 4,911,930 51.80% 35.13%
Henry R. Silverman(7)....................... 283,372 2.90% 1.99%
Stephen P. Holmes(8)........................ 24,200 * *
Martin L. Edelman(9)........................ 199,910 2.11 1.43%
Michael J. Kennedy(10)...................... 15,000 * *
Marc E. Leland(11).......................... 4,909,930 51.78% 35.12%
Dr. Guido Goldman(12)....................... 1,052,631 11.11% 7.53%
Rachel Robinson............................. 0 * *
Carl Winston................................ 1,000 * *
Ronald E. Jackson........................... 0 * *
Kenneth J. Weber............................ 0 * *
Douglas H. Verner........................... 0 * *
All Executive Officers and Directors as a
Group (12 persons)(13)..................... 5,255,502 53.52% 36.70%
</TABLE>
- --------
* less than 1%
(1) CL Associates is a limited partnership primarily consisting of members of
the Fisher Brothers family and a trust for the benefit of Gordon Getty
and members of his family. Of the 4,904,930 shares of Common Stock
reflected in the table as beneficially owned by it, CL Associates has
sole power to vote and dispose of 3,852,299 shares of Common Stock.
Pursuant to the Stockholders' Agreement, FSNL and CL Associates have
agreed to elect certain nominees as Directors and FSNL has agreed to vote
its shares of Common Stock at all meetings of stockholders of the Company
and in any written consent in the manner directed by CL Associates.
Therefore, CL Associates and FSNL are deemed to share voting and
dispositive power with respect to the 1,052,631 shares reflected in the
table as owned by FSNL, and the number of shares reflected
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in the table as owned by CL Associates includes both the shares that are
owned of record by CL Associates and the shares that are owned of record by
FSNL. See "Certain Transactions--Relationships with CL Associates and
FSNL." Messrs. Fisher, Leland and Edelman are beneficial owners of CL
Associates.
(2) The 3,852,299 shares owned of record by CL Associates represents
approximately 40.76% of the outstanding shares of Common Stock before
giving effect to the Offering.
(3) FSNL is a limited liability company owned principally by a trust for the
benefit of Charles de Gunzburg. Pursuant to the Stockholders' Agreement,
FSNL and CL Associates share voting and dispositive power with respect to
these shares. Dr. Goldman is a beneficial owner of FSNL.
(4) Based upon information contained in a Schedule 13G dated February 15,
1996, filed by The Kaufmann Fund, Inc., a registered investment company,
such entity beneficially owns 602,500 shares of Common Stock. The
Kaufmann Fund, Inc. has sole voting and sole dispositive power over such
shares.
(5) Based upon information contained in a Schedule 13D, dated September 10,
1996, filed by the group composed of George Weiss Associates, Inc., a
broker-dealer ("Weiss Inc."), George Weiss Associates, Inc. Profit
Sharing Plan Trust Dated 12/1/78, an employee profit sharing plan ("Weiss
Profit Plan Trust"), and IOU Limited Partnership, an investment company
("IOU L.P."), such entities beneficially own in the aggregate 474,800
shares of Common Stock. Weiss Inc. has sole voting and sole dispositive
power over 192,700 shares of Common Stock. Weiss Profit Plan Trust has
sole voting and sole dispositive power over 251,600 shares of Common
Stock. IOU L.P. has shared voting and shared dispositive power over
30,500 shares of Common Stock.
(6) Includes 5,000 shares issuable upon the exercise of options granted under
the Company's 1994 Stock Option Plan, which options are currently
exercisable, or exercisable within 60 days. Also includes all shares
owned by CL Associates, and 2,000 shares owned by Fisher Brothers
Financial and Development Company ("FBFDC"). Mr. Fisher is the President
and one of the two directors of Chartwell Leisure Corp. II ("CL Corp."),
the general partner of CL Associates, and, accordingly, may be deemed to
own beneficially all shares owned beneficially by CL Associates. Mr.
Fisher is also a limited partner of CL Associates. FBFDC is a New York
limited partnership of which Mr. Fisher is both a general and limited
partner. Mr. Fisher disclaims beneficial ownership of the shares of
Common Stock owned by CL Associates and FBFDC other than 373,993 shares
representing 9.70% of the shares owned of record by CL Associates and 16%
of the shares owned by FBFDC. Mr. Fisher owns, in the aggregate, a 9.70%
beneficial interest in CL Associates and a 16% interest in FBFDC.
(7) Includes 278,200 shares of Common Stock issuable upon the exercise of
options granted under the 1992 Stock Option Plan of HFS, the former
parent of the Company, which options are currently exercisable, and 5,172
shares of Common Stock in two retirement plans whose sole beneficiary is
Mr. Silverman. Mr. Silverman was granted options to purchase 300,000
shares of Common Stock on November 22, 1994 under the Company's 1994
Stock Option Plan. Such options were cancelled as of February 1, 1996.
(8) Includes 24,000 shares issuable upon the exercise of options granted
under HFS' 1992 Stock Option Plan, which options are currently
exercisable or exercisable within 60 days. Mr. Holmes was granted options
to purchase 60,000 shares on November 22, 1994 under the Company's 1994
Stock Option Plan. Such options were cancelled as of February 1, 1996.
(9) Includes 15,000 shares issuable upon the exercise of options granted
under the Company's 1994 Stock Option Plan, which options are currently
exercisable, or exercisable within 60 days. Amounts shown include 184,910
shares representing 4.8% of the shares owned of record by CL Associates.
Mr. Edelman owns, in the aggregate, a 4.8% beneficial interest in CL
Associates.
(10) Includes 15,000 shares issuable upon the exercise of options granted
under the Company's 1994 Stock Option Plan, which options are currently
exercisable or exercisable within 60 days.
(11) Includes 5,000 shares issuable upon the exercise of options granted under
the Company's 1994 Option Plan, which options are currently exercisable
or exercisable within 60 days. Also represents the shares of Common Stock
beneficially owned by CL Associates. Mr. Leland is the Vice President and
one of the two directors of CL Corp. and, accordingly, may be deemed to
own beneficially all shares owned beneficially by CL Associates. Mr.
Leland is also a beneficial owner of CL Associates. Mr. Leland disclaims
beneficial ownership of the shares of Common Stock owned by CL Associates
other than 122,118 shares, representing approximately 3.17% of the shares
owned of record by CL Associates. Mr. Leland owns an 8% general
partnership interest in FGT L.P. which, in turn, owns a 39.6% limited
partnership interest in CL Associates.
(12) Represents the shares of Common Stock held by FSNL. Dr. Goldman is a
Manager and beneficial owner of FSNL and a beneficiary of a trust that is
a member in FSNL. Dr. Goldman disclaims beneficial ownership of the
shares of Common Stock owned by FSNL.
(13) Includes 337,200 shares, in the aggregate, of Common Stock purchasable by
officers and directors pursuant to options granted under HFS' 1992 Stock
Option Plan or the Company's 1994 Stock Option Plan, which options are
currently exercisable or exercisable within 60 days.
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DESCRIPTION OF CAPITAL STOCK
The following description summarizes certain information regarding the
capital stock of the Company. This information does not purport to be complete
and is subject in all respects to the applicable provisions of the Delaware
General Corporation Law, as amended (the "DGCL"), the Company's Restated
Certificate of Incorporation (the "Certificate of Incorporation") and the
Company's Amended and Restated Bylaws (the "Bylaws").
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, $0.01 par value per share, and 10,000,000 shares of Preferred
Stock, $1.00 par value per share. Upon consummation of the Offering,
13,976,600 shares of Common Stock will be issued and outstanding. The Company
has no shares of Preferred Stock issued and outstanding, nor will any shares
of Preferred Stock be issued and outstanding upon consummation of the
Offering.
COMMON STOCK
Each share of Common Stock entitles the holder thereof to one vote on all
matters submitted to a vote of stockholders, including the election of
directors. There is no cumulative voting in the election of directors;
consequently, the holders of a majority of the outstanding shares of Common
Stock can elect all of the directors then standing for election.
Holders of Common Stock are entitled to receive such dividends, if any, as
may be declared from time to time by the Board of Directors out of funds
legally available therefor. See "Dividend Policy." Holders of Common Stock
have no conversion, redemption or preemptive rights to subscribe to any
securities of the Company. All outstanding shares of Common Stock are, and the
shares to be sold in the Offering when issued and paid for will be, validly
issued, fully paid and nonassessable. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, holders of Common
Stock will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors. The rights,
preferences and privileges of holders of Common Stock are subject to the
rights of the holders of any shares of preferred stock that the Company may
issue in the future.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to create
and issue one or more series of Preferred Stock and determine the rights and
preferences of each series, to the extent permitted by the Certificate of
Incorporation and applicable law. Among other rights, the Board of Directors
may determine with respect to any such series of preferred stock (i) the
designation of such series; (ii) the rate and time of, and conditions and
preferences with respect to, dividends, and whether such dividends are
cumulative; (iii) the voting rights, if any, of shares of such series; (iv)
the price, timing and conditions regarding the redemption of shares of such
series and whether a sinking fund should be established for such series; (v)
the rights and preferences of shares of such series in the event of voluntary
or involuntary dissolution, liquidation or winding up of the affairs of the
Company; and (vi) the right, if any, to convert or exchange shares of such
series into or for stock or securities of any other series or class. Except
for any difference so provided by the Board of Directors, the shares of all
series of Preferred Stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets of liquidation.
The provisions of any such series of preferred stock could have an adverse
effect on the earnings of the Company available for dividends on the Common
Stock and for other corporate purposes and on amounts distributable to the
holders of Common Stock if the Company were liquidated. Such provisions may
also include restrictions on the ability of the Company to pay dividends on,
repurchase or redeem shares of Common Stock or other series of preferred
stock.
