<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-24794
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from ______ to ______
--------------------
CHARTWELL LEISURE INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3326054
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
605 Third Avenue
23rd Floor
New York, New York 10158
(Address of principal executive offices, including zip code)
(212) 692-1400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 6, 1997, based on the last reported sale price per share of
these shares of $14 1/4 on that date, was $88,646,015.
As of March 6, 1997, there were 11,160,779 shares of the Registrant's Common
Stock, par value $.01 per share ("Common Stock"), issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
ITEM 1. Business................................................. 1
ITEM 2. Properties............................................... 16
ITEM 3. Legal Proceedings........................................ 17
ITEM 4. Submission of Matters to a Vote of Security Holders...... 17
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 18
ITEM 6. Selected Financial Data.................................. 19
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 21
ITEM 8. Financial Statements and Supplementary Data.............. 30
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 30
PART III
ITEM 10. Directors and Executive Officers of the Company.......... 31
ITEM 11. Executive Compensation................................... 31
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 31
ITEM 13. Certain Relationships and Related Transactions........... 31
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 32
</TABLE>
___________________________________________________
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER
THE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Annual Report
on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 which involve certain risks and
uncertainties. The Company's actual results or outcomes may differ materially
from those anticipated. Important factors that the Company believes might cause
such differences are discussed in the cautionary statements accompanying the
forward-looking statements and under the caption "Business--Risk Factors" in
this Annual Report on Form 10-K. In assessing forward-looking statements
contained herein, readers are urged to carefully read those statements. When
used in this Annual Report on Form 10-K, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Chartwell Leisure Inc. ("Chartwell" or the "Company"), is a hotel and
motel owner, operator, developer and acquiror. Chartwell owns, directly or with
joint venture partners, 130 hotel properties in both the full-service and
limited-service segments, including approximately 11,410 guest rooms, located in
25 states and six Canadian provinces. In the full-service segment, Chartwell
operates 27 hotels aggregating approximately 5,430 guest rooms that contributed
approximately 63% of Chartwell's gross room revenues (including gross room
revenues of unconsolidated joint ventures) during the twelve-month period ended
December 31, 1996 on a pro forma basis. Chartwell's remaining 103 hotels,
consisting of approximately 5,980 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 904,930 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. ("Forte
Hotels") for approximately $99 million (the "Travelodge Acquisition").
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 (the "CL
Associates/FSNL Investment") to an expanded investment group consisting of CL
Associates and a limited liability company owned principally by a trust for the
benefit of Charles de Gunzburg ("FSNL"), 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) 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"), (ii)
obtained the 30-year exclusive master franchise licenses for the Travelodge
brand in Canada and Mexico, (iii) formed a joint venture ("Chartwell de Mexico")
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 and (iv) formed a strategic alliance with
Hilton Inns, Inc. ("Hilton") pursuant to which Chartwell expects to develop,
own, manage and operate up to 20 Hilton Garden Inn(R) hotels in target markets
nationwide under a franchise license. Chartwell has curtailed future activities
in the gaming industry and, during the twelve-month period ended December 31,
1996, derived no revenues from gaming.
Chartwell'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. Chartwell's principal executive offices are located at 605 Third
Avenue, New York, New York 10158, and its telephone number is (212) 692-1400.
Unless the context otherwise requires, all references in this annual report to
the Company include Chartwell, its subsidiaries and their respective
predecessors, and references to "hotels" include both hotels and motels.
<PAGE>
RECENT DEVELOPMENTS
Strategic Alliance with Hilton: On January 20, 1997, Chartwell
announced that it had formed a strategic alliance with Hilton in which Chartwell
expects to develop, own, manage and operate at least 20 Hilton Garden Inn hotels
in target markets nationwide under a franchise license. The initial term of the
alliance is three years and will require a total investment of up to $200
million by Chartwell, of which approximately $40 million is required to be
funded by Chartwell as equity. Hilton is in negotiations with NationsBank Corp.
("NationsBank") and Nomura Asset Capital Corporation ("Nomura") to arrange for
construction financing and permanent mortgage financing for the Hilton Garden
Inn development program. There can be no assurance that such financing will be
obtained. Of the total construction costs, NationsBank is expected to provide
up to 80% of the financing, with Hilton expected to guarantee up to 25% of the
NationsBank loan. Chartwell is required to fund the remaining 20% of the
capital as equity. The financing terms are expected to provide that upon
obtaining a certificate of occupancy for each Hilton Garden Inn, the
construction loan allocated for such hotel is expected to convert to a 15-year
permanent mortgage through an arrangement with Nomura. Chartwell expects to
commence construction of its first Hilton Garden Inn shortly at Albuquerque
International Airport and this spring expects to commence construction of its
second Hilton Garden Inn site in Santa Fe, New Mexico at its Anasazi Plaza site.
Chartwell expects to break ground on other Hilton Garden Inns as additional
sites are secured. In addition to the Hilton Garden Inn franchise license,
Hilton has formally approved the conversion of the 207 room, Chartwell-owned San
Diego Travelodge to a full-service Hilton hotel. The property, on Harbor Island
Drive, is scheduled to undergo a $3.3 million renovation, expected to be
completed by this summer.
Sale of Common Stock to Brahman Funds: On January 31, 1997, Chartwell
sold 1,000,000 shares of Common Stock to funds managed by affiliates of Brahman
Management, LLC (collectively, "Brahman") at $14 per share, for a total
investment of $14 million by Brahman (the "Brahman Private Placement"). Brahman
manages investment funds, including one affiliated with George Soros. As a
result of the Brahman Private Placement, the Brahman-Soros group owns
approximately 1,300,000 shares of Common Stock, or approximately 9.7% of the
Company's outstanding Common Stock, after giving effect to the issuance of
2,228,977 shares of Common Stock pursuant to the Rights Offering (discussed
below).
Sale of Common Stock to Baron Fund: On March 6, 1997, Chartwell sold
658,929 shares of Common Stock to Baron Asset Fund ("Baron") at $14.00 per
share, for a total investment of approximately $9.2 million by Baron (the "Baron
Private Placement"). Baron is one of a family of funds managed by Ronald Baron.
As a result of the Baron Private Placement, Baron owns 658,929 shares of Common
Stock, or approximately 4.9% of the Company's outstanding Common Stock, after
giving effect to the issuance of 2,228,977 shares of Common Stock pursuant to
the Rights Offering.
Rights Offering: On March 13, 1997, Chartwell completed an offering
(the "Rights Offering") of 2,228,977 shares of Common Stock pursuant to the
exercise of transferable subscription rights ("Rights") that were distributed to
holders of record ("Record Holders") at the close of business on February 13,
1997 of Chartwell's Common Stock and to holders of certain options
("Participating Option Holders") to purchase shares of Common Stock. The
Rights, which were distributed to the Record Holders and the Participating
Option Holders at no cost, were exercisable at a cash price of $14.00 per share.
After deducting expenses of approximately $1.2 million, the net proceeds of the
Rights Offering to Chartwell were approximately $30.0 million.
Notes Offering: Chartwell is in the process of pursuing a $100 million
offering of senior notes (the "Notes") due 2007 (the "Notes Offering"). In
connection with the Notes Offering, it is expected that Chartwell's existing
$150.0 million credit facility will be terminated and replaced with a new
secured facility of approximately $60.0 million and that HFS' $75 million
guarantee of Chartwell's existing credit facility and a related $1.5 million
annual fee will be eliminated. There can be no assurance that the Company will
be able to successfully complete the Notes Offering or enter into a new credit
facility and consummate the related refinancing of its existing credit facility.
The Company intends to use the net proceeds from the Notes Offering, together
with the net proceeds from the Brahman Private Placement, the Baron Private
Placement and the Rights Offering, to repay existing indebtedness under its
existing credit facility and for working capital and general corporate purposes,
including to fund current and future development projects. In addition, as
Chartwell evaluates from time to time potential acquisition opportunities, a
portion of such net proceeds may be used to acquire additional hotels. See
2
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Equity Offerings" and "--Notes
Offering."
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. Chartwell believes that capital investments and operational changes
designed to bring the performance of these hotels up to or in excess of industry
averages offer the potential for significant improvements in cash flow 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 revenue per available room
("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 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. During 1997, the Company intends to spend
approximately $20 million in capital improvements at its U.S. and Canadian
hotel properties. These investments are in addition to amounts budgeted
for regular capital maintenance. As of December 31, 1996, the Company had
invested approximately $5.8 million in 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 Company believes that this program
will enhance the competitiveness of its Travelodge hotels.
. 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 some of its Travelodge hotels would satisfy market
demand through expanding the size of the hotel. For example, Chartwell
intends to add approximately 100 guest rooms at the Fisherman's Wharf
Travelodge, subject to local zoning approval. See "Business--Growth
Strategy--External Growth Opportunities--Travelodge Acquisition." 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(R) hotels and is in the process
of converting 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 during 1997 for marketing individual
hotels, generally in their local markets.
3
<PAGE>
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.
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 $99 million. The principal assets of
Forte Hotels consisted of fee and leasehold interests in 115 hotel properties,
including sole ownership of 18 hotels and joint venture interests in 97
additional hotels (the "Acquired Forte Properties") constituting in the
aggregate approximately 8,000 guest rooms. 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--Growth Strategy--External Growth Opportunities--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. HFS also provided advisory services
to the Company in connection with the Travelodge Acquisition for which the
Company paid a $2.0 million fee.
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 by 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 of $80,000. In the twelve-
month period ended December 31, 1996, the arcade generated approximately $2.0
million in net operating income.