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DIVESTITURE AND LOSS OF VOTING RIGHTS
The Certificate of Incorporation contains a provision (the "Gaming
Provision") that provides that except as otherwise approved by the Company's
Board of Directors, no stockholder who is a "Disqualified Stockholder" would
be entitled to vote, directly or indirectly, any shares of the Company's
capital stock beneficially owned by such stockholder on any matter. A
"Disqualified Stockholder" is defined as any stockholder who (i) owns
beneficially five percent or more of the outstanding capital stock of the
Company and has not fully cooperated with the Company and/or any regulatory
gaming authority with respect to providing information or complying with other
similar requests, (ii) is required by any gaming authority to be qualified
with respect to any of the Company's or its subsidiaries' gaming licenses or
authorizations (collectively, the "Gaming Licenses") and who has neither been
qualified by nor obtained a waiver of qualification from each gaming authority
requiring such qualification (a "Waiver") in a timely manner, (iii) has been
found unsuitable or disqualified by any gaming authority with respect to any
Gaming Licenses, if such finding has not been reversed, vacated or superseded
or (iv) is not a United States citizen (as defined under the Shipping Act or
the Merchant Marine Act) and who acquires beneficial ownership of shares of
the Company's capital stock, which when aggregated with all other shares of
the Company's capital stock that are owned by non-U.S. citizens, represents
more than 25% of the Company's outstanding capital stock (such shares of
capital stock in excess of 25% of the Company's outstanding capital stock
being the "Excess Shares"). Shares of the Company's capital stock held by a
Disqualified Stockholder would not be considered as outstanding stock entitled
to vote for any purpose.
In addition, under the Gaming Provision, the Company has the right, upon
written notice, to require that a Disqualified Stockholder that holds
"Publicly-traded Securities" dispose of any and all (or the Excess Shares in
the case of a Disqualified Stockholder described in (iv) above) of the
Company's Publicly-traded Securities held by such Disqualified Stockholder.
"Publicly-traded Securities" are defined as any securities that are listed or
admitted to trading on any national securities exchange or are quoted on the
NASDAQ.
The Company also has the right, at its option, to call for redemption any or
all of the shares (or the Excess Shares in the case of a Disqualified
Stockholder described in (iv) above) of the Company's capital stock
beneficially owned by a Disqualified Stockholder. Generally, the "Redemption
Price" paid to the Disqualified Stockholder for each share of capital stock,
in the case of exchange-listed or NASDAQ-quoted stock, would be equal to the
average closing price of such shares for the 20-day period preceding the date
of the notice of redemption, and if the stock were not listed or quoted, then
the Redemption Price would be the fair market value as determined by the
Company's Board of Directors. The Company has the right to pay the Redemption
Price to the Disqualified Stockholder in cash, property or rights, including
securities of the Company, as the Board of Directors might determine. If, on
the date set for redemption, a holder failed to deliver the certificates for
the shares to be redeemed properly endorsed for transfer, the payment to be
delivered by the Company would be set aside to be delivered to the holder,
without interest, upon surrender of the certificates. Unsurrendered
certificates would no longer represent outstanding shares, the right to
receive further dividends with respect to those shares would cease, and all
rights of the person holding those shares would cease, except for the right to
receive the payment that had been set aside with respect to those shares.
CLASSIFIED DIRECTORS
The Certificate of Incorporation provides that the number of directors shall
not be less than three nor more than 15 and, within such limits and subject to
the rights of holders of any class or series of preferred stock, the number
may be fixed from time to time by the Board of Directors of the Company. The
Certificate of Incorporation provides that directors shall be divided into
three classes, designated Class I, Class II and Class III, each class
consisting, as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. Each director serves for
a term ending on the date of the third annual meeting of stockholders next
following the annual meeting at which such director was elected, provided that
directors originally designated as Class I, Class II and Class III directors,
respectively, serve for a term ending on the date of the first, second and
third annual meeting, respectively, following the effective date of the
Certificate of Incorporation.
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With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, are generally required to effect a change in a
majority of the Board of Directors. As a result, a classified Board of
Directors may discourage proxy contests for the election of directors or
purchases of a substantial block of the Common Stock because it limits the
ability to obtain control of the Board of Directors of the Company in a
relatively short period of time. The classification provisions could also have
the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of the Company. In addition, because
under Delaware law a director serving on a classified Board of Directors may
be removed only for cause, a classified Board of Directors would delay
stockholders who do not agree with the policies of the Board of Directors from
replacing a majority of the Board of Directors for two years, unless it could
be demonstrated that the directors should be removed for cause and the
requisite vote of stockholders were obtained. Such a delay may help ensure
that the Board of Directors of the Company, if confronted by a person
conducting a proxy contest or pursuing an extraordinary corporate transaction,
will have sufficient time to review the proposal and appropriate alternatives
to the proposal and to act in what it believes is the best interests of the
Company and its stockholders. Approval of the Board of Directors as well as an
80% stockholder vote is required to amend the director classification
provisions of the Certificate of Incorporation.
SPECIAL MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT; ADVANCE NOTICE
PROVISIONS
The Certificate of Incorporation and Bylaws provide that special meetings of
stockholders of the Company may only be called by the Board of Directors or
the Chairman of the Board of the Company. The Certificate of Incorporation
also requires that stockholder action be taken at a meeting of stockholders
and prohibits stockholder action by written consent. The Bylaws provide that
stockholder nominations of directors and stockholder proposals to conduct
business at a stockholders' meeting must be given in advance of the meeting
within the time period and in the manner provided for in the Bylaws. Approval
of the Board of Directors as well as an 80% stockholder vote would be required
to amend any of the foregoing provisions.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Company's Certificate of Incorporation contains a provision that
eliminates the personal liability of a director to the Company and its
stockholders for breaches of fiduciary duty as a director to the fullest
extent permitted by the DGCL. Under Delaware law, however, this provision does
not eliminate or limit the personal liability of a directors (i) for any
breach of such director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) under the DGCL statutory
provision making directors personally liable, under a negligence standard, for
unlawful payment of dividends or unlawful stock repurchase or redemptions, of
(iv) for any transaction from which the director derived an improper personal
benefit. This provision offers persons who serve on the Board of Directors of
the Company protection against awards of monetary damages resulting from
breaches of their duty of care (except as indicated above), including grossly
negligent business decisions made in connection with takeover proposals for
the Company. As a result of this provision, the ability of the Company or a
stockholder thereof to successfully prosecute an action against a director for
a breach of his duty of care has been limited. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Certificate of Incorporation also provides that each person (and the
heirs, executors or administrators of such person) who was or is a party or is
threatened to be made a party to, or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such persons is or was a director
or officer of the Company or is or was serving at the request of the Company
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, shall be indemnified and held harmless by the
Company to the fullest extent permitted by the DGCL. Under the DGCL and the
Bylaws of Incorporation, the right to indemnification includes the right to be
paid by
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the Company the expenses incurred in defending in any such proceeding in
advance of its final disposition to the fullest extent permitted by the DGCL.
The Certificate of Incorporation provides further that, by action of the Board
of Directors, the Company may provide indemnification to such officers,
employees and agents of the Company to the extent that, in the determination
of the Board of Directors, indemnification is appropriate and authorized under
the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services. Its principal executive offices are located at 450 West
33rd Street, New York, NY 10001-2697.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding an
aggregate of 13,976,600 shares of Common Stock (based on the number of shares
outstanding as of November 20, 1996), assuming no exercise of outstanding
options. Of the total outstanding shares of Common Stock, the 4,500,000 shares
of Common Stock sold in the Offering will be freely tradable without
restriction or further registration under the Securities Act, unless purchased
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (which sales would be subject to certain volume limitations and
other restrictions described below). In addition, the 4,904,930 outstanding
shares of Common Stock held by CL Associates and FSNL after the Offering are
eligible for resale in the public market, subject to certain volume and other
restrictions under Rule 144, the "lock-up" discussed below, the restrictions
imposed by the Stock Purchase Agreement and the stockholders agreement between
CL Associates and FSNL. See "Certain Transactions--Relationships with CL
Associates and FSNL."
In general, under Rule 144 as currently in effect, a person, including a
person who may be deemed an "affiliate" of the Company, who has held
restricted shares for two years may sell such shares, subject to certain
volume limitations and other restrictions, without registering them under the
Act. The Company, its directors and executive officers have agreed that during
the period commencing on the date hereof and ending 90 days after the date of
this Prospectus, and CL Associates and FSNL have agreed that during the period
commencing on the date hereof and ending 180 days after the date of this
Prospectus, without the prior written consent of Morgan Stanley on behalf of
the Underwriters, they will not, subject to certain exceptions, (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (provided that such shares or securities are
either now owned by such stockholder or are hereafter acquired prior to or in
connection with the Offering), or (2) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing
restrictions shall not apply to the sale to the Underwriters of any shares of
Common Stock pursuant to this Offering or to the issuance by the Company of
shares of Common Stock upon the exercise of an option outstanding on the date
of this Prospectus. In addition, the Company's directors and executive
officers have agreed that during the period commencing on the date hereof and
ending 90 days after the date of this Prospectus, and CL Associates and FSNL
have agreed that during the period commencing on the date hereof and ending
180 days after the date of this Prospectus, without the prior written consent
of Morgan Stanley on behalf of the Underwriters, they will not make any demand
for or exercise any right with respect to the registration of any shares of
Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock. Rule 144 generally also permits sales of restricted shares,
without any volume limitations, by a person who has not been an "affiliate" of
the Company for at least three months preceding the sale of such shares and
who has held those restricted shares for at least three years. Pursuant to the
terms of a registration rights agreement, each of CL Associates or FSNL (or
its assignee) will be entitled to certain demand registration rights with
respect to shares of Common Stock held by them. In addition to these demand
registration rights, each of CL Associates and FSNL (or its assignees) will
be, subject to certain limitations, entitled to register shares of Common
Stock in connection with future registration statements prepared by the
Company to register its equity securities. See "Certain Transactions--
Relationships with CL Associates and FSNL."
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES TO NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder who is not a United States person (a "Non-U.S. Holder"). For
this purpose, the term "United States person" is defined as any person who is
a citizen or resident of the United States, a corporation or a partnership or
other entity created or organized in the United States or
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under the laws of the United States or of any state, or an estate or trust
whose income is includible in gross income for United States federal income
tax purposes regardless of source. This discussion does not address all
aspects of United States federal income and estate taxes and does not deal
with foreign, state and local consequences that may be relevant to such Non-
U.S. Holders in light of their personal circumstances, or to certain types of
Non-U.S. Holders which may be subject to special treatment under United States
federal income tax laws (for example, insurance companies, tax-exempt
organizations, financial institutions or broker-dealers). Furthermore, this
discussion is based on provisions of the Code, existing and proposed
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. Each prospective purchaser of Common
Stock is advised to consult a tax advisor with respect to current and possible
future tax consequences of acquiring, holding and disposing of Common Stock as
well as any tax consequences that may arise under the laws of any U.S. state,
municipality or other taxing jurisdiction.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during the three-year period ending in the current
calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year). Resident
aliens are subject to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. It is the current policy of the Board to retain any earnings to
finance the operation and expansion of the Company's business. The payment of
any cash dividends in the future will depend upon the Company's earnings,
financial condition and capital needs and on other factors deemed relevant by
the Board. In addition, the Company's Credit Facility prohibits the payment of
cash dividends by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Price Range of Common Stock" and "Dividend Policy." In the event,
however, that dividends are paid on shares of Common Stock, dividends paid to
a Non-U.S. Holder of Common Stock will be subject to withholding of United
States federal income tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty, unless the dividends are effectively
connected with the conduct of a trade or business of the Non-U.S. Holder
within the United States and the Non-U.S. Holder provides the payor with
proper documentation or, if a tax treaty applies, the dividends are
attributable to a U.S. permanent establishment of the Non-U.S. Holder. In
order to claim the benefit of an applicable tax treaty rate, a Non-U.S. Holder
may be required to file with the Company or its dividend paying agent a
reduced treaty rate certificate. Dividends that are effectively connected with
the conduct of a trade or business within the United States or, if a tax
treaty applies, are attributable to such a United States permanent
establishment, are subject to United States federal income tax on a net income
basis (that is, after allowance for applicable deductions) at applicable
graduated individual or corporate rates. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of
such country for purposes of the withholding discussed above (unless the payor
has knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of
a tax treaty rate. Under proposed United States Treasury regulations not
currently in effect, however, a Non-U.S. Holder of Common Stock who wishes to
claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification and other requirements.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
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GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i)(a) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States or (b) if a treaty
applies, the gain is attributable to a United States permanent establishment
of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an
individual and holds the Common Stock as a capital asset, such holder is
present in the United States for 183 or more days in the taxable year of the
sale or other disposition and certain other conditions are met, (iii) the
Company is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes within the preceding five years, or (iv)
the Non-U.S. Holder is subject to tax pursuant to certain provisions of the
Code applicable to expatriates. The Company believes that it is a "U.S. real
property holding corporation" for United States federal income tax purposes.
An exception from United States taxation as a result of this status may be
available for persons who have not owned beneficially more than 5% of a class
of stock regularly traded on an established securities market.
If an individual Non-U.S. Holder falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale in a
manner similar to a United States person. If an individual Non-U.S. Holder
falls under clause (ii) above, such individual generally will be subject to a
flat 30% tax on the gain derived from a sale, which may be offset by certain
United States capital losses (notwithstanding the fact that such individual is
not considered a resident of the United States). Thus, Non-U.S. Holders who
have spent (or expect to spend) 183 days or more in the United States in the
taxable year in which they contemplate a sale of Common Stock are urged to
consult their tax advisors as to the tax consequences of such sale.
If a Non-U.S. Holder that is an international corporation falls under clause
(i) above, it generally will be taxed on its net gain at the United States
federal income tax rates generally applicable to U.S. corporations and, in
addition, will be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits" within the meaning of the Code
for the taxable year, as adjusted for certain items, unless it qualifies for a
lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Common Stock held by an individual Non-U.S. Holder at the time of death (or,
in certain cases, transferred prior to the Non-U.S. Holder's death) will be
included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends. These information reporting requirements apply even if
withholding was not required because the dividends were effectively connected
with a trade or business in the United States of the Non-U.S. Holder or
withholding was reduced by an applicable income tax treaty. Copies of the
information returns reporting such dividends and withholding may be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides or is established under the provisions of an applicable income tax
treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting
requirements) generally will not apply to dividends paid to Non-U.S. Holders
outside the United States that are either subject to the 30% withholding
discussed above or that are not so subject because a tax treaty applies that
reduces such 30% withholding. In that regard, under United States Treasury
regulations, backup withholding will not apply to dividends paid on Common
Stock to a Non-U.S. Holder at an address outside the United States unless the
payor has knowledge that the payee is a United States person. Backup
withholding and information reporting generally will apply to dividends paid
to addresses inside the United States on shares of Common Stock
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to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of Common Stock by or through a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, a U.S. person, a controlled foreign corporation, or a
foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, such
payments will not be subject to backup withholding but will be subject to
information reporting, unless (i) such broker has documentary evidence in its
records that the beneficial owner is a Non-U.S. Holder and certain other
conditions are met, or (ii) the beneficial owner otherwise establishes an
exemption. There are proposed Treasury Regulations which would, if adopted,
alter the foregoing rules in certain respects. Among other things, the
proposed Regulations would provide certain presumptions under which a Non-U.S.
Holder would be subject to back-up withholding and information reporting.
Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder, or otherwise establishes an exemption. Any amounts withheld
under the backup withholding rules will be allowed as a refund or a credit
against such holder's U.S. federal income tax liability provided the required
information is furnished to the IRS.
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UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date of this Prospectus (the "Underwriting Agreement"), the Company
has agreed to sell 4,500,000 shares of Common Stock and the U.S. Underwriters
named below, for whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co.
Inc., Montgomery Securities and Chase Securities Inc. are serving as U.S.
Representatives, have severally agreed to purchase, and the International
Underwriters named below, for whom Morgan Stanley & Co. International Limited,
Bear, Stearns International Limited, Montgomery Securities and Chase
Investment Bank Limited are serving as International Representatives, have
severally agreed to purchase, the respective number of shares of Common Stock
set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated...................................
Bear, Stearns & Co. Inc. ...........................................
Montgomery Securities...............................................
Chase Securities Inc. ..............................................
---------
Subtotal............................................................ 3,600,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited..........................
Bear, Stearns International Limited.................................
Montgomery Securities...............................................
Chase Investment Bank Limited.......................................
---------
Subtotal............................................................ 900,000
---------
Total............................................................... 4,500,000
=========
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The U.S. Representatives and the
International Representatives are collectively referred to as the
"Representatives." All shares of Common Stock to be purchased by the U.S.
Underwriters and the International Underwriters under the Underwriting
Agreement are referred to herein as the "U.S. Shares" and the "International
Shares," respectively. The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of Common Stock offered hereby are subject to the approval of certain
legal matters by counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all the shares of Common Stock offered hereby if
any such shares are taken.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each U.S. Underwriter has represented and agreed that, with
certain exceptions, (a) it is not purchasing any U.S. Shares (as defined
below) being sold by it for the account of anyone other than a United States
or Canadian Person (as defined below) and (b) it has not offered or sold, and
will not offer or sell, directly or indirectly, any U.S. Shares or distribute
any prospectus relating to the U.S. Shares outside the United States or Canada
or to anyone other
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than a United States or Canadian Person. Pursuant to the Agreement Between
U.S. Underwriters and International Underwriters, each International
Underwriter has represented and agreed that, with certain exceptions, (a) it
is not purchasing any International Shares (as defined below) being sold by it
for the account of any United States or Canadian Person and (b) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
International Shares or distribute any prospectus relating to the
International Shares within the United States or Canada or to any United
States or Canadian Person. With respect to any Underwriter that is a U.S.
Underwriter and an International Underwriter, the foregoing representations
and agreements (i) made by it in its capacity as a U.S. Underwriter shall
apply only to shares purchased by it in its capacity as a U.S. Underwriter,
(ii) made by it in its capacity as an International Underwriter shall apply
only to shares purchased by it in its capacity as an International
Underwriter, and (iii) do not restrict its ability to distribute any
prospectus relating to the shares of Common Stock to any person. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement Between U.S. Underwriters and
International Underwriters. As used herein, "United States or Canadian Person"
means any national or resident of the United States and Canada or any
corporation, pension, profit-sharing, or other trust or other entity organized
under the laws of the United States or Canada or any political subdivision
thereof (other than a branch located outside the United States and Canada of
any United States or Canadian Person) and includes any United States or
Canadian branch of a person who is otherwise not a United States or Canadian
Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and
International Underwriters of any number of shares of Common Stock to be
purchased pursuant to the Underwriting Agreement as may be mutually agreed.
The per share price of any shares so sold shall be the Price to Public set
forth on the cover page hereof, in United States dollars, less an amount not
greater than the per share amount of the concession to dealers set forth
below.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each U.S. Underwriter has represented that it has not offered or
sold, and has agreed not to offer or sell, any shares of Common Stock,
directly or indirectly, in any province or territory of Canada or to, or for
the benefit of, any resident of any province or territory of Canada in
contravention of the securities laws thereof and has represented that any
offer of shares of Common Stock in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer is made. Each U.S. Underwriter has
further agreed to send to any dealer who purchases from it any shares of
Common Stock a notice stating in substance that, by purchasing such shares of
Common Stock, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any such shares of
Common Stock in any province or territory of Canada or to, or for the benefit
of, any resident of any province or territory of Canada in contravention of
the securities laws thereof and that any offer of shares of Common Stock in
Canada will be made only pursuant to an exemption from the requirement to file
a prospectus in the province or territory of Canada in which such offer is
made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of Common Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each International Underwriter has represented and agreed that
(a) it has not offered or sold, during the period of six months from the date
hereof, and will not offer or sell any shares of Common Stock in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing, or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations (1995) (the
"Regulations"); (b) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the shares of Common Stock offered
hereby in, from, or otherwise involving the United Kingdom; and (c) it has
only issued or passed on and will only issue or pass on to any person in the
United Kingdom any document received by it in connection with the issue of the
shares of Common Stock, if that person is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1995, or is a person to whom such document may lawfully be issued or
passed on.
74
<PAGE>
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, each International Underwriter has represented and agreed that
it has not offered or sold, and agrees not to offer or sell, directly or
indirectly, in Japan or to or for the account of any resident thereof, any of
the shares of Common Stock acquired in connection with the distribution
contemplated hereby, except for offers or sales to Japanese International
Underwriters or dealers and except pursuant to any exemption from the
registration requirements of the Securities and Exchange Law or any other
relevant laws and regulations of Japan. Each International Underwriter further
agrees to send to any dealer who purchases from it any of the shares of Common
Stock a notice stating in substance that, by purchasing such shares, such
dealer represents and agrees that it has not offered or sold, and will not
offer or sell any of such shares, directly or indirectly in Japan or to or for
the account of any resident thereof except for offers or sales to Japanese
International Underwriters or dealers and except pursuant to any exemption
from the registration requirements of the Securities and Exchange Law and any
other relevant laws and regulations of Japan. Each International Underwriter
further agrees to send to any dealer who purchases from it any of the shares
of Common Stock a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will
not offer or sell any of such shares, directly or indirectly in Japan or to or
for the account of any resident thereof except for offers or sales to Japanese
International Underwriters or dealers and except pursuant to any exemption
from the registration requirements of the Securities and Exchange Law of
Japan, and that such dealer will send to any other dealer to whom it sells any
of such shares of Common Stock a notice containing substantially the same
statement as contained in the foregoing.