Canadian Acquisition: On October 1, 1996, the Company purchased from
Capital Properties Limited Partnership ("CPLP") 20 hotels and a one-half
interest in an additional hotel (the "Acquired CPLP Properties"), which
represent in the aggregate approximately 3,500 guest rooms, located throughout
Canada. These hotels operate under the Travelodge brand name and are managed by
Royco Hotels and Resorts, Ltd. ("Royco"). The Company accomplished 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 taxes of $1.8 million), and by assuming the liability for identified
trade payables and property specific bank debt, aggregating approximately
another $7.4 million. 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 29% of the Company's total revenues on a pro forma
basis during the twelve-month period ended December 31, 1996. Of the $70 million
payment, substantially all was financed by bank borrowings under the credit
facility among the Company, Chartwell Canada Corp., which is a subsidiary of the
Company, The Chase Manhattan Bank, as Administrative Agent, The Bank of Nova
Scotia, as Syndication Agent, and the Banks (as defined therein) from time to
time parties thereto (the "Credit Facility"). In connection with the Canadian
Acquisition, the Company was granted the 30-year master license under an
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. 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 will manage any 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
4
<PAGE>
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 December 31, 1996 and 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.
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's Inn in Brunswick, Georgia, which the Company intends to reposition,
refurbish and convert into a 213-room Ramada. 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."
. 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 Albuquerque and Santa Fe, New
Mexico, Phoenix, Arizona and Irving, Texas. In conjunction with its
strategic alliance with Hilton, the Company is currently developing 120-
room Hilton Garden Inn(R) hotels at its Albuquerque and Santa Fe
development sites. The Santa Fe 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 development site in Irving, Texas will consist of a 112-room
Wingate Inn(R) 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 anticipates that most of its newly-developed
hotels will be franchised under major franchise brands such as Hilton
Garden Inn and Wingate Inn. 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.
Through Chartwell de Mexico, the Company intends to develop up to 30
Travelodge and other branded lodging 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 a
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 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. 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 was granted the 30-
year exclusive master license under an 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
5
<PAGE>
develop in various stages up to 1,140 hotel suites or resort lodging guest
rooms by December 31 of each year through 2006. Under certain
circumstances, including where the Company does not satisfy its development
obligations in accordance with a prescribed schedule, the Mexican Master
License may be terminated by HFS.
HOTEL PROPERTIES
The Company owns fee and leasehold interests in 130 hotel properties,
including sole ownership of 39 hotel properties (totaling approximately 6,000
rooms) and joint venture interests in 91 additional hotel properties (totaling
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 25 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. As of March 15, 1997, the states and provinces in which those hotels
are located, the number of rooms and brand affiliation of each hotel and the
nature of the Company's ownership interest and percentage of the Company's joint
venture interest, if applicable, are set forth in the following table:
6
<PAGE>
THE COMPANY'S HOTELS
(AS OF MARCH 15, 1997)
<TABLE>
<CAPTION>
# OF FRANCHISE OWNED/JOINT
HOTEL LOCATION ROOMS BRAND VENTURE ("JV")
- ------------------------------------------- ----------- ----- ------------ ---------------
<S> <C> <C> <C> <C>
Full-Service:
San Francisco Wharf
Hotel (1) CA 250 Travelodge JV/78%
San Diego Harbor
Island (2) CA 207 Travelodge Owned
Walt Disney World FL 325 Travelodge Owned
Brunswick (3) GA 213 Ramada Owned
Mt. Laurel NJ 229 Travelodge Owned
J.F.K. NY 476 Ramada Plaza Owned
Portland OR 236 Ramada Plaza Owned
Houston TX 205 Travelodge Owned
Edmonton West Alberta 226 Travelodge Owned
Edmonton South Alberta 222 Travelodge JV/50%
Calgary Macleod Trail Alberta 220 Travelodge Owned
Calgary Int'l Airport Alberta 203 Travelodge Owned
Vancouver Airport B. Columbia 160 Travelodge Owned
Winnipeg Manitoba 156 Travelodge Owned
Toronto East Ontario 228 Travelodge Owned
Mississauga Ontario 225 Travelodge Owned
Toronto North Ontario 184 Travelodge Owned
Ottawa/Parliament Hill Ontario 175 Travelodge Owned
Kitchener Ontario 172 Travelodge Owned
Windsor Downtown Ontario 160 Travelodge Owned
Scarborough Ontario 158 Travelodge Owned
London Ontario 144 Travelodge Owned
Sudbury Ontario 140 Travelodge Owned
Ottawa East Ontario 129 Travelodge Owned
Burlington Ontario 116 Travelodge Owned
Ingersoll Ontario 98 Travelodge Owned
Laval Quebec 175 Travelodge Owned
----------- -----
TOTAL FULL-SERVICE 27 HOTELS 5,432
Limited-Service:
Athens AL 60 Travelodge Owned
Flagstaff AZ 49 Travelodge JV/50%
Yuma AZ 48 Travelodge JV/50%
Williams AZ 41 Travelodge JV/45%
Mesa AZ 39 Travelodge JV/50%
San Francisco Airport
North CA 197 Travelodge Owned
Palm Springs CA 158 Travelodge JV/50%
Monterey
Fairgrounds/Carmel CA 103 Travelodge JV/80%
Mission Valley CA 101 Travelodge JV/25%
San Francisco Central CA 84 Travelodge JV/58.3%
San Francisco
Downtown CA 80 Travelodge JV/50%
Visalia Thriftlodge CA 77 Thriftlodge JV/50%
San Diego Airport CA 72 Travelodge JV/62.5%
Sacramento Downtown CA 71 Travelodge Owned
</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) Conversion to Hilton pending.
(3) Conversion to Ramada pending.
7
<PAGE>
<TABLE>
<CAPTION>
# OF FRANCHISE
HOTEL LOCATION ROOMS BRAND
- ------------------------------------------- -------- ----------- --------------
<S> <C> <C> <C> <C>
Long Beach Downtown CA 63 Travelodge JV/50%
Lake Tahoe South CA 59 Travelodge JV/50%
San Francisco Airport South CA 58 Travelodge JV/50%
Anaheim CA 57 Travelodge Owned
Santa Cruz CA 55 Travelodge JV/50%
Monterey Downtown CA 49 Travelodge JV/50%
Rancho Bernardo CA 49 Travelodge JV/50%
Lake Tahoe City CA 47 Travelodge JV/50%
Eureka CA 46 Travelodge JV/25%
San Diego Airport/
Pt. Loma CA 45 Travelodge JV/53.3%
La Jolla Beach CA 44 Travelodge JV/50%
Santa Rosa Downtown CA 43 Travelodge JV/50%
Hollywood Inn CA 39 Travelodge JV/50%
Milpitas CA 39 Independent JV/50%
San Luis Obispo CA 39 Travelodge JV/50%
El Cajon Valley Thriftlodge CA 38 Thriftlodge Owned
Ontario CA 33 Travelodge JV/50%
Paso Robles CA 31 Travelodge JV/50%
Santa Rosa CA 31 Travelodge JV/50%
Berkeley CA 30 Travelodge JV/50%
Cabrillo Central CA 30 Independent JV/50%
La Jolla Cove CA 30 Travelodge JV/50%
San Diego Thriftlodge
Downtown CA 30 Thriftlodge JV/25%
Bayview Thriftlodge CA 29 Thriftlodge JV/57.8%
Golden Gate CA 29 Travelodge JV/25%
Mojave CA 29 Independent JV/10%
Palo Alto CA 29 Travelodge JV/50%
Santa Monica CA 29 Travelodge JV/25%
Balboa Park CA 28 Travelodge JV/25%
Burbank CA 28 Travelodge JV/50%
Oceanside CA 28 Travelodge JV/50%
Presidio CA 27 Travelodge JV/58.3%
Ghirardelli Square CA 25 Travelodge JV/62.5%
Eagle Rock
(Eagle Rock Inn) CA 24 Independent JV/25%
San Diego Harborside CA 24 Independent Owned
San Diego Uptown/
Welcome Inn CA 24 Independent JV/25%
Santa Barbara City
Center CA 23 Travelodge JV/25%
Santa Barbara Beach CA 19 Travelodge JV/50%
Embarcadero--Harbor CA 18 Travelodge JV/50%
Durango Lodge CO 39 Independent JV/50%
Ocala FL 68 Travelodge JV/50%
Tallahassee FL 58 Travelodge Owned
Gainesville (Gainesville
Lodge) FL 38 Independent JV/50%
Lake Park GA 78 Travelodge JV/49%
Atlanta Downtown GA 71 Travelodge JV/50%
Mason City IA 47 Thriftlodge JV/50%
Boise ID 48 Travelodge JV/50%
Chicago O'Hare IL 95 Travelodge JV/37.5%
Quincy IL 68 Travelodge JV/75%
Lawrence KS 68 Travelodge JV/87.5%
Louisville KY 96 Travelodge JV/50%
Alexandria LA 70 Travelodge Owned
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
# OF FRANCHISE OWNED/JOINT
HOTEL LOCATION ROOMS BRAND VENTURE ("JV")
- ----------------------------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Lafayette Center LA 61 Travelodge JV/50%
Natick MA 68 Travelodge JV/50%
Bedford MA 42 Travelodge JV/50%
Missoula MT 60 Travelodge JV/50%
South Sioux City NE 61 Travelodge JV/50%
Santa Fe NM 48 Travelodge JV/50%
Las Vegas South Strip NV 128 Travelodge Owned
Las Vegas Strip NV 100 Travelodge JV/48.8%
Reno NV 98 Travelodge Owned
Las Vegas Downtown NV 58 Travelodge JV/50%
Cincinnati OH 71 Travelodge JV/62.5%
Zanesville Thriftlodge OH 54 Thriftlodge JV/50%
Ashtabula OH 48 Travelodge JV/37.5%
Portland Thriftlodge OR 77 Thriftlodge JV/50%
Roseburg OR 40 Travelodge JV/25%
Lancaster PA 58 Travelodge JV/50%
Chambersburg PA 51 Travelodge JV/50%
El Paso City Central TX 108 Travelodge JV/50%
San Antonio Alamo TX 81 Travelodge JV/93.3%
Ogden UT 78 Travelodge JV/37.5%
Salt Lake City Center UT 60 Travelodge JV/50%
Salt Lake City Temple
Square UT 55 Travelodge JV/37.5%
Seattle Space Needle WA 88 Travelodge JV/50%
University (Seattle) WA 74 Travelodge JV/50%
Seattle City Center WA 73 Travelodge JV/75%
Omak Thriftlodge WA 59 Thriftlodge Owned
Bellevue WA 54 Travelodge JV/37.5%
Yakima WA 48 Travelodge JV/50%
Moses Lake WA 40 Travelodge JV/50%
Walla Walla WA 39 Travelodge JV/50%
Mercer Island WA 35 Travelodge JV/87.5%
Ephrata WA 28 Travelodge JV/50%
Kamloops B. Columbia 68 Travelodge JV/50%
Revelstoke Lodge B. Columbia 42 Independent JV/50%
Oshawa/Whitby Ontario 120 Travelodge Owned
North Bay Ontario 100 Travelodge Owned
Regina East Saskatchewan 183 Travelodge Owned
------------ ------ -----------
TOTAL LIMITED-SERVICE 103 HOTELS 5,978
------
TOTAL COMPANY 130 HOTELS 11,410
======
- ---------------------------------------------------------------------------------
</TABLE>
All but 20 of the Company's hotels are Travelodge properties. Virtually all
of the Company's hotel properties operate under the "Travelodge" brand name,
although eight 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 or Ramada or as independent hotels.
9
<PAGE>
The Company's limited-service 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 limited-service 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
limited-service 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.
U.S. Operations: The Company or one of its joint venture partners directly
manages each of the hotels in the United States and 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. Those
regional and general managers, in turn, are supervised by the Company's senior
management. The on-site management teams at each of the Company's hotels also
receive 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.
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--Growth Strategy--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--Growth Strategy--External Growth Opportunities--Selected Development
of Hotels."
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.
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. The Company has also introduced "Sleepy Bear Rooms" at its
Travelodge hotel in Walt Disney World Village. These family-targeted rooms are
also available at 19 other Travelodge properties located in the United States
and four Travelodge properties located in Canada.
On a local level, the Company's hotels generally advertise in their individual
markets and some of the Company's larger hotels employ marketing staffs to carry
on their local advertising and marketing programs. In
10
<PAGE>
addition, each on-site general manager typically makes regular calls to 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.
GROUND LEASES
Approximately 69% of the Company's hotels are located on property covered by
ground leases with unaffiliated third parties. 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 ground leases have varying expiration dates, but most are scheduled to
expire between 1998 and 2015. 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."
JOINT VENTURE AGREEMENTS
Ninety-one 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 60 hotels and holds a joint venture interest greater
than 50% in 14 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 nine 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.
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
11
<PAGE>
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.
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, name recognition 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.
12
<PAGE>
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 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, local and foreign
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 believes that it is substantially in
compliance 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,
and 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. As a result of reserves taken
13
<PAGE>
as of December 31, 1996, book value totalled approximately $500,000. These
investments represented less than one percent of the Company's total assets on
December 31, 1996. The Company does not intend to make any further investments
in the gaming industry. During the twelve-month period ended December 31, 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.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 1,950 persons, of
whom approximately 90% were compensated on an hourly basis. Management
considers its employee relations to be good.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
business interruption insurance with respect to its hotels, with policy
specifications, insured limits and deductibles customarily carried for similar
hotels. The Company will carry similar insurance with respect to any other
hotels developed or acquired in the future. There are, however, certain types
of losses (such as losses arising from wars and losses arising from certain acts
of nature) that are not generally insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in the
affected hotel, as well as the anticipated future revenues from such hotel, and
would continue to be obligated on any mortgage indebtedness or other obligations
related to the hotel. Any such loss could adversely affect the business of the
Company. Management of the Company believes that its hotels are adequately
insured in accordance with industry practices.
RISK FACTORS
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.
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.
Newly opened hotels generally begin with lower occupancy and room rates and
improve those rates over time.
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
14
<PAGE>
(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 or
contain its expenditures. 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 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 in 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 nonfranchised 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
15
<PAGE>
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.
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, and Martin L.
Edelman, a Director and the Company's President. The occurrence of any event
which would cause the Company to lose the services of either of Messrs. Fisher
or Edelman 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. 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 either of Messrs. Fisher or Edelman. 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.
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 borrowings under its Credit Facility are
currently guaranteed by HFS. The amount and availability of the Credit Facility
could be adversely affected by adverse changes in the financial condition of
HFS.
Risk of Expiration of Ground Leases
Approximately 69% of the Company's hotels are located on property covered by
ground leases with unaffiliated third parties. 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. In
addition, there can be no assurance that, should the Company decide to renew, it
will be able to do so.
ITEM 2. PROPERTIES
The executive offices of the Company are located at 605 Third Avenue, New
York, New York and are occupied pursuant to a lease (the "New York Lease")
entered into in March 1996 with an affiliate of Chartwell and an unaffiliated
third party, as landlords. Under the New York Lease, the Company has leased
approximately 18,700 square feet of space for a period of ten years. The
Company is obligated to pay approximately $542,000 per year
16
<PAGE>
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 New York Lease for the use of the
office space.
The Company also leases office space located at 1973 Friendship Drive, El
Cajon, California, a suburb of San Diego, pursuant to a lease (the "El Cajon
Lease") entered into in November 1991 with an unaffiliated third party, as
landlord. Prior to January 1996, the office space served as the headquarters of
Forte Hotels and as its reservation center. Under the El Cajon Lease, the
Company is obligated to pay approximately $317,000 per year over a term of ten
years for the use of the office space. In the seventh year of the term of the
El Cajon Lease, the Company has an option to purchase at fair market value its
landlord's interest, which is that of a sublessor. The Company subleases
approximately half of the office space to HFS, which continues to operate the
Travelodge reservation system from that space. Rental costs charged to HFS for
the space used by it are allocated based upon the percentage of space occupied
and the related overhead expenses associated with that percentage.
The Company is in the process of evaluating its operations at its three
locations, El Cajon, New York and Calgary, with the intention of consolidating
operations and improving operating efficiencies. Management estimates exit and
severance costs of $1.0 million will be incurred during the first quarter of
1997 in connection with this consolidation.
See Item 1 under the caption "Business--External Growth Opportunities" and "--
Hotel Properties" for a description of the Company's ownership in various hotel
properties and retail space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any litigation which it believes will have a
material impact on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("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 range of
high and low sale prices per share of Common Stock, as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
1994 High Low
------- -------
<S> <C> <C>
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 1/2
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 1/2
Fourth Quarter................................. $17 3/4 $11 1/2
</TABLE>
On March 25, 1997, the last reported sale price per share of Common Stock
on the Nasdaq National Market was $14 3/4. As of March 25, 1997, there were
approximately 176 holders of record of Common Stock.
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 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--Credit
Facilities".
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected historical financial data for the
Company and its subsidiaries since inception. All amounts are in thousands,
except per share amounts.
<TABLE>
<CAPTION>
PERIOD AUGUST 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1993 (DATE OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, INCEPTION) TO
1996 1995 1994 DECEMBER 31, 1993
- --------------------------------------------------------------------------------------------
OPERATING DATA
Chartwell Leisure Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 89,028 $ -- $ -- $ --
Total operating expenses 113,290 21,485 5,495 581
Loss before income tax
expense (benefit) and
extraordinary item 28,355 17,473 3,104 453
Loss before
extraordinary loss 28,629 18,182 1,831 --
Extraordinary item 1,477 -- -- --
Net loss 30,106 18,182 1,831 267
Net loss per share
before extraordinary loss 3.84 3.57 .037 .05
Extraordinary loss
per share .20 -- -- --
Net loss per share 4.04 3.57 0.37 .05
BALANCE SHEET DATA
- --------------------------------------------------------------------------------------------
Cash and cash equivalents $ 17,590 $51,470 $44,233 $ --
Investments 880 16,700 20,092 5,360
Loans receivable 12,454 17,647 15,375 6,518
Total assets 232,038 87,074 98,895 12,238
Long term obligations 94,186 -- -- --
Stockholders' equity 111,218 86,522 96,979 $12,041
</TABLE>
There were no dividends declared during the periods presented above.
On November 22, 1994, HFS distributed to its stockholders one share of
Common Stock for every ten shares of HFS common stock held on November 14, 1994
(the record date for the Distribution). Prior to November 22, 1994, the
Company's operations were conducted by HFS and its subsidiaries.
19
<PAGE>
The following is the operating data for the period February 1, 1995 through
January 23, 1996 and the year ended January 31, 1995 for the
Travelodge/Thriftlodge business acquired by the Company on January 23, 1996.
<TABLE>
<CAPTION>
OPERATING DATA PERIOD FEBRUARY 1, 1995 YEAR ENDED
TRAVELODGE/THRIFTLODGE TO JANUARY 23, 1996 JANUARY 31, 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Total revenue $69,141 $66,458
Total operating expenses 67,737 64,846
Income before income tax
provision (benefit) 5,722 4,625
Income Tax (provision) (2,288) (1,850)
Net income 3,434 2,775
</TABLE>
PRO FORMA FINANCIAL DATA
CHARTWELL LEISURE INC. AND SUBSIDIARIES
The following table presents the unaudited pro forma consolidated results
of operations for the twelve months ended December 31, 1996 and 1995 as if the
Travelodge Acquisition and Canadian Acquisition described in Item 1 occurred on
January 1, 1995, giving effect to the depreciation and amortization associated
with the acquired properties and the sale of 4 million shares of newly issued
common stock on August 8, 1996 and financing costs associated with acquisitions.