The Underwriters propose to offer part of the shares of Common Stock offered
hereby directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share below the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to 675,000 additional
shares of Common Stock at the public offering price set forth on the cover
page hereof, less underwriting discounts and commissions. The U.S.
Underwriters may exercise such option to purchase solely for the purpose of
covering over-allotments, if any, made in connection with this Offering.
The Offering will be made in compliance with the provisions of Section (c)
(8) of Rule 2710 of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD") since, in connection with the repayment
of indebtedness under the Credit Facility as described under "Use of
Proceeds," more than 10% of the net proceeds of the Offering will be paid to
banks that have affiliates that are NASD members participating in the
Offering.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended.
The Company, its directors and executive officers have agreed that during
the period commencing on the date hereof and ending 90 days after the date of
this Prospectus, and CL Associates and FSNL have agreed that during the period
commencing on the date hereof and ending 180 days after the date of this
Prospectus, without the prior written consent of Morgan Stanley on behalf of
the Underwriters, they will not, subject to certain exceptions, (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common stock (provided that such shares or securities are
either now owned by such stockholder or are hereafter acquired prior to or in
connection with this Offering), or (2) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
restrictions shall not apply to the sale to the Underwriters of any shares of
Common Stock pursuant to this Offering or the issuance by the Company of
shares of Common Stock upon the exercise of an option outstanding as of the
date of this Prospectus.
75
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Battle Fowler LLP. Certain legal matters for the Underwriters will
be passed upon by Davis Polk & Wardwell. Martin L. Edelman, who is the
President and a Director of the Company, is also of counsel to Battle Fowler
LLP.
EXPERTS
The consolidated financial statements of the Company for the years ended
December 31, 1995 and 1994 and the period August 1, 1993 (date of inception)
to December 31, 1993 incorporated by reference in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing therein, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing. The consolidated financial statements of Travelodge/Thriftlodge as
of January 23, 1996 and for the period February 1, 1995 to January 23, 1996
incorporated by reference in this prospectus and the registration statement
have been audited by Deloitte & Touche LLP independent auditors, as stated in
their report appearing therein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in auditing and
accounting. The consolidated financial statements of Travelodge/Thriftlodge as
of January 31, 1995 and for each of the two years in the period ended January
31, 1995 incorporated by reference in this prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing. The
consolidated financial statements of Capital Properties Limited Partnership as
of September 30, 1995 and 1994 and each of the three years in the period ended
September 30, 1995 incorporated by reference in this prospectus and the
related financial statement schedules included therein have been audited by
Deloitte & Touche, independent auditors, as stated in their reports appearing
therein, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company can be inspected without charge at the office of the Commission at the
Public Reference Section located at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies thereof may be
obtained from the Commission upon payment of the prescribed fees. The
Commission also maintains a site on the World Wide Web, the address of which
is http://www.sec.gov, that contains reports, proxy and information statements
and other information regarding issuers, such as the Company, that file
electronically with the Commission. Such reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
National Association of Securities Dealers, 1735 K Street, N.W., Washington,
D.C. 20006, which supervises the NASDAQ National Market on which the Company's
Common Stock is traded.
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-3 (of which this Prospectus is a part) under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and such exhibits and schedules.
76
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission are incorporated in this
Prospectus by reference:
(i) The Company's Annual Report of Form 10-K for the fiscal year ended
December 31, 1995 (File No. 0-24794) filed with the Commission on April 1,
1996, as amended by the Company's Annual Report on Form 10-K/A filed with
the Commission on May 24, 1996, as amended by the Company's Annual Report
on Form 10-K/A filed with the Commission on July 3, 1996;
(ii) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996 filed with the Commission on May 15, 1996;
(iii) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1996 filed with the Commission on August 8, 1996, as amended
by the Company's Quarterly Report on Form 10-Q/A filed with the Commission
on August 9, 1996;
(iv) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996 filed with the Commission on November 12, 1996;
(v) The Company's Current Report on Form 8-K, dated January 23, 1996,
filed with the Commission on February 7, 1996, as amended by the Company's
Current Report on Form 8-K/A filed with the Commission on April 2, 1996, as
amended by the Company's Current Report on Form 8-K/A filed with the
Commission on July 3, 1996, as amended by the Company's Current Report on
Form 8-K/A filed with the Commission on July 9, 1996; and
(vi) The Company's Current Report on Form 8-K, dated October 1, 1996,
filed with the Commission on October 10, 1996.
All documents subsequently filed by the Company with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date hereof and, prior to the termination of the Offering, shall be deemed
incorporated by reference in this Prospectus and to be a part of this
Prospectus from the date of the filing of such reports. The Company hereby
undertakes to provide without charge to each person to whom a copy of this
Prospectus has been delivered, on the written or oral request of any such
person, a copy of any or all of the information that has been incorporated by
reference in this Prospectus (not including exhibits to the information that
is incorporated by reference unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates). Requests for such copies should be directed to Chartwell
Leisure Inc., 605 Third Avenue, New York, New York 10158 (telephone (212) 692-
1400), Attention: Douglas H. Verner.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
77
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995................................................... F-2
Consolidated Statements of Operations for the
Nine-Month Periods Ended September 30, 1996 and 1995.................... F-3
Consolidated Statements of Cash Flows for the Periods
Ended September 30, 1996 and September 30, 1995......................... F-4
Notes to Consolidated Financial Statements............................... F-5
</TABLE>
F-1
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995(A)
------------- ------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 17,802 $ 51,470
Accounts receivable--net........................... 5,689 --
Loans receivable--net.............................. 1,314 10,481
Receivable from joint ventures--net................ 1,999 --
Prepaid and other current assets................... 984 837
--------- --------
Total current assets............................. 27,788 62,788
INVESTMENTS.......................................... 2,225 16,700
LOANS RECEIVABLE--net................................ 11,310 7,166
JOINT VENTURE INTERESTS.............................. 16,934 --
PROPERTY AND EQUIPMENT--Net.......................... 83,710 --
MANAGEMENT CONTRACTS--Net............................ 9,101 --
OTHER ASSETS......................................... 7,161 420
--------- --------
TOTAL ASSETS......................................... $ 158,229 $ 87,074
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............. $ 10,426 $ 552
Current portion of long-term debt.................. 880 --
--------- --------
Total current liabilities........................ 11,306 552
--------- --------
LONG-TERM DEBT....................................... 17,379 --
OTHER LIABILITIES.................................... 107 --
--------- --------
Total liabilities................................ 28,792 552
--------- --------
MINORITY INTEREST.................................... 3,609 --
COMMITMENTS AND CONTINGENCIES(Note 10)............... -- --
STOCKHOLDERS' EQUITY:
Common stock....................................... 95 55
Paid-in capital.................................... 161,521 106,697
Accumulated deficit................................ (35,874) (20,280)
Foreign currency translation adjustment............ 86 --
Unrealized gain on securities available for sale... -- 50
--------- --------
Total stockholders' equity....................... 125,828 86,522
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $ 158,229 $ 87,074
========= ========
</TABLE>
- --------
(a)Derived from the December 31, 1995 Audited Balance Sheet.
See notes to consolidated financial statements.
F-2
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
(UNAUDITED)
<S> <C> <C>
REVENUE:
Hotel Revenue............................................ $ 54,111 $ --
Management fee and other income.......................... 2,942 --
Equity in earnings of unconsolidated joint ventures...... 5,104 --
-------- --------
Total revenue.......................................... 62,157 --
-------- --------
OPERATING EXPENSES:
Hotel operating expense.................................. 22,451 --
General and administrative............................... 10,936 2,062
Marketing, franchise & reservation fees.................. 5,619 --
Maintenance and property taxes........................... 4,296 --
Rent..................................................... 3,842 --
Depreciation and amortization............................ 6,615 --
Other.................................................... 3,219 --
Minority interest........................................ 978 --
General and administrative related party................. 1,147 2,464
Gaming development costs................................. -- 14,953
Provision for losses on gaming assets.................... 14,240 --
-------- --------
Total operating expenses............................... 73,343 19,479
-------- --------
OPERATING LOSS............................................. (11,186) (19,479)
INTEREST INCOME (EXPENSE)--NET............................. (2,719) 3,138
-------- --------
LOSS BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY ITEM...... (13,905) (16,341)
INCOME TAX EXPENSE......................................... 213 709
-------- --------
LOSS BEFORE EXTRAORDINARY ITEM............................. (14,118) (17,050)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT......... (1,477) --
-------- --------
NET LOSS................................................... $(15,595) $(17,050)
======== ========
PER SHARE INFORMATION:
Loss before extraordinary item........................... $ (2.12) $ (3.34)
Extraordinary item....................................... (.22) --
-------- --------
Net Loss................................................. $ (2.34) $ (3.34)
======== ========
Weighted average common shares outstanding............... 6,651 5,112
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........ $ 7,724 $(6,868)
--------- -------
INVESTING ACTIVITIES:
Issuance of loans receivable............................. (270) (801)
Joint venture interests and investments in casino pro-
jects................................................... -- (850)
Principal payments received on loans..................... 10,898 7,423
Travelodge acquisition, net of cash acquired............. (99,449) --
Other acquisitions and additions to property and equip-
ment.................................................... (9,874) --
Proceeds from sale of investments........................ 130 --
Other assets and investments............................. (4,428) --
--------- -------
Net cash (used in) provided by investing activities.... (102,993) 5,772
FINANCING ACTIVITIES:
Proceeds of borrowing.................................... 70,000 --
Loan closing costs....................................... (3,269) --
Repayment on borrowings.................................. (59,995) --
Net proceeds of stock offering........................... 54,865 --
--------- -------
Net cash provided by financing activities.............. 61,601 --
--------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (33,668) (1,096)
--------- -------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 51,470 44,233
--------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 17,802 $43,137
========= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated balance sheet of Chartwell Leisure Inc. and subsidiaries
(the "Company") as of September 30, 1996, and the related condensed
consolidated statements of operations and cash flows for the nine-month
periods ended September 30, 1996 and 1995 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted only of
normal recurring items. Interim results are not necessarily indicative of
results for a full year.