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1996 1995
-------- -------
(In Thousands Except per Share Amounts)
<S> <C> <C>
Revenue $119,154 $106,225
Loss before extraordinary
item 23,348 14,049
Loss per share before
extraordinary item 2.37 1.03
Other Data:
EBITDA before gaming
expenses and $9.5 million
charge for termination of
corporate service agreement (A) $ 19,504 $ 17,533
</TABLE>
(A) EBITDA before gaming expenses represents earnings before extraordinary
items, losses on gaming assets and gaming development costs, the $9.5
million charge for termination of corporate service agreement with HFS,
interest expense, provision for income taxes (if applicable) and
depreciation and amortization (plus depreciation, amortization and interest
expense of joint venture interests) and excludes interest income on cash
investments. EBITDA is used by the Company for the purpose of analyzing
its operating
20
<PAGE>
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.
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. See "Business--Growth Strategy--External Growth Opportunities--
Travelodge Acquisition" and "--Canadian Acquisition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Travelodge Acquisition" and "--Canadian
Acquisition."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
The Company was engaged in the development of prospective casino gaming
facilities until the fourth 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.
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 writedowns on gaming assets to continue to carry
such assets at their estimated net realizable value. As a result of writedowns
of $16.4 million for the twelve months ended December 31, 1996, the carrying
value of the Company's remaining gaming assets equals $7.1 million. These
assets consist of loans to a casino of $6.6 million which are performing in
accordance with their contractual terms and other investments (which are not
producing significant earnings) totaling $500,000 at December 31, 1996.
Management continues to evaluate the recoverability of these investments and
will record future writedowns to the extent necessary. The winding down of the
gaming assets has had a significant negative effect on the Company's operations
in 1996. As a result of the $16.4 million of writedowns on gaming assets and
the $9.5 million charge for termination of the Corporate Services Agreement (as
defined herein), the Company reported an operating loss of $24.3 million for the
twelve months ended December 31, 1996. Without the above charges, the Company
would have reported operating income of $1.6 million for the same period. Based
on the relatively small remaining investment in gaming assets, management
believes that future operations will not be impacted materially by the Company's
disposal of its remaining gaming investments.
The Company believes that comparisons of its results during the period
ended December 31, 1996 to prior periods should take into account the changes in
the Company's primary business.
RESULTS OF OPERATION
PRO FORMA TWELVE-MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
The pro forma financial data (see Item 6) includes the operations of the
assets acquired in the Travelodge Acquisition and the Canadian Acquisition for
the twelve months ended December 31, 1996 and 1995 as if those acquisitions had
occurred on January 1, 1995, giving effect to depreciation and amortization
associated with the acquired properties and financing costs associated with the
Acquisitions. The pro forma financial data also includes revenues and expenses
associated with the Company's gaming business which include writedowns on gaming
assets of $16.4 million for the twelve month period ended December 31, 1996 and
gaming development costs of $15.5 million for the twelve month period ending
December 31, 1995. Included in the pro forma financial data for the twelve
months ended December 31, 1996 is approximately $1.2 million of professional
fees relating to CPLP's non-recurring workout of bank debt that occurred prior
to the Canadian Acquisition as well as $1.5 million relating to the 1996 fee
paid to HFS pursuant to the Corporate Services Agreement and $9.5 million for
the termination of the Corporate Services Agreement.
21
<PAGE>
Set forth below is a summary of the Company's full and limited-service
properties and rooms as of March 10, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
FULL SERVICE LIMITED-SERVICE TOTAL
PROPERTIES ROOMS PROPERTIES ROOMS PROPERTIES ROOMS
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. 8 2,141 98 5,465 106 7,606
Canada 19 3,291 5 513 24 3,804
-- ----- --- ----- --- ------
Total 27 5,432 103 5,978 130 11,410
- ------------------------------------------------------------------
</TABLE>
The Company's 27 full-service hotels contributed approximately 63% of the
Company's gross room revenues (including the Company's share of gross room
revenues of unconsolidated joint ventures) during the twelve month period ending
December 31, 1996, on a pro forma basis. The Company's full-service hotels
continue to be a significant revenue generator and are a primary focus for the
Company's capital improvement program.
The Company has ownership interests in 89 joint venture limited-service
hotels representing 4,715 rooms, with 2,395 rooms representing the Company's
allocable ownership percentage in those hotels. The Company also has a 78%
interest in a joint venture owning the full-service 250-room San Francisco Wharf
Travelodge hotel and a 50% interest in a joint venture owning a 222-room
Canadian Travelodge hotel. The Company's ownership interests in joint ventures
range from 10% to 93.3% and average approximately 52%. These are interests in
general partnerships established to conduct the operations of individual
limited-service hotels. The joint venture limited-service hotels are located
principally in the western region of the United States.
Set forth below is a summary of the Company's ownership interests in its
hotels as of March 15, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
OWNERSHIP INTEREST PROPERTIES ROOMS
- -------------------------------------------------- ------
- ----------------------------------------------------------
<S> <C> <C>
Wholly Owned 39 6,223
Joint Venture (greater than) 50% 14 1,031
Joint Venture = 50% 60 3,282
Joint Venture (less than) 50% 17 874
--- ------
Total 130 11,410
- ----------------------------------------------------------
</TABLE>
Since December 31, 1996, the Company has sold ownership interests in four
joint venture limited-service hotels. The transactions represent 171 rooms with
the Company's share totaling 78 rooms.
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. The Company occupies the premises
under a 74-year master land lease expiring in February 2035 with an annual rent
fixed until termination of $80,000. In the twelve-month period ended December
31, 1996, the arcade generated approximately $2.0 million in net operating
income.
For all hotels, total pro forma hotel revenues increased by $13.0 million,
or 12.2%, from $106.2 million in 1995 to $119.2 million in 1996. For all hotels
representing the Company's ownership interest, pro forma occupancy increased
3.9% to 66.0% and the pro forma average daily rate increased 5.0% to $51.8 for
the twelve months ended December 31, 1996 compared to the same period in 1995.
Since acquiring the Acquired Forte Properties on January 23, 1996, the Company
has begun its rebranding of certain properties, which has had a positive impact
on both occupancy and rates. Two properties that have been rebranded are the
hotel at the JFK airport in New York which became a Ramada Plaza Hotel and the
Portland, Oregon Travelodge which also became a Ramada Plaza Hotel. As a result
of the increases in occupancy and rates, pro forma REVPAR increased to
22
<PAGE>
$34.20, or 9.0%, over the comparable twelve month period in 1995. Pro forma
EBITDA increased $2.0 million, or 11.2%, over the comparable twelve month period
in 1995.
HISTORICAL TWELVE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Since the Travelodge Acquisition, the Company's operations have been
focused on the lodging business. Therefore, the results of operations for 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
hotel and motel properties in 1996 with no comparative amounts for 1995.
Accordingly, the Company's operating results for 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 1996, the
Company's interest expense was $6.5 million on acquisition debt while the
Company had no interest bearing debt in 1995. Gaming development expense for
the twelve months ended December 31, 1995 consisted primarily of writedowns of
gaming assets and related expenses associated with terminated transactions.
During 1996, in connection with the Company's ongoing periodic evaluation of its
gaming assets, the Company wrote down $16.4 million 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.
ACQUIRED FORTE PROPERTIES 1995 VERSUS 1994
Until January 1996 when the Company acquired the Acquired Forte Properties
in the Travelodge Acquisition, the Company was engaged solely in the gaming
business. Prior to the Travelodge Acquisition, the Acquired Forte Properties
were owned by Forte Hotels. See "Business--Growth Strategy--External Growth
Opportunities--Travelodge Acquisition." Revenue from the Acquired Forte
Properties, while these hotels were assets of Forte Hotels, increased for the
period February 1, 1995 to January 23, 1996 compared to the year ended January
31, 1995 by 4% due to an increase in overall occupancy and average daily rate.
The occupancy rate of the Acquired Forte Properties increased by 3% to 66% for
the period ended January 23, 1996 compared to the period ended January 31, 1995
while the average daily rate also increased by 3% during the same period.
Revenue per available room of the Acquired Forte Properties increased by 5% for
the period February 1, 1995 to January 23, 1996 as compared to the year ended
January 31, 1995.
Earnings before taxes increased by approximately $1.0 million, or
approximately 27%. This increase was primarily due to the increase in equity in
earnings of the joint ventures, and the overall decrease in interest expense.
The Travelodge results represent the financial results of the business acquired
in the Travelodge Acquisition.
HISTORICAL TWELVE MONTHS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
The Company's operations from August 1, 1993 (date of inception) through
November 1995 consisted of the pursuit of gaming development opportunities.
Accordingly, the Company's operating results for 1995 and 1994 consist of modest
investment revenue. In 1995, the Company's other income of $4.0 million
consisted entirely of interest income compared to $2.4 million of other income
in 1994, which consisted of $1.4 million of interest income and a $1.0 million
gain on the sale of Capital Gaming International, Inc. common stock.
Development expenses for the year ended December 31, 1995, totaling $15.5
million, primarily consist of expenses associated with terminated investments
and transactions, compared to $2.4 million of development expenses associated
with the pursuit of equity and development investments in unsuccessful gaming
opportunities in 1994. In 1995, due to the failure of the Pennsylvania
legislature to adopt legislation contemplating a referendum on authorization of
gaming in the state, the Company agreed in principle with its partners to
dissolve its joint ventures to develop casino gaming facilities in Pittsburgh
and Erie, Pennsylvania. As a result, the Company recorded $6.7 million of
losses in 1995, primarily in the third quarter, representing a write-off of its
Pittsburgh and Erie joint venture interests. In 1995, the Company also
recognized approximately $2.4 million of write-downs of its investment in
Boomtown, Inc.'s ("Boomtown") Biloxi, Mississippi casino to the investment's
estimated net realizable value. In the second quarter of 1995, the Company
recognized a $1.9 million expense for professional and loan commitment fees
associated with the termination of its proposed acquisition of all of the
outstanding common stock of Par-A-Dice Gaming Corporation ("Par-A-Dice")
following the Illinois Gaming Board's determination not to approve the Company's
acquisition of Par-A-Dice. The Company also recorded a $1.0 million loss for
the permanent impairment of its investment in Century Casinos, Inc. ("Century")
common stock and investment in a proposed joint venture with Century following
the unfavorable decision of the State of Indiana in June 1995 towards Century's
proposed casino in Switzerland County, Indiana. The Company recognized
23
<PAGE>
approximately $1.4 million of professional fee expenses, primarily in the first
quarter of 1995, incurred in connection with the Company's proposed merger with
Boomtown which was terminated in April 1995.