The December 31, 1995 consolidated balance sheet was derived from the
Company's audited financial statements. These financial statements should be
read in conjunction with the Company's consolidated financial statements and
notes incorporated by reference in the 1995 Annual Report on Form 10-K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements
include the accounts and transactions of the Company, together with its
wholly-owned subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation.
B. INVESTMENTS--Investments in marketable equity securities are considered
available for sale and are reported at fair value. Unrealized gains and losses
are excluded from earnings and reported in a separate component of
stockholders' equity. Management periodically evaluates each investment to
determine whether a decline in fair value below the amortized cost is other
than temporary.
Investments which are nonmarketable equity securities and joint venture
interests are recorded at the lower of cost or net realizable value.
C. LOAN ORIGINATION COSTS--Included in other assets are costs directly
associated with the issuance of loans to casino gaming entities. These costs
are amortized over the life of related loans using the effective interest
method.
D. ALLOWANCE FOR LOAN LOSSES--The Company evaluates the collectability of
loans receivable on a quarterly basis. The major factors considered in
evaluating potential losses are the current financial position of the
borrower, general economic considerations and the net realizable value of any
collateral received.
E. INCOME TAXES--The Company uses the liability method of recording deferred
income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and income
tax purposes.
F. CASH FLOW INFORMATION--The Company considers highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
G. LOSS PER SHARE--Loss per share is computed based upon the number of
shares outstanding. Common stock equivalents are not included as they would be
antidilutive.
H. SIGNIFICANT ESTIMATES, RISKS AND UNCERTAINTIES--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 date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
I. ACCOUNTING FOR INVESTMENTS IN JOINT VENTURES--The Company accounts for
its investments in joint ventures in which it does not have a controlling
financial interest using the equity method of accounting.
F-5
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
J. PROPERTY AND EQUIPMENT--Property and equipment is stated at cost.
Expenditures for replacements and major improvements are capitalized and
depreciated. Depreciation is recognized using the straight line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the shorter of their estimated useful lives (ten to fifteen years) or the
lease term. Expenditures for normal maintenance, repairs and minor renewal are
charged to expense as incurred. Upon the sale or retirement of property or
equipment, the asset cost and related accumulated depreciation are removed
from the respective accounts and any gain or loss is included in the results
of operations.
The Company periodically assesses the recoverability of the carrying value
of property and equipment based on estimated nondiscounted cash flows on an
individual property basis. If the estimated nondiscounted cash flows are less
than the carrying value, an impairment loss is charged to operations based on
the difference between the carrying value and the estimated discounted cash
flows.
The Company considers interest expense on funds borrowed for the development
and construction of new hotels to be a cost of the property and capitalizes
such costs until the construction is completed. The amount capitalized is
amortized over the life of the property once it becomes operational. The
Company did not capitalize any interest during the nine months ended September
30, 1996 and the year ended December 31, 1995.
K. MANAGEMENT CONTRACTS--The management contracts are stated at cost and are
being amortized over the 20-year term of the contracts. The Company
periodically assesses the recoverability of the carrying value of its
management contracts based on the estimated nondiscounted cash flows to be
generated from the contracts. If the estimated nondiscounted cash flows are
less than the carrying value, an impairment loss would be charged to
operations based on the difference between the carrying value and the
estimated discounted cash flows.
L. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT--In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," which became
effective for the Company beginning January 1, 1996. SFAS No. 123 requires
expanded disclosures of stock-based compensation arrangements with employees
and encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are permitted,
however, to continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company will continue to apply APB Opinion No. 25 to its stock
based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
3. ACQUISITIONS AND SALE OF STOCK
Travelodge Acquisition
On January 23, 1996, the Company acquired the outstanding common stock of
Forte Hotels, Inc. ("FHI") for $98.4 million plus expenses, less certain
working capital adjustments totaling approximately $3.1 million. In related
transactions on January 23, 1996, prior to consummation of the FHI
acquisition, HFS Incorporated ("HFS") and Motels of America, Inc. acquired
from FHI the Travelodge franchise system and 19 motel properties,
respectively, for an aggregate purchase price of $71.6 million. The principal
assets of FHI acquired by the Company include 18 wholly-owned hotels (one of
which was subsequently disposed of), and joint venture interests in 97 other
lodging facilities. The Company financed $60 million of the purchase price
with proceeds from a bank revolving credit facility and $38.4 million with
existing cash. HFS provided advisory services in connection with the
acquisition for which the Company paid a $2.0 million fee.
F-6
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The FHI acquisition described above was accounted for by the purchase
method. The operating results of the acquired company are included in the
consolidated statements of operations from its acquisition date, January 23,
1996.
Canadian Acquisition
On October 1, 1996, the Company acquired from Capital Properties Limited
Partnership ("CPLP") 20 hotels and a one-half interest in an additional hotel,
consisting of approximately 3500 guest rooms, which hotels are located
throughout Canada and franchised under the "Travelodge" brand name (the
"Canadian Acquisition"). The Company paid approximately $70 million to
purchase substantially all of CPLP's existing bank debt and to pay certain
specified closing costs (including real estate taxes and transfer taxes), as
well as its assumption of liability for identified trade payables and property
specific bank debt, aggregating approximately another $7 million. In addition,
the Company will be obliged to make certain contingent payments to CPLP's
constituent partners following a preferred return to the Company. In
connection with the acquisition of CPLP on October 1, 1996, the Company
borrowed $65.9 million under its credit facility.
Sale of Stock
On February 14, 1996, the Company entered into an agreement with Chartwell
Leisure Associates L.P. II ("CL Associates") and FSNL LLC ("FSNL") to sell 4
million newly issued shares of the Company's unregistered common stock to
Chartwell and FSNL for $57 million. This transaction was completed on
August 8, 1996. Chartwell and FSNL own approximately 52% of the outstanding
common stock of the Company. HFS provided advisory services in connection with
the transaction for which the Company paid a fee of $1.14 million.
Master Franchise Agreement
On September 30, 1996, the Company entered into an exclusive thirty year
master franchise agreement with HFS, pursuant to which the Company will be
entitled to develop and operate, or to franchise others to develop and
operate, lodging facilities in Canada under the "Travelodge" and "Thriftlodge"
names. The Company will be required to pay to HFS or its affiliates certain
fees, including development fees, franchise fees, royalty fees based on gross
room revenues, and certain other customary fees, such as for travel agency,
marketing and consulting services.
The following presents the unaudited pro forma consolidated results of
operations for the nine months ended September 30, 1996 and 1995 as if the
transactions described above occurred on January 1, 1995, giving effect to the
sale of stock and financing costs associated with the Travelodge Acquisition
and Canadian Acquisition.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenue........................................... $ 92,283 $ 83,333
Loss before extraordinary item.................... $ (10,917) $ (14,900)
Loss per share before extraordinary item.......... $ (1.11) $ (1.64)
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated
as indicated nor are they intended to indicate results that may occur in the
future.
F-7
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LOANS RECEIVABLE
Loans receivable consist of the following at September 30, 1996 and December
31, 1995 (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Short term:
Rainbow Casino Loan (a)............... $ 1,276 $ 942
Urban Redevelopment Authority of City
of Pittsburgh (b).................... -- 9,539
Other................................. 38 --
------- -------
$ 1,314 $10,481
======= =======
Long term:
Rainbow Casino Loan(a)................ $ 5,602 $ 7,166
Receivable from joint ventures(c)..... 5,108 --
Other................................. 600 --
------- -------
$11,310 $ 7,166
======= =======
</TABLE>
a) Consists of a loan to Rainbow Casino Corporation ("Rainbow") to finance
the licensing, construction and start-up costs for a dockside casino located
in Vicksburg, Mississippi which commenced operations in July 1994. Under the
terms of the promissory note, Rainbow pays $153,383 in monthly installments of
principal and interest at 7 1/2% through maturity in August 2001, before the
allocation of loan payments to Chartwell Leisure Associates L.P. ("Chartwell
Leisure"), an affiliate of the Company, in connection with the Company's
interest in a family entertainment center located on the Rainbow site. The
loan is secured by a first mortgage on existing real and tangible personal
property excluding certain equipment.
At the inception of the loan, the Company recorded the loan receivable based
upon an imputed interest rate of 10% which was determined to be a fair market
rate based upon comparable loans with similar risk. Accordingly, a loan
receivable discount approximating $0.8 million was recorded and a
corresponding amount was assigned to HFS Incorporated's ("HFS") marketing
agreements. The loan receivable discount is being amortized in accordance with
the interest method over the life of the loan. Accumulated amortization of the
loan receivable discount at December 31, 1995 was $222,652.
During 1995, the Company agreed to loan up to an additional $2.0 million to
the partnership that owns the Rainbow casino. The proceeds of such loan,
together with additional capital to be contributed by the general partner of
such partnership, will be used to finance certain improvements to the casino
project, the completion of related facilities and provide additional working
capital. The loan is unsecured and bears interest at 10% per annum and is to
be repaid in equal monthly installments of principal and interest over a
seven-year term. The Company paid approximately $1.2 million in 1995 in
connection with the loan.
b) Consists of a mortgage loan receivable from the Urban Redevelopment
Authority of the City of Pittsburgh ("URA") in connection with the URA's
purchase of a 100-acre tract on the Monogahela River in Pittsburgh,
Pennsylvania. The loan bears interest at 4% which is not payable until
maturity, and is secured by the entire tract of land. On September 30, 1995
the URA exercised its option to extend the maturity of its loan due the
Company from September 30, 1995 to September 30, 1996. The option requires
that interest payments be remitted during the extension period. Such land was
expected to be utilized by the Company in connection with the development of a
riverboat casino facility; however, as a result of the URA's decision not to
permit
F-8
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
gaming on the site, the Company has notified the URA that it will not exercise
its option to purchase a portion of such site and expects to seek collection
of the loan. In January 1996, the Company received $3.8 million of principal
and accrued interest on the loan. The loan was paid on September 30, 1996.
c) Notes receivable bear interest at rates ranging from 3% to 12% with
various maturities to 2014. Certain of these notes aggregating $4.1 million
were collateralized by real property at September 30, 1996.
During 1995, Bryanston Group, Inc. ("Bryanston"), an affiliate of Alpha
Hospitality, Inc. ("Alpha"), purchased various Company investment in Alpha.
The Company received $6.5 million cash and 153,600 shares of the Company's
common stock in payment of a $7.1 million loan (net of discount and deferred
loan costs) and approximately $0.6 million of the Company's investment in
Alpha common stock. The Company reduced stockholders' equity by $1.2 million
as a result of the repurchase of its common stock which was subsequently
retired.
5. INVESTMENTS
Investments consists of the following (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Investment in Boomtown(a)......................... $ -- $ 4,840
Investment in Prescott(b)......................... -- 4,767
Investments in common stock(c).................... 150 425
Investment in Odyssey(d).......................... -- 3,752
Investment in Funtricity(e)....................... 1,825 1,836
Warrants(f)....................................... 250 1,080
------ -------
Total............................................. $2,225 $16,700
====== =======
</TABLE>
- --------
(a) During 1994, the Company acquired for approximately $8.5 million, plus
expenses, and leased back to Boomtown, Inc. ("Boomtown") a casino building
and barge located in Biloxi, Mississippi for a term of 25 years. Lease
payments are based upon a percentage of the casino's net income (as
defined) net of marketing fees paid to HFS and are not required to the
extent of cumulative net losses (as defined). Since the Company receives
consideration which has characteristics of an equity investment, the
Company has classified the purchase as an investment and records related
income based on the equity method of accounting. As of December 31, 1995,
the Company has a cumulative net loss; thus, the Company has not
recognized income related to its investment.
On November 6, 1995 the Company and HFS entered into agreements with
Boomtown to reduce the Company's profit participation in Boomtown's Biloxi,
Mississippi casino by 25% and to reduce the marketing fee payable to HFS for
services provided to the casino by 25%. In return, the Company and HFS
received $1.8 million and $0.6 million, respectively, reducing their
corresponding investments. Furthermore, the Company recorded a $2.4 million
charge in the third quarter of 1995 to reduce its investment in Boomtown's
Biloxi casino to its estimated net realizable value, based on the present
value of the anticipated fair market buyout at the end of the lease. Upon
further analysis, the Company has fully reserved for this investment as of
June 30, 1996 through the provision for losses on gaming assets.
(b) The Company acquired a 19.9% limited partnership interest in Prescott
Convention Center Limited Partnership on November 30, 1994 for $4.5
million plus expenses. Prescott owns and operates a hotel and convention
center in Prescott, Arizona which includes an operating casino facility.
Historically, the Company has not received net distributions after
marketing fees payable to HFS and based on discussions with the general
partner does not anticipate receiving net distributions in the future. As
a result, the Company has fully reserved approximately $4.8 million for
this investment as of September 30, 1996 through the provision for losses
on gaming assets.
F-9
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(c) The Company acquired 200,000 shares of the common stock of Century
Casinos, Inc. ("Century") in 1994 for $1.3 million. During 1995, the State
of Indiana determined not to award a gaming license to Century for its
proposed casino gaming operation in Switzerland County, Indiana. Based on
this decision, the Company determined that its investment in Century
common stock was permanently impaired and recorded a $1.0 million loss
which is included in development expenses. The Company also holds options,
and may be required by Century to purchase up to 230,000 shares of Century
common stock at $3 per share if the closing price of Century's common
stock exceeds certain specified levels ($10 to $13 per share) for 10
consecutive days prior to March 4, 1999. Based on the current trading
price of Century common stock and Century's historical results of
operations, the Company believes the options will not become exercisable
and, therefore, have no value. At September 30, 1996, the market value of
the stock was $150,000. A $75,000 writedown to market value was included
in the provision for losses on gaming assets in the second quarter. During
September 1996, 100,000 shares were sold for $130,000 resulting in a loss
of $45,000.
The Company received 96,429 shares of Alpha common stock in settlement
of certain outstanding obligations amounting to $559,000 in November 1994.
During 1995, the Company sold its investment in Alpha common stock to
Bryanston (see Note 4(c)).
(d) Includes nonvoting preferred stock convertible into common stock
representing a 20% interest in Odyssey Gaming Corporation ("Odyssey")
acquired for approximately $3.8 million plus approximately $1.5 million
contingent upon the occurrence of certain events which have not occurred
and are, in the opinion of management, unlikely to occur. The Company has
also committed, under certain circumstances which are, in the opinion of
management, unlikely to occur (including the execution of agreements
between Odyssey and certain Native American tribes for the development and
management of Class II (bingo, pulltabs and nonbanking card games) or
Class III (casino style) gaming facilities) to make secured project
financing loans of up to an aggregate of $10 million to be used in
connection with the development of Native American casino gaming
facilities to be managed by Odyssey. As of June 30, 1996, Odyssey has no
assets and was automatically dissolved by the Delaware Secretary of State
for failure to pay its taxes and file annual reports. It is highly
unlikely this casino will open due to the difficulties incurred to date in
obtaining a gaming license. The Company has fully reserved against this
asset through the provision for losses on gaming assets.
(e) Consists of the Company's allocation of Rainbow loan payments (see Note
4(c)) to Chartwell Leisure as an inducement to Chartwell Leisure to
provide financing for a family entertainment center ("Funtricity") located
on the Rainbow site. The Company agreed to pay a percentage of principal
and interest payments on the $10 million loan with Rainbow to Chartwell
Leisure ranging from 14% to 27% adjusted annually in accordance with a
schedule to the agreement. Additionally, HFS agreed to share marketing
fees from Rainbow with Chartwell Leisure based on the same scheduled
percentages. Chartwell Leisure agreed to share with HFS 50% of the net
cash flow payable to Chartwell Leisure in respect to the family
entertainment center and HFS agreed to share such amounts pro rata with
the Company based on relative amounts paid by HFS and the Company,
respectively, to Chartwell Leisure each year. The entertainment center
commenced operations on May 1, 1995. The Company paid approximately
$215,000 and $290,000 in 1995 and in 1996, respectively, in connection
with the agreement.
(f) The Company holds warrants to acquire 600,000 shares of Alpha common stock
at $14 per share which expire in October 1998. The fair value of the
underlying common stock approximated $4 per share at December 31, 1995.
The warrants were recorded at cost on date of receipt of approximately
$1.5 million. These options were written down by $830,000 to fair value
utilizing the Black-Scholes option valuation model at December 31, 1995
and a comparison to the fair market value of similar marketable securities
issued by Alpha Hospitality Corp. at September 30, 1996.
F-10
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The Company is a partner in joint ventures that own and operate hotels. The
Company has a fifty percent interest in many of its joint ventures. The
Company consolidates the joint ventures in which it has a majority ownership
interest. It records its interest under the equity method for those joint
ventures in which the Company does not have a majority ownership interest.
Assets, liabilities and the results of operations of joint ventures
accounted for under the equity method are reflected in the following balance
sheet data and statements of operation data (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
------------------
<S> <C>
JOINT VENTURE BALANCE SHEET DATA
Joint venture assets:
Current assets............................................. $ 7,570
Long-term assets............................................. 39,028
Less joint venture liabilities
Current liabilities........................................ 5,802
Long-term liabilities...................................... 7,196
--------
Joint venture equity....................................... 33,600
Less equity of other investors............................... 16,666
--------
Investment in joint ventures, end of period.................. $ 16,934
========
<CAPTION>
PERIOD
JANUARY 1, 1996
TO
SEPTEMBER 30, 1996
------------------
<S> <C>
JOINT VENTURE STATEMENTS OF OPERATION DATA
Hotel Revenue................................................ $ 36,444
Operating costs.............................................. (24,799)
Interest expense............................................. (535)
--------
$ 11,110
========
7. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands of dollars):
<CAPTION>
SEPTEMBER 30,
1996
------------------
<S> <C>
Land......................................................... $ 6,874
Buildings and improvements................................... 49,404
Furniture and equipment...................................... 30,552
Capitalized Lease (see Note 10).............................. 2,309
Construction in progress..................................... 594
--------
89,733
Less accumulated depreciation................................ 6,023
--------
$ 83,710
========
</TABLE>
F-11
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Payroll and payroll benefits...................... $1,664 $486
Taxes............................................. 1,130 --
Accrued rent payable.............................. 1,215 --
Accrued interest payable.......................... 207 --
Other............................................. 3,264 --
------ ----
$7,480 $486
====== ====
</TABLE>
9. LONG-TERM DEBT
Credit Facility
The Company is a party to a Credit Facility among the Company, Chartwell
Canada Corp., which is a subsidiary of the Company ("Chartwell Canada"), The
Chase Manhattan Bank as Administrative Agent, The Bank of Nova Scotia, as
Syndication Agent, and the Banks from time to time parties thereto (the
"Credit Facility"). The Credit Facility provides that the Company may borrow
up to $150 million under a revolving credit commitment (the "Commitment"),
which may be utilized for the incurrence of revolving credit loans or the
issuance of letters of credit. An amount of up to C$95 million of the
Commitment is available to be borrowed by Chartwell Canada and Bear Financial
Corp. ("Bear"), which are subsidiaries of the Company, as a Subfacility under
the Credit Facility (the "Canadian Subfacility"). The Company is jointly and
severally liable for all borrowings by Chartwell Canada and Bear under the
Canadian Subfacility. HFS has guaranteed $75 million of the Company's
obligations under the Credit Facility. Total borrowings and letters of credit
outstanding as of September 30, 1996, under the Credit Facility were $11.0
million and $15.0 million, respectively. On October 1, 1996, in connection
with the CPLP acquisition the Company borrowed C$90 million ($65.9 million
U.S.) under the Credit Facility. All outstanding obligations under the credit
facility mature in August 2002. The Company used the Credit Facility to
refinance its prior credit facility. An extraordinary charge of $1.5 million
was incurred as a result of the early extinguishment of debt and the writeoff
of the deferred financing costs associated with the prior credit facility.
Borrowings under the Credit Facility are available to the Company to finance
the acquisition of hotel properties and to finance the Company's working
capital and general corporate requirements. Borrowings under the Canadian
Subfacility were used to finance the acquisition of hotels from CPLP and to
pay the fees and expenses related to the Canadian Acquisition.
Revolving loans denominated in U.S. dollars under the Credit Facility are
available as base rate loans or Eurodollar loans. Revolving loans denominated
in Canadian dollars under the Credit Facility are available as Eurodollar
loans. Interest on the outstanding principal amount of each base rate loan is
payable at an annual rate equal to the highest of (A) .5% in excess of the
Federal Reserve reported certificate of deposit rate, (B) .5% in excess of the
federal funds rate or (C) the prime lending rate of The Chase Manhattan Bank.