Included in general and administrative expenses-related party ("Related
Party G&A") in 1995 are approximately $3.2 million of fees paid to HFS in
consideration for providing both corporate services and up to $75 million of
available credit and/or guarantees on behalf of the Company. Related Party G&A
totaling $339,000 in 1994 consisted of similar charges for only a 1 1/2 month
period following the Distribution. Other general and administrative expenses
(G&A) for 1995 of $2.8 million approximated 1994 expenses. The Company also
expensed the net deferred tax assets previously recorded at December 31, 1994
which were expected to be realized from income generated from Par-A-Dice
operations, following the Illinois Gaming Board's determination not to approve
the Company's acquisition of Par-A-Dice.
LIQUIDITY AND CAPITAL RESOURCES
TRAVELODGE ACQUISITION
On January 23, 1996 the Company acquired the outstanding common stock of
Forte Hotels for approximately $99 million. In a related transaction prior to
consummation of the Travelodge Acquisition, HFS and MOA acquired from Forte
Hotels the Travelodge franchise system and 19 hotel 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 115
hotel properties, including sole ownership of 18 wholly-owned hotels and joint
venture interests in 97 additional hotel properties. Seven of the Acquired
Forte Properties were subsequently disposed of. The Company financed
approximately $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 paid the balance of $38.4
million with existing cash.
CANADIAN ACQUISITION
On October 1, 1996, the Company purchased the Acquired CPLP Properties and
a profits participation interest in certain hotel management contracts by paying
approximately $70 million, including approximately $6.0 million for the profits
participation interest, to purchase substantially all of CPLP's existing bank
debt of $63.9 million and to pay certain specified closing costs (including real
estate and transfer taxes of $1.8 million) and by assuming the liability for
identified trade payables and property specific bank debt, aggregating
approximately another $7.4 million.
In connection with the Canadian Acquisition, the Company became obligated
to make certain payments to 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 investment in the CPLP Hotels
(the "Preferred Return"). The Company is required to pay CPLP (i) 100% of
Remaining Cash Flow up to C$600,000, (ii) 16% of the next C$1.8 million of
Remaining Cash Flow after C$600,000 and (iii) 25% of Remaining Cash Flow in
excess of C$2.4 million. 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 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 no less than C$800,000, calculated in accordance with the
terms of the Future Payments Agreement. The Company had made no payments as of
December 31, 1996 in accordance with the agreement.
Also 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")
which manages the Company's Canadian hotels and any future hotels acquired by
the Company in Canada, 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 will 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
24
<PAGE>
October 1, 1997. The Company made payments totaling $310,000 as of December 31,
1996 pursuant to the Development Agreement.
Also in connection with the Canadian Acquisition, the Company entered into
a management services and franchise development agreement (the "MSFDA") with
Royco. Under the MSFDA, Royco is 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 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. Under the termination or expiration of the
MSFDA, Royco shall have the option to purchase the Canadian Master License from
the Company.
CHARTWELL DE MEXICO
Through Chartwell de Mexico, the Company intends to develop up to 30
Travelodge and other 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 the Company. 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 in
various stages up to 1140 hotel suites or resort lodging guest rooms by December
31, 2006. Under certain circumstances, including where the Company does not
satisfy its development obligations in accordance with a prescribed schedule,
the Mexican Master License may be terminated by HFS.
HILTON ALLIANCE
On January 20, 1997, the Company formed an alliance with Hilton pursuant to
which the Company will own, develop, manage and operate at least 20 Hilton
Garden Inn hotels in target markets nationwide under a franchise license. The
initial term of the agreement is three years and represents a total investment
of nearly $200 million by the Company, of which approximately $40 million is
required to be funded by the Company as equity. Hilton is in negotiations to
arrange for construction financing and permanent mortgage financing for the
Hilton Garden Inn development program through NationsBank and Nomura. There can
be no assurance that such financing can be obtained. Of the total construction
costs, NationsBank is expected to provide up to 80% of the financing with Hilton
expected to guarantee up to 25% of the NationsBank loan. The Company is
required to fund the remaining 20% of the capital as equity. The financing
terms are expected to provide that upon obtaining a certificate of occupancy for
each Hilton Garden Inn, the construction loan allocated for such hotel is
expected to convert to a 15-year permanent mortgage through an arrangement with
Nomura. The Company expects to begin construction shortly of its first two
Hilton Garden Inns in Santa Fe and Albuquerque, New Mexico.
HFS TRANSACTIONS
On November 25, 1996, the Company and HFS agreed to terminate their
advisory contract (the "Corporate Services Agreement") under which the Company
was obligated to pay to HFS an annual fee of $1.5 million until 2019 in exchange
for various advisory services by HFS. The termination of that agreement became
effective on December 31, 1996. In connection with the termination, the Company
agreed to pay to HFS a total of $9.5 million, consisting of a $2.5 million cash
payment that was paid in December 1996 and a $7 million promissory note payable
over seven years commencing on July 1, 1999. The promissory note will bear
interest at 6% per year payable in semi-annual installments commencing on July
1, 1997. The Company recorded a $9.5 million expense in the fourth quarter of
1996 as a result of the termination of the Corporate Services Agreement.
On December 16, 1996, the Company received from HFS a development advance
in the principal amount of $2.8 million to finance a portion of the costs
incurred by the Company in connection with the acquisition or development of
future hotel properties. The Company will have the right, but not the
obligation, from time to time
25
<PAGE>
as it acquires or develops new properties, to cause such properties to be
operated under an HFS brand, pursuant to a franchise agreement entered into
between the Company and HFS. The Company will receive a credit against
repayment of the advance, and the outstanding balance of the advance shall be
reduced, on a dollar for dollar basis for each dollar of qualifying franchise
fees paid to HFS. The outstanding balance of the advance will become due and
payable on December 31, 2000.
CAPITAL IMPROVEMENT PROGRAM
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
U.S. and Canadian properties that do not meet corporate standards. During 1997,
the Company intends to invest approximately $20 million in capital improvements,
in addition to amounts budgeted for regular capital maintenance. 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, proceeds from the Rights Offering, the Brahman
Private Placement and the Baron Private Placement and excess cash on hand.
CONSOLIDATION OF OPERATIONS
The Company is in the process of evaluating its operations at its three
locations, El Cajon, New York and Calgary, with the intention of consolidating
operations and improving operating efficiencies. Management estimates exit and
severance costs of $1.0 million will be incurred during the first quarter of
1997 in connection with this consolidation.
HOTEL BRAND REPOSITIONING
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. As a result of the conversion of the Travelodge hotel in San
Diego, California to a Hilton hotel, the Company is obligated to pay to HFS
$750,000 in franchise termination fees over a five-year period. During the
fourth quarter of 1996, the Company recorded the $750,000 operating expense
associated with such termination.
GAMING BUSINESS
In connection with the joint venture to develop a gaming facility in
Pittsburgh, the Company loaned the Urban Redevelopment Authority of Pittsburgh,
Pennsylvania ("URA") approximately $9.5 million in September 1994. In September
1995, the URA exercised its option to extend the maturity of the loan by one
year to September 30, 1996. The URA made a $3.8 million payment of principal
and interest in January, 1996 and a $2.2 million payment of principal and
interest in June, 1996. On September 30, 1996, the principal and accrued
interest were paid in full.
In 1994, the Company loaned Rainbow Casino Corporation ("Rainbow") $10
million to finance the licensing, construction and start-up costs associated
with the Rainbow Casino, a dockside casino located in Vicksburg, Mississippi,
which commenced operations on July 12, 1994. In March 1995, the Company agreed
to loan up to an additional $2.0 million to the partnership that owns the
Rainbow Casino in Vicksburg, Mississippi. The Company advanced $1.2 million to
Rainbow in 1995. The proceeds of such loan, together with additional capital to
be contributed by the general partner of such partnership, are being used to
finance certain improvements to the casino project, the completion of related
facilities and to provide additional working capital. The loan is unsecured,
bears interest at 10% per annum and will be repaid in equal monthly installments
of principal and interest over its seven year term. In 1994, the Company
entered into an agreement with Chartwell Leisure Associates L.P., an affiliate
of CL Associates, to induce Chartwell Leisure Associates L.P. to build a family
entertainment center, which opened in May 1995. In connection with the
agreement, the Company agreed to pay Chartwell Leisure
26
<PAGE>
Associates L.P., upon opening of the entertainment center, a percentage of
principal and interest payments collected on the $10 million loan to Rainbow,
ranging from 14% to 27% of such payouts adjusted annually in accordance with a
schedule to the agreement. The Company commenced payments to Chartwell Leisure
Associates L.P. in July 1995 and made approximately $0.2 million of payments in
1995 and $ 0.3 million in 1996. HFS also shares marketing fees from the
Rainbow Casino with Chartwell Leisure Associates L.P. based on the same
scheduled percentages. Chartwell Leisure Associates L.P. has agreed to share
50% of the net cash flow payable to Chartwell Leisure Associates L.P. with
respect to the family entertainment center with HFS and HFS has agreed to share
such amounts pro rata with the Company based on relative amounts paid by HFS and
the Company, respectively, to Chartwell Leisure Associates L.P. each year.
CREDIT FACILITIES
Revolving 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
Bank of Nova Scotia, as Syndication Agent, The Chase Manhattan Bank, as
Administrative 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
undrawn letters of credit. The Company is contemplating terminating the Credit
Facility and replacing it with a new secured facility of approximately $60.0
million. See "--Notes Offering." An amount of up to C$95 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"). As of December 31, 1996,
$91.7 million was drawn on the Credit Facility, including $15 million
representing issuance of undrawn letters of credit. The Company is jointly and
severally liable for all borrowings by Chartwell Canada or Bear under the
Canadian Subfacility. Pursuant to this agreement, HFS has guaranteed $75 million
of the Company's borrowings under the Credit Facility, for which the Company
pays HFS an annual fee of $1.5 million. As of December 31, 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 December 31,
1996, the Company had issued $15 million of undrawn letters of credit under the
Credit Facility. During March 1997, $11 million of loans were repaid. 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 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. All borrowings as of December
31, 1996 were Eurodollar loans. 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 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, $17.5 million in 1999, $20 million in 2000 and 2001, and $85 million in
2002. 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.
27
<PAGE>
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) modifying the agreements relating to the
Company's indebtedness and preferred stock or its corporate charter documents.
The facility prohibits the payment of dividends.
In addition, the Credit Facility 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. The Credit Facility contains a restrictive covenant based on
the ratio of pro-forma earnings to debt as defined in the credit facility
document.
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. The B of A Loan Agreement is scheduled to expire on March 31, 1997, at
which time the Company's outstanding obligations under the agreement will become
due. The Company is in negotiations to extend the B of A Loan Agreement until
April 30, 1997. Although the Company expects to be able to extend the B of A
Agreement, there can be no assurance that it will be successful in doing so.
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. 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 $7.1 million at December 31, 1996, of which
approximately $3.6 million is allocable to the Company.
New Credit Facility
In connection with the Notes Offering, it is expected that the Credit
Facility will be terminated and replaced with a new secured facility (the "New
Credit Facility") with The Chase Manhattan Bank and The Bank of Nova Scotia of
approximately $60.0 million. At the same time, it is expected that the HFS
guarantee and the related $1.5 million annual fee will be eliminated. Some of
the expected terms of the New Credit Facility are described below. However, the
terms of the New Credit Facility are currently being negotiated and there is no
assurance that the Company will enter into the New Credit Facility or that a
definitive agreement, if entered into, will contain the terms described below.
The New Credit Facility is expected to provide the Company with an
aggregate revolving credit commitment of up to $60 million, which the Company
will be entitled to utilize for the incurrence of revolving credit loans or the
issuance of letters of credit.
Proceeds of borrowings under the New Credit Facility are expected to be
available to the Company (i) to refinance the Company's indebtedness under the
Credit Facility, (ii) to finance the acquisition of hotel properties and (iii)
to finance the Company's working capital and general corporate requirements.
The New Credit Facility is expected to contain covenants restricting the
Company and its subsidiaries and joint ventures from, among other things: (i)
creating, incurring or assuming liens; (ii) merging or consolidating or
disposing of assets, or acquiring assets from other persons; (iii) changing the
nature of their respective businesses; (iv) incurring indebtedness; (v) paying
dividends or making restricted payments; and (vi) modifying the
28
<PAGE>
agreements relating to the Company's indebtedness and preferred stock or its
corporate charter documents. The New Credit Facility is expected to prohibit
the Company from paying dividends on its Common Stock.
In addition, the New Credit Facility is expected to require that the
Company satisfy, in certain cases on a stand alone basis and in other cases on a
consolidated basis with its subsidiaries and joint ventures, certain financial
ratio coverage tests, including maintenance of net worth, minimum interest
coverage, and minimum fixed charge and maximum leverage coverages.
EQUITY OFFERINGS
On August 8, 1996, the Company sold 4 million shares of the Company's
Common Stock to CL Associates and FSNL for $57.0 million. In connection with
the CL Associates/FSNL Investment, the Company incurred professional fees of
approximately $2.2 million which were charged directly against paid-in capital.
During the first quarter of 1997, the Company raised approximately $54.0
million of equity through the Rights Offering, the Brahman Private Placement and
the Baron Private Placement.
Pursuant to the Rights Offering, which closed on March 13, 1997, after
deducting expenses of approximately $1.2 million, the Company raised
approximately $30.0 million through the sale of 2,228,977 shares of Common Stock
to the Company's February 13, 1997 record holders and to the Participating
Option Holders. CL Associates and FSNL, the Company's two principal
stockholders, invested approximately $15.8 million in the Company through the
exercise of Rights they received. After giving effect to the Rights Offering,
CL Associates and FSNL together own approximately 45.1% of the Company's
outstanding shares of Common Stock.
Pursuant to the Brahman Private Placement and the Baron Private Placement,
which closed on January 31, 1997 and March 6, 1997, respectively, the Company
raised an aggregate of approximately $23.0 million through the sale of an
aggregate of 1,658,929 shares of Common Stock at $14.00 per share. Brahman,
which manages investment funds including one affiliated with George Soros,
purchased 1,000,000 shares of Common Stock. Baron, which is one of a family of
funds managed by Ronald Baron, purchased 658,929 shares of Common Stock. As a
result of their two purchases and after giving effect to the Rights Offering,
Brahman and Baron own approximately 9.7% and 4.9%, respectively, of the
Company's outstanding shares of Common Stock.
The Company intends to use the proceeds of the Rights Offering, the Brahman
Private Placement and the Baron Private Placement to fund the construction of
Hilton Garden Inns under the Company's recently announced alliance with Hilton,
to fund the Company's Mexican joint venture, to redevelop the Company's existing
hotels and for general corporate purposes. In addition, as the Company from
time to time evaluates potential acquisition opportunities, the Company may also
use a portion of the net proceeds to acquire additional hotels.
NOTES OFFERING
The Company is in the process of pursuing a $100 million offering of senior
notes due 2007. In connection with the Notes Offering, it is expected that the
Credit Facility will be terminated and replaced with the New Credit Facility and
that HFS' $75 million guarantee of the Credit Facility and the related $1.5
million annual fee will be eliminated. There can be no assurance that the
Company will be able to successfully complete the Notes Offering or enter into
the New Credit Facility and consummate the related refinancing of the Credit
Facility. The Company intends to use the net proceeds from the Notes Offering to
repay existing indebtedness under the Credit Facility and for working capital
and general corporate purposes, including to fund current and future development
projects. An extraordinary charge of $1.6 million will be incurred as a result
of the early extinguishment of debt and the writeoff of the deferred financing
costs associated with the Credit Facility if the offering of the Notes is
completed.
The Notes will be unsecured, senior obligations of the Company ranking pari
passu in right of payment with all other existing and future unsecured, senior
indebtedness of the Company and senior in right of payment to all other existing
and future subordinated indebtedness of the Company. The Notes will bear
interest at a fixed rate and no amortization or sinking fund payments will be
required with respect to the Notes. The Company has entered into treasury rate
locks of approximately 6.630% totaling $80.0 million to partially hedge the
interest rate of the proposed bond offering. The settlement date of the hedges
is May 15, 1997. In connection with the Notes Offering, it is expected that the
Company's existing $150.0 million credit facility will be terminated and
replaced with a new secured facility of approximately $60.0 million and the HFS
guarantee and related $1.5 million annual fee will be eliminated. See "--New
Credit Facility."
29
<PAGE>
CASH FLOWS
Cash provided by (used in) operating activities was $3.4 million for the
twelve months ended December 31, 1996 compared to $(6.5) million for the twelve
months ended December 31, 1995. The change relates primarily to the change in
focus to the lodging industry which produced operating cash flow.
Cash (used in) provided by investing activities was $(167.4) million for
the twelve months ended December 31, 1996 compared to $5.5 million for the
twelve months ended December 31, 1995. This change related primarily to the
Acquisitions as well as additions to plant and equipment and related costs
offset by the receipt of principal payments on loans.
Cash provided by financing activities was $130.1 million for the twelve
months ended December 31, 1996 compared to $8.3 million for the twelve months
ended December 31, 1995. This change resulted from net borrowing proceeds and
proceeds from the sale of stock to CL Associates and FSNL.
WORKING CAPITAL
The Company had $7.5 million of available working capital including $17.6
million of cash at December 31, 1996. The Company believes that its cash and
existing financing arrangements will be adequate to fund cash needs during 1997,
whether or not the Notes Offering and the contemplated replacement of the Credit
Facility with a new secured facility are successful.
IMPACT OF INFLATION
The primary source of revenue of the Company is the lodging facilities'
gross room revenue. As a result, the Company's revenue (excluding those changes
attributable to new property acquisition or disposals) is expected to change
consistent with the trend of the consumer price index. The Company does not
believe that inflation would have an unfavorable impact on its operations.