Interest on the outstanding principal amount of each Eurodollar loan is
payable at an annual rate equal to the sum of the applicable margin (which is
within a range of .40% to .875% based on the principal amount of revolving
loans and letters of credit outstanding) plus the Eurodollar rate. The Company
is obligated to pay a commitment fee on the unutilized portion of the facility
at an annual rate of .2% to .375% depending on the principal amount of
revolving loans and letters of credit outstanding. The Company is also
obligated to pay a fee in respect of each outstanding letter of credit equal
to the applicable margin of the stated amount of the letter of credit, plus an
additional fee equal to the higher of (A) $500 and (B) a rate per annum agreed
to in writing by the Company and the issuing bank of the letter of credit.
F-12
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate revolving credit commitment will reduce by $7.5 million in
1998 and 1999 and $10 million each year thereafter. To the extent outstanding
borrowings exceed the resulting commitment amount, principal will be required
to be repaid. The revolving credit commitment amount also will be reduced, and
to the extent outstanding borrowings exceed the resulting commitment amount,
principal will be repaid upon the occurrence of certain events specified in
the Credit Facility. In addition, the Credit Facility is subject to
termination upon a change of control as defined in the Credit Facility or if
CL Associates or FSNL dispose any of their shares of Common Stock.
The Credit Facility contains covenants restricting, with certain exceptions,
the Company and its subsidiaries and joint ventures from: (i) creating,
incurring or assuming any liens; (ii) merging or consolidating or disposing of
its assets, or acquiring assets from any other person; (iii) changing the
nature of their respective businesses; (iv) incurring indebtedness other than
existing subordinated indebtedness not to exceed $50 million to finance
permitted acquisitions and other permitted indebtedness specified in the
Credit Facility; (v) paying dividends or making restricted payments; and (vi)
modifying the agreements relating to the Credit Facility's indebtedness and
preferred stock or its corporate charter documents.
In addition, the Company's ability to borrow under the Credit Facility is
subject to customary conditions and covenants, including that there not exist
a material adverse change in the Company's operating performance. The Credit
Facility also requires that the Company, in certain cases on a stand alone
basis and in other cases on a consolidated basis with its subsidiaries and
joint ventures, satisfy certain financial ratio coverage tests, including
maintenance of net worth, minimum interest coverage, and maximum leverage
coverages.
Long-term debt is summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Notes and contracts payable to banks and others--interest
rates ranging from 5.8% to 12.0% with maturities to 2002..... $12,915
Capitalized lease obligation.................................. 5,344
-------
18,259
Less current portion.......................................... 880
-------
Long-term debt................................................ $17,379
=======
</TABLE>
Future principal payments required on the Company's debt are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30,
-------------
<S> <C>
1997............................................................. $ 679
1998............................................................. 651
1999............................................................. 385
2000............................................................. 147
2001............................................................. 42
Thereafter....................................................... 11,011
-------
$12,915
=======
</TABLE>
Interest expense paid approximated $4.4 million during the period January 1,
1996 to September 30, 1996 and $-0- during the period January 1, 1995 to
September 30, 1995.
F-13
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LEASES
Capital Leases--The Company has a lease that qualifies as a capital lease.
The present value of the future minimum lease payments under this capital
lease is based upon the estimated incremental borrowing rate of the Company in
effect at the time of entering into the lease, which ranges from 8.0% to
10.0%. The present value of the future minimum lease payments as of September
30, 1996 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
MINIMUM
PERIOD ENDING LEASE
SEPTEMBER 30, PAYMENTS
------------- --------
<S> <C>
1997............................................................. $ 713
1998............................................................. 713
1999............................................................. 713
2000............................................................. 713
2001............................................................. 713
Thereafter....................................................... 6,064
------
Total minimum lease payments..................................... 9,629
Less amounts representing interest............................... 4,285
------
Present value of minimum lease payments.......................... 5,344
Less current portion............................................. 201
------
Long-term capitalized lease obligations.......................... $5,143
======
</TABLE>
Operating Leases--The Company operates many of its hotels under long-term
leases expiring at various dates through 2051. Some leases have renewal
options exercisable after a specified number of years and all require the
payment of real estate taxes and insurance. Contingent rentals, based on room
sales volume, are also required by most leases. The Company is obligated to
pay future minimum rentals under noncancellable operating leases as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
PERIOD ENDING
SEPTEMBER 30,
-------------
<S> <C>
1997............................................................. $ 2,309
1998............................................................. 2,219
1999............................................................. 2,219
2000............................................................. 2,219
2001............................................................. 2,294
Thereafter....................................................... 23,923
-------
$35,183
=======
Rental expense on operating leases is summarized as follows (in thousands of
dollars):
<CAPTION>
PERIOD
JANUARY 1, 1996
TO
SEPTEMBER 30, 1996
------------------
<S> <C>
Minimum rentals.................................................. $1,580
Contingent rentals............................................... 1,981
-------
$3,561
=======
</TABLE>
F-14
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES
Deferred tax assets of $7.6 million at December 31, 1995 increased by
approximately $6.2 million during the nine months ended September 30, 1996.
Such deferred tax assets are offset by a 100% valuation allowance. The Company
has approximately $16.1 million of loss carryforwards for federal income tax
purposes, expiring through 2010.
The amount of $16.1 million includes net operating loss carryforwards of
approximately $12.3 million and capital loss carryforwards of approximately
$3.8 million. The loss carryforward available to offset future taxable income
will be restricted over several years pursuant to Section 382 of the Internal
Revenue Code of 1986.
Income tax expense of $0.2 million for the nine months ended September 30,
1996 primarily consists of Delaware Franchise Tax and Mississippi Corporate
Income Tax.
12. STOCKHOLDERS' EQUITY
a) Shares Reserved for Issuance--The Company reserved for issuance up to
433,290 shares of common stock to certain persons including directors and
officers of HFS and the Company, in accordance with a distribution agreement
signed in connection with the Distribution ("Distribution Agreement"). The
shares correspond with options to acquire HFS common stock granted pursuant to
HFS' incentive stock option plan which were unexercised at the Distribution
Date. The shares are stapled to the HFS options and have no exercise price. As
such, the Company will not receive any proceeds from exercised options. As of
September 30, 1996 and December 31, 1995, options to acquire 308,720 and
294,830 shares, respectively, were exercisable.
The Company also reserved for issuance up to 153,600 shares of common stock
to Bryanston in accordance with the Distribution Agreement. The shares
correspond with Bryanston's rights to purchase HFS common stock at the
distribution date. Following the Distribution, the Company issued 153,600
shares pursuant to such rights, which were subsequently reacquired.
F-15
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
b) Stock Options--Pursuant to the Company's 1994 Stock Option Plan, options
to purchase up to two million shares of common stock may be granted to
employees of the Company and certain other persons over the 10-year term of
the plan. Options granted became exercisable at the rate of 33 1/3% per year
beginning one year after the date of grant and generally expire 10 years from
the date of grant. Options for 675,000 shares of common stock were granted on
November 22, 1994 at an exercise price of $16.75 representing fair market
value on the date of grant. Additional options for 90,000 shares of common
stock were granted during November and December 1995 at an exercise price of
$9.88, representing fair market value on the dates of grant. As of December
31, 1995, there were 765,000 options outstanding of which 224,999 were
exercisable. 615,000 of such options were canceled as of February 1, 1996.
Options for 310,000 shares of common stock were granted under the Company's
1994 Stock Option Plan on January 23, 1996 at an exercise price of $10.625,
representing fair market value on the date of grant. Additional options were
granted under the Company's 1994 Stock Option Plan (i) for 900,000 shares of
common stock on March 4, 1996 at an exercise price of $13.25, (ii) 75,000
shares of common stock on April 11, 1996 at an exercise price of $13.25, (iii)
30,000 shares of common stock on August 8, 1996 at an exercise price of
$16.875 and (iv) 200,000 shares of common stock on August 15, 1996 at an
exercise price of $16.00. Such exercise prices represent the fair market value
on the dates of such grants. At September 30, 1996, 2,137,000 options were
outstanding of which 20,000 were exercisable.
c) Sale of Common Stock--The Company sold 904,930 shares of its unregistered
common stock to CL Associates in December 1995, representing approximately 17%
ownership interest in the Company, for approximately $8,484,000 ($8,311,000
net of expenses). CL Associates also designated two directors to the Board in
December 1995. On August 8, 1996 the Company sold 4 million newly issued
shares of unregistered common stock to CL Associates and FSNL for $57 million
increasing ownership to approximately 52% of the outstanding common stock of
the Company.
13. MEXICO JOINT VENTURE
On July 12, 1996, the Company's subsidiary entered into a joint venture with
a subsidiary of Grupo Piasa, a Mexican hotel company, for the purpose of
developing and operating, or franchising others to operate, lodging facilities
in Mexico under the "Travelodge" and "Thriftlodge" trade names. The joint
venture is to be funded with up to $20 million in capital contributions, $10
million of which will be contributed by the Company and $10 million of which
will be contributed by Grupo Piasa. The joint venture entered into an
exclusive thirty year master franchise agreement with HFS, pursuant to which
the joint venture will be entitled to develop and operate, or to franchise
others to develop and operate, lodging facilities in Mexico under the
"Travelodge" and "Thriftlodge" names. The Company will require the joint
venture to pay to HFS or its affiliates certain fees, including development
fees, franchise fees, royalty fees based on gross room revenues, and certain
other customary fees, such as for travel agency, marketing and consulting
services.
14. RELATED PARTY TRANSACTION
During March 1996, the Company entered into a lease with an affiliate of
Chartwell and an unaffiliated third party, as landlords, pursuant to which the
Company has leased approximately 18,700 square feet of office space for a
period of 10 years. Under this lease, the Company is obligated to pay
approximately $542,000 per year for each of the first five years, and
approximately $600,000 per year for each of the last five years of the term of
the lease for the use of such office space. The terms of this lease are, in
the opinion of the Company, substantially similar to the market terms that
would be available from a third party for similar property.
F-16
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE]
PROSPECTUS (Subject To Completion)
Issued November 22, 1996
4,500,000 Shares
Chartwell Leisure Inc.
COMMON STOCK
-----------
OF THE 4,500,000 SHARES OF COMMON STOCK BEING OFFERED, 900,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 3,600,000 SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE
4,500,000 SHARES OF COMMON STOCK OFFERED
HEREBY ARE BEING OFFERED BY THE COMPANY.
-----------
THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "CHRT." ON NOVEMBER 20, 1996, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $13 1/2 PER SHARE.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
-------- -------------- -------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses of the Offering payable by the Company,
estimated at $1,200,000.
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
675,000 additional Shares of Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering over-
allotments, if any. If the U.S. Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions
and the proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1997, at the office of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in immediately available funds.