SEASONALITY
Room occupancy rates at its 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 than during the balance of
the year, with the lowest occupancy rates occurring in the first quarter of the
year. As a result, as a company which will be primarily engaged in the lodging
business in the future, 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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB Statement No. 128, "Earnings Per Share" was
released. The statement establishes standards for computing and presenting
earnings per share ("EPS") for publicly traded companies. The statement
simplifies the standards for computing earnings per share and makes them
comparable to international EPS standards. The statement is effective for
financial statements issued for periods ending after December 15, 1997. The
Company does not believe that the requirements of the statement will have a
significant impact on the presentation of EPS in the financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1 of this Report, which includes an index to the Company's
consolidated financial statements. Financial statement schedules and
supplementary data are omitted for the reason that they are not applicable or
the required information is included in the consolidated financial statements or
notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning the directors and executive officers of the
Company is set forth in the Proxy Statement (the "Proxy Statement") to be sent
to stockholders in connection with the Company's 1997 Annual Meeting of
Stockholders, under the heading "Election of Directors--Proposal 3," which
information is incorporated herein by reference. With the exception of the
information specifically incorporated herein by reference, the Company's Proxy
Statement is not to be deemed filed as part of this report for the purposes of
this Item.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference. With the exception of the information
specifically incorporated herein by reference, the Company's Proxy Statement is
not to be deemed filed as part of this report for the purposes of this Item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference. With the exception of the information
specifically incorporated herein by reference, the Company's Proxy Statement is
not to be deemed filed as part of this report for the purposes of this Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference. With the exception of
the information specifically incorporated herein by reference, the Company's
Proxy Statement is not to be deemed filed as part of this report for the
purposes of this Item.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
--------------------
See Index to Financial Statements on page F-1 hereof.
2. Financial Statement Schedule:
----------------------------
Financial statement schedules and supplementary data are omitted
for the reason that they are not applicable or the required
information is included in the consolidated financial statements or
notes thereto.
3. Exhibits:
--------
See Exhibit Index commencing on page E-1 hereof.
(b) Reports on Form 8-K
1. Current Report on Form 8-K, dated October 1, 1996, filed with the
Commission on October 15, 1996, Items 2 and 7, relating to the
completion of the Canadian Acquisition, the financial statements
for which were filed by amendment.
2. Current Report on Form 8-K/A, dated October 1, 1996, filed with the
Commission on December 12, 1996, Items 2 and 7, relating to the
completion of the Canadian Acquisition, including audited financial
statements of Canadian Properties Limited Partnership for the
periods indicated therein and the unaudited pro forma financial
statements of the Company for the periods indicated therein, and
Item 5, relating to the termination of the Corporate Services
Agreement.
(c) See response to Item 14(a)(3) above.
(d) None.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
CHARTWELL LEISURE INC.
By: /s/ Richard L. Fisher
---------------------
Richard L. Fisher
Chairman of the Board and
Chief Executive Officer
Date: March 27, 1997
Each of the officers and directors of Chartwell Leisure Inc. whose signature
appears below, in so signing, also makes, constitutes and appoints Richard L.
Fisher and Martin L. Edelman, and each of them acting alone, his true and lawful
attorney-in-fact, with full power and substitution, for him in any and all
capacities, to execute and cause to be filed with the Securities and Exchange
Commission any and all amendment or amendments to this Report on Form 10-K, with
exhibits thereto and other documents connected therewith and to perform any acts
necessary to be done in order to file such documents, and hereby ratifies and
confirms all that said attorney-in-fact or his substitute or substitutes may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Richard L. Fisher
- ------------------------ Chairman of the Board, March 27, 1997
Richard L. Fisher Chief Executive Officer
/s/ Martin L. Edelman Director and President March 27, 1997
- ------------------------
Martin L. Edelman
/s/ Kenneth J. Weber Chief Financial Officer March 27, 1997
- ------------------------ (principal financial and
Kenneth J. Weber accounting officer)
/s/ Henry R. Silverman
- ------------------------ Director March 27, 1997
Henry R. Silverman
/s/ Stephen P. Holmes
- ------------------------ Director March 27, 1997
Stephen P. Holmes
/s/ Rachel Robinson
- ------------------------ Director March 27, 1997
Rachel Robinson
/s/ Marc E. Leland
- ------------------------ Director March 27, 1997
Marc E. Leland
/s/ Michael J. Kennedy
- ------------------------ Director March 27, 1997
Michael J. Kennedy
/s/ Dr. Guido Goldman
- ------------------------ Director March 27, 1997
Dr. Guido Goldman
/s/ Arnold Fisher Director March 27, 1997
- ------------------------
Arnold Fisher
33
<PAGE>
<TABLE>
<CAPTION>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994:
Consolidated Balance Sheets at December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
PREDECESSOR FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORTS F-28
Consolidated Statements of Operations F-30
Consolidated Statements of Cashflows F-31
Notes to Consolidated Financial Statements F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Chartwell Leisure Inc.
We have audited the accompanying consolidated balance sheets of Chartwell
Leisure Inc. (formerly known as National Lodging Corp.) and its subsidiaries
(the "Company") as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
February 12, 1997, except for Note 20, as to which the date is March 21, 1997
F-2
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (In Thousands, Except Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,590 $ 51,470
Accounts receivable - net of an allowance of $1,828 for 1996 7,356
Loans receivable 2,687 10,481
Prepaid and other current assets 3,010 837
----------- -----------
Total current assets 30,643 62,788
INVESTMENTS 880 16,700
LOANS RECEIVABLE 9,767 7,166
JOINT VENTURE INTERESTS 18,948 -
PROPERTY AND EQUIPMENT - Net 157,766 -
MANAGEMENT CONTRACTS - Net 2,961 -
DEFERRED TAX ASSET 1,200 -
OTHER ASSETS 9,873 420
----------- ----------
TOTAL ASSETS $ 232,038 $ 87,074
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,594 $ 66
Accrued expenses 12,139 486
Current portion of long-term debt and capital lease 7,442
--------
Total current liabilities 23,175 552
LONG-TERM DEBT 85,028
CAPITALIZED LEASE OBLIGATION 5,090
OTHER LIABILITIES 4,068
----------- ----------
Total liabilities 117,361 552
MINORITY INTEREST 3,459 -
COMMITMENTS AND CONTINGENCIES (Notes 18 and 20)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - 100,000,000 authorized; 9,476,600 and
5,452,320 issued and outstanding, at December 31, 1996 and 1995 95 55
Paid-in capital 161,480 106,697
Accumulated deficit (50,386) (20,280)
Foreign currency translation adjustment 29 -
Unrealized gain on securities available for sale - 50
----------- ----------
Total stockholders' equity 111,218 86,522
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 232,038 $ 87,074
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994
(Amounts in Thousands, Except Per Share Amounts)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUE:
Hotel revenue $ 80,278 $ - $ -
Management fee and other income 2,957 - -
Equity in earnings of unconsolidated joint ventures 5,793 - -
---------- ---------- ----------
Total revenue 89,028 - -
---------- ---------- ----------
OPERATING EXPENSES:
Hotel operating expense 33,768
- -
General and administrative 16,638 2,756 2,742
Marketing, franchise and reservation fees 8,340 - -
Maintenance and property taxes 7,450 - -
Rent 5,272 - -
Depreciation and amortization 8,585 - -
Other 4,527 - -
Minority interest 1,271 - -
General and administrative, related party 1,522 1,747 176
Gaming development costs 15,482 2,414
-
Provision for losses on gaming assets 16,417 - -
Costs of terminating corporate services agreement 9,500 - -
---------- ---------- ----------
Total operating expenses 113,290 19,985 5,332
---------- ---------- ----------
OPERATING LOSS (24,262) (19,985) (5,332)
INTEREST INCOME 2,388 4,012 1,347
INTEREST EXPENSE (6,481) (1,500) (163)
GAIN ON SALE OF SECURITIES - - 1,044
---------- ---------- ----------
LOSS BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY LOSS (28,355) (17,473) (3,104)
INCOME TAX (EXPENSE) BENEFIT (274) (709) 1,273
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY LOSS (28,629) (18,182) (1,831)
EXTRAORDINARY LOSS ON EARLY
EXTINGUISHMENT OF DEBT (1,477) - -
---------- ---------- ----------
NET LOSS $ (30,106) $ (18,182) $ (1,831)
========== ========== ==========
PER SHARE INFORMATION:
Loss before extraordinary loss $ (3.84) $ (3.57) $ (0.37)
Extraordinary item (0.20) - -
---------- ---------- ----------
NET LOSS $ (4.04) $ (3.57) $ (0.37)
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 7,455 5,099 5,003
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996,
1995 AND 1994
(Amounts in Thousands, Except for Common Stock Shares)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) On
Cumulative Securities
Common Stock Paid-in Accumulated Translation Available
Shares Amount Capital Deficit Adjustment for Sale Total
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994 100 $ - $ 12,308 $ (267) $ - $ - $ 12,041
Capital contribution from HFS - - 87,349 - - - 87,349
Issuance of shares in connection
with the distribution 4,529,520 45 (45) - - - -
Issuance of common stock -
reserved for issuance 100,400 1 (1) - - - -
Net loss - - - (1,831) - - (1,831)
Unrealized loss on securities
available for sale - - - - - (580) (580)
---------- ------- -------- --------- -------- ------- ---------
BALANCE, DECEMBER 31,
1994 4,630,020 46 99,611 (2,098) - (580) 96,979
Sale of common stock 904,930 9 8,302 - - - 8,311
Issuance of common stock -
reserved for issuance 71,480 1 (1) - - - -
Acquisition and cancellation of
treasury stock (154,110) (1) (1,215) - - - (1,216)
Net loss - - - (18,182) - - (18,182)
Reversal of unrealized loss
related to securities sold - - - - - 580 580
Unrealized gain on securities
available for sale - - - - - 50 50
---------- ------- -------- --------- -------- ------- ---------
BALANCE, DECEMBER 31,
1995
5,452,320 55 106,697 (20,280) - 50 86,522
Sale of common stock 4,024,280 40 54,783 - - - 54,823
Cumulative translation
adjustments - - - - 29 - 29
Net loss
Reversal of unrealized gain - - - (30,106) - - (30,106)
related to securities sold
- - - - - (50) (50)
---------- ------- -------- --------- -------- ------- ---------
BALANCE, DECEMBER 31,
1996 9,476,600 $ 95 $161,480 $ (50,386) $ 29 $ - $ 111,218
========== ======= ======== ========= ======== ======= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Amounts in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (30,106) $ (18,182) $ (1,831)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Extraordinary loss 1,477 - -
Provision for gaming losses and write-off of gaming joint venture interests 16,117 10,485 -
Depreciation and amortization 8,842 (45) (201)
Loss on disposal of assets 99 520 -
Deferred income taxes (1,200) 644 (714)
Deferred financing costs - (62) (863)
Gain on sale of securities - - (1,044)
Change in foreign currency 29 - -
Equity in earnings of unconsolidated hotel joint ventures (5,793) - -
Capital distributions from unconsolidated hotel joint ventures 5,077 - -
Minority interest expense 1,271 - -
Capital distributions to minority interest shareholders (1,150) - -
Increase (decrease) from changes in:
Receivables and other current assets 252 (139) (895)
Other assets (700) 1,006 (395)
Accounts payable and other liabilities 9,138 (775) 1,200
-------- -------- --------
Net cash provided by (used in) operating activities 3,353 (6,548) (4,743)
-------- -------- --------
INVESTING ACTIVITIES:
Issuance of loans receivable (384) (1,189) (18,728)
Joint venture interests and investments in casino projects - (4,322) (24,809)
Principal payments received on loans 11,639 7,220 467
Travelodge acquisition, net of cash acquired (98,768) - -
CPLP acquisition, net of cash acquired (66,391) - -
Other acquisitions and additions to property and equipment (12,014) - -
Proceeds from investments - 2,360 -
Proceeds from sale of securities 249 559 4,697
Proceeds from sale of land - 846 -
Other assets and investments (1,697) - -
-------- -------- --------
Net cash (used in) provided by investing activities (167,366) 5,474 (38,373)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds of borrowing 146,700 - -
Loan closing costs (3,344) - -
Repayment on borrowings (70,663) - -
Sale of common stock 54,823 8,311 -
Capital contribution from HFS - - 87,349
Other financing activities 2,617 - -
-------- -------- --------
Net cash provided by financing activities 130,133 8,311 87,349
-------- -------- --------
NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS (33,880) 7,237 44,233
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 51,470 44,233 -
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,590 $ 51,470 $ 44,233
======== ======== ========
</TABLE>
See Note 10 for interest paid
See notes to consolidated financial statements.