-----------
MORGAN STANLEY & CO.
International
BEAR, STEARNS INTERNATIONAL LIMITED
MONTGOMERY SECURITIES
CHASE INVESTMENT BANK LIMITED
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows all expenses of the issuance and distribution of
the securities offered hereby, other than underwriting discounts and
commissions:
<TABLE>
<S> <C>
Securities and Exchange Commission ("SEC") filing fee......... $ 20,583
National Association of Securities Dealers, Inc. ("NASD") fil-
ing fee...................................................... 7,293
Nasdaq National Market ("Nasdaq") listing fee................. 17,500
Transfer agent's and registrar's fee.......................... 2,000
Printing and engraving expenses............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Blue Sky filing fees and expenses (including counsel fees).... 5,000
Miscellaneous expenses........................................ *
----------
Total....................................................... $1,200,000
==========
</TABLE>
- --------
* To be completed by amendment.
All expenses other than the SEC filing fee, NASD filing fee and Nasdaq
listing fee have been estimated for purposes of this filing. All expenses will
be paid by the Company.
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation), by reason of the fact
that such person is or was a director, officer or agent of the corporation or
another enterprise if serving at the request of the corporation. Depending on
the character of the proceeding, a corporation may indemnify against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person indemnified acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe such person's conduct was unlawful. In the case
of an action by or in the right of the corporation, no indemnification may be
made with respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such an action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstance of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper. Section 145 further
provides that to the extent a director or officer of a corporation has been
successful in the defense of any action, suit or proceeding referred to above
or in the defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith. The
indemnification provided is not deemed to be exclusive of any other rights to
which a director or officer may be entitled under any corporation's by-law,
agreement, vote or otherwise.
In accordance with Section 145 of the DGCL, Article 10 of the Company's
Restated Certificate of Incorporation (the "Restated Certificate") and Article
VIII of the Company's Amended and Restated Bylaws (the "Bylaws") provide that
the Company shall indemnify to the fullest extent permitted under the DGCL any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director or officer of the Company, or is or was a director or officer
of the Company serving at the request of the Company as director or officer,
employee or agent of another corporation, partnership, joint venture, trust,
II-1
<PAGE>
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The indemnification provided by the Restated Certificate and the
Bylaws shall not be deemed exclusive of any other rights to which any of those
seeking indemnification or advancement of expenses may be entitled under any
other agreement, vote or otherwise. Expenses incurred in defending a civil or
criminal action, suit or proceeding shall (in the case of any action, suit or
proceeding against a director or officer of the Company) or may (in the case
of any action, suit or proceeding against an employee or agent) be paid by the
Company in advance of the final disposition of such action, suit or proceeding
as authorized by the Board of Directors of the Company upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Company. Article 10 of the Restated Certificate provides that neither the
amendment or repeal of the above-referenced provisions of the Restated
Certificate shall eliminate or reduce the effect of such provisions in respect
of any matter occurring before such amendment or repeal.
The Underwriting Agreement, included in Exhibit 1.1 hereto, provides that
each of the Underwriters will indemnify the directors and officers of the
Company against certain liabilities, including liabilities under the
Securities Act of 1993, as amended (the "Securities Act").
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.**
2.1 Transfer and Distribution Agreement, dated as of November 22, 1994,
between the Company and HFS. (Incorporated by reference to the
Company's Current Report on Form 8-K, dated December 2, 1994, Exhibit
2.1).
2.2 Agreement and Plan of Merger and Reorganization, dated as of January
17, 1995, by and among Boomtown, Tweety Sub, Inc. and the Company.
(Incorporated by reference to the Company's Current Report on Form 8-
K, dated February 1, 1995, Exhibit 2.1).
2.3 Agreement and Plan of Merger by and among National Gaming Corp., NGC
Acquisition Corp. and Par-A-Dice Gaming Corporation, dated December
28, 1994. (Incorporated by reference to the Company's Annual Report on
Form 10-K, dated December 31, 1994, Exhibit 2.3).
2.4 Stock Purchase Agreement, dated as of December 19, 1995, between Forte
USA and the Company. (Incorporated by reference to the Company's
Current Report on Form 8-K, dated January 23, 1996, Exhibit 2.1).
2.5 Amendment No. 1 to Stock Purchase Agreement, dated as of January 1996,
between Forte USA, Inc. and the Company. (Incorporated by reference to
the Company's Current Report on Form 8-K, dated January 23, 1996,
Exhibit 2.2).
2.6 Stock Purchase Agreement, dated as of December 20, 1995, by and
between Chartwell Leisure Associates L.P. II and the Company.
(Incorporated by reference to the Company's Annual Report on Form 10-
K, dated December 31, 1995, Exhibit 2.6).
2.7 Stock Purchase Agreement, dated as of February 14, 1996, by and
between Chartwell Leisure Associates L.P. II, FSNL LLC and the
Company. (Incorporated by reference to the Company's Annual Report on
Form 10-K, dated December 31, 1995, Exhibit 2.7).
2.8 Form of Amended and Restated Stock Purchase Agreement, dated as of
March 14, 1996, by and among Chartwell Leisure Associates L.P. II,
FSNL LLC and the Company. (Incorporated by reference to the Company's
Annual Report on Form 10-K, dated December 31, 1995, Exhibit 2.8).
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
4.1 Form of Common Stock Certificate. (Incorporated by reference to Amendment
No. 2 to the Company's Registration Statement on Form 10/A (File No. 0-
024794), dated November 2, 1994, Exhibit 4.1).
5.1 Opinion of Battle Fowler LLP regarding the legality of the securities being
registered.**
23.1(a) Consent of Deloitte & Touche LLP.*
23.1(b) Consent of Deloitte & Touche LLP.*
23.1(c) Consent of Deloitte & Touche.*
23.2 Consent of Battle Fowler LLP (included in its opinion filed as Exhibit 5.1
hereto).**
23.3 Consent of Price Waterhouse LLP.*
24.1 Powers of Attorney (included on the signature pages hereto).*
</TABLE>
- --------
* Filed herewith.
** To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES:
All other schedules have been omitted because they are not applicable, or
are not required, or the information is shown in the Financial Statements or
the Notes thereto.
17. UNDERTAKINGS
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 Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) 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.
(2) 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 that
time shall be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON NOVEMBER 22, 1996.
Chartwell Leisure Inc.
(Registrant)
/s/ Richard L. Fisher
By: _________________________________
RICHARD L. FISHER
CHAIRMAN OF THE BOARD OF DIRECTORS
AND
CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Richard L. Fisher and Martin L.
Edelman, or any of them, each acting alone, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for such
person and in his name, place and stead, in any and all capacities, in
connection with the Registrant's Registration Statement on Form S-3 under the
Securities Act of 1933, as amended, including, without limiting the generality
of the foregoing, to sign the Registration Statement in the name and on behalf
of the Registrant or on behalf of the undersigned as a director or officer of
the Registrant, and any and all amendments or supplements to the Registration
Statement, including any and all stickers and post-effective amendments to the
Registration Statement, and to sign any and all additional registration
statements relating to the same offering of securities as the Registration
Statement that are filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
and any applicable securities exchange or securities self-regulatory body,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard L. Fisher Chairman of the November 22,
- ------------------------------------- Board of Directors 1996
RICHARD L. FISHER and Chief Executive
Officer (principal
executive officer)
/s/ Martin L. Edelman Director and November 22,
- ------------------------------------- President 1996
MARTIN L. EDELMAN
/s/ Kenneth J. Weber Chief Financial November 22,
- ------------------------------------- Officer (principal 1996
KENNETH J. WEBER financial and
accounting officer)
II-4
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Henry R. Silverman Director November 22,
- ------------------------------------- 1996
HENRY R. SILVERMAN
/s/ Stephen P. Holmes Director November 22,
- ------------------------------------- 1996
STEPHEN P. HOLMES
/s/ Marc E. Leland Director November 22,
- ------------------------------------- 1996
MARC E. LELAND
/s/ Michael J. Kennedy Director November 22,
- ------------------------------------- 1996
MICHAEL J. KENNEDY
/s/ Dr. Guido Goldman Director November 22,
- ------------------------------------- 1996
DR. GUIDO GOLDMAN
/s/ Rachel Robinson Director November 22,
- ------------------------------------- 1996
RACHEL ROBINSON
II-5
<PAGE>
EXHIBIT 23.1(a)
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and
Shareholders of Chartwell Leisure Inc.
We consent to the incorporation by reference in this Registration Statement of
Chartwell Leisure Inc. (formerly National Lodging Corp.) on Form S-3 of our
report dated March 11, 1996 appearing in and incorporated by reference in the
Annual Report on Form 10-K of Chartwell Leisure Inc. for the year ended December
31, 1995, and to the reference to us under the heading "Experts" in the
Prospectus which is part of this registration statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 21, 1996
<PAGE>
EXHIBIT 23.1(b)
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and
Shareholders of Chartwell Leisure Inc.
We consent to the incorporation by reference in this Registration Statement of
Chartwell Leisure Inc. (formerly National Lodging Corp.) on Form S-3 of our
report dated April 19, 1996 appearing in the Report on Form 8-K/A of Chartwell
Leisure Inc. on the financial statements of Travelodge/Thriftlodge for the
period from February 1, 1995 to January 23, 1996 and to the reference to us
under the heading "Experts" in the Prospectus which is part of this registration
statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 21, 1996
<PAGE>
Exhibit 23.1(c)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Chartwell Leisure Inc. (formerly National Lodging Corp.) on Form S-3 of our
report dated December 18, 1995 (except as to Note 10 for which the date is
February 6, 1996) appearing in the report on Form 8-KA of Chartwell Leisure
Inc. on the financial statements of Capital Properties Limited Partnership for
the year ended September 30, 1995 and to the reference to us under the heading
"Experts" in the prospectus which is part of this Registration Statement.
Deloitte & Touche
Chartered Accountants
Calgary, Alberta, Canada
November 21, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Chartwell
Leisure Inc. (formerly National Lodging Corp.) of our report dated February 20,
1996 relating to the financial statements of the Acquired Business as of and for
each of the two years in the period ended January 31, 1995, which appears on
page 8 of the Current Report on Form 8-K/A of Chartwell Leisure Inc. (formerly
National Lodging Corp.) dated January 23, 1996, as amended, filed with the
Securities and Exchange Commission on July 9, 1996. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Diego, California
November 21, 1996