F-6
<PAGE>
CHARTWELL LEISURE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BUSINESS
Chartwell Leisure, Inc. (formerly known as National Lodging Corp.) and
subsidiaries (the "Company") became an independent publicly traded
company following the distribution of all outstanding capital stock of
the Company by HFS Incorporated ("HFS") to HFS stockholders on November
22, 1994. At the distribution date, the Company was engaged in the
business of developing and owning casino gaming facilities.
Due to a confluence of negative factors impacting the Company's gaming
investments and the gaming industry, on November 9, 1995, the Company
announced a decision by its Board of Directors to curtail future gaming
investments and focus on investments and acquisitions in nongaming
industries. On January 23, 1996, the Company acquired the outstanding
common stock of Forte Hotels, Inc. ("FHI") for approximately $98.8
million subject to certain working capital adjustments and commenced
engaging in the business of hotel ownership, management, and development
(Note 4).
2. DISTRIBUTION
On November 22, 1994 (the "Distribution Date"), HFS distributed to its
stockholders one share of the Company common stock for every 10 shares of
HFS owned as of the November 14, 1994 record date. Subsequent to the
Distribution Date, HFS no longer has an equity interest in the Company.
The net assets of the Company at the time of the distribution were as
follows (amount in thousands):
<TABLE>
<S> <C>
Cash $50,000
Loans receivable 25,999
Investments 16,861
Joint venture interests 5,203
Other - net 157
-------
Total net assets contributed $98,220
=======
</TABLE>
At the Distribution Date, the Company and HFS entered into agreements for
marketing, financing, advisory and corporate services, and a facility
lease. The Company and HFS modified or terminated certain of these
arrangements upon the acquisition of FHI. The marketing services
agreement was canceled on January 24, 1996. Pursuant to the current
financing agreement, HFS committed to provide up to $75 million in
guarantees for a fee equal to 2% of its annual commitment. Included in
interest expense is $1.5 million, $1.5 million, and $162,500 for the
years ended December 31, 1996, 1995 and 1994, respectively, related to
the financing agreement. HFS provided investment and advisory services to
the Company under a 25-year arrangement for a fee equal to 2% of the
total development or acquisition costs associated with completed
transactions. The Company incurred costs of approximately $90,000 in 1994
under this agreement. The Company is no longer obligated to pay fees to
HFS under the advisory agreement. Pursuant to a Corporate Services
Agreement, HFS has provided to the Company advisory services in
connection with business acquisitions, financings, and other transactions
F-7
<PAGE>
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 semiannual installments commencing on July 1, 1997.
The Company's cash requirements prior to the Distribution Date were
supported by HFS. Significant requirements include the payment of
salaries, related benefits, and development expenditures. Prior to the
Distribution Date, General and Administrative - Related Party expenses
include the allocation of certain HFS costs associated with corporate
administration and other overhead costs based upon actual expenses
incurred and an estimate of time spent by HFS employees for the benefit
of the Company. Management believes that the costs allocated to the
Company are reasonable. Expenditures made by HFS on behalf of the Company
represented permanent capital and, accordingly, are included in Paid-in
Capital through the Distribution Date. The Company is a party to a
development advance agreement, dated as of October 1996, pursuant to
which HFS made a $2.8 million development advance to the Company in
December 1996. 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
10 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.
3. 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 and majority owned
joint ventures. All material intercompany balances and
transactions have been eliminated in consolidation.
b. 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 but exerts significant
influence using the equity method of accounting.
c. Property and Equipment - Property and equipment includes a hotel
under a capital lease which is stated at cost. The Company
recorded the capital lease as an asset at an amount equal to the
present value at the beginning of the lease term of minimum lease
payments during the lease term, excluding that portion of the
payments representing executory costs such as insurance,
maintenance, and taxes to be paid by the lessor, together with any
profit thereon. 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 (10 to 15 years)
or the lease term. The hotel under the capital lease is amortized
using the straight-line method over the term of the lease.
The Company periodically assesses the recoverability of the
carrying value of property and equipment based on estimated
undiscounted cash flows on an individual property basis. If the
estimated undiscounted 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.
F-8
<PAGE>
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 capitalized
$89,388 and $0 of interest during the years ended December 31,
1996 and 1995, respectively.
d. 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
undiscounted cash flows to be generated from the contracts. If the
estimated undiscounted 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.
e. Investments - Investments in marketable equity securities are
considered available for sale and are reported at fair value.
Unrealized gains and losses are excluded from operations 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 are
recorded at the lower of cost or net realizable value.
f. Loan Origination Costs - Included in other assets and loans
receivables are costs directly associated with the issuance of
loans to a casino gaming entity and the line of credit. These
costs are amortized over the life of the related loans and credit
line using the effective interest method.
g. 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.
h. Income Taxes - In accordance with SFAS No. 109, the Company uses
the asset and liability method of accounting for income taxes.
Differences between financial and tax reporting arise from
differences in the recognition of income and expenses for
financial and income tax purposes.
i. Cash and Cash Equivalents - The Company considers highly liquid
debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
j. Loss Per Share - Loss per share is computed based upon the
weighted average number of shares outstanding. Common stock
equivalents are not included as they would be antidilutive.
k. 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.
l. Advertising Expense - The Company expenses advertising costs as
incurred. The Company expensed $3.2 million in 1996, $0 in 1995,
and $0 in 1994.
F-9
<PAGE>
m. Presentation - Certain items have been reclassified from the prior
year to conform with the current year's presentation.
4. ACQUISITIONS AND SALE OF STOCK
Travelodge Acquisition - On January 23, 1996, the Company acquired the
outstanding common stock of Forte Hotels, Inc. ("FHI") for $98.8 million
plus expenses. 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 approximately $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.
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. The assets acquired and liabilities assumed are as follows (in
thousands).
<TABLE>
<S> <C>
Property and equipment (including joint ventures) $86,799
Management contracts 5,910
Other assets 9,981
-------
102,690
Less disposal proceeds from sale of property and equipment (1,124)
Less liabilities and working capital deficit (2,798)
Total $98,768
=======
</TABLE>
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 3,500 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 $7 million. Also the Company may be required 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. The Canadian Acquisition was accounted for by the
purchase method. The operating results of the acquired company are
included in
F-10
<PAGE>
the consolidated statements of operations from its acquisition date,
October 1, 1996. The assets acquired and liabilities assumed are as
follows (in thousands).
<TABLE>
<CAPTION>
<S> <C>
Property and equipment $ 72,775
Net assets 158
--------
72,933
Less debt acquired (6,542)
--------
Total $ 66,391
========
</TABLE>
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 CL Associates and FSNL for $57 million. This
transaction was completed on August 8, 1996. As of December 31, 1996, CL
Associates 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.
The following presents the unaudited pro forma consolidated results of
operations for the years ended December 31, 1996 and 1995 as if all of
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>
Years Ended
December 31,
1996 1995
(In Thousands Except
Per Share Amounts)
<S> <C> <C>
Revenue $ 119,154 $ 106,225
Loss before extraordinary item (23,348) (14,049)
Loss per share before extraordinary item (2.37) (1.03)
</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-11
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consist of the following at December 31, 1996 and 1995
(amount in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Rainbow Casino loans (a) $ 6,637 $ 7,465
Urban Redevelopment Authority of City of Pittsburgh (b) - 9,539
Notes Receivable (c) 4,758 -
Loans to Officer (d) 600 -
Deferred loan origination costs (a) 459 643
------- -------
12,454 17,647
Less current portion 2,687 10,481
------- -------
Loans receivable - net of current portion $ 9,767 $ 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 CL Associates, 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, 1996
was $373,692.
During 1995, the Company agreed to loan up to an additional $2.0
million to the partnership that owns the Rainbow casino; of this
amount, $1.2 million was advanced in 1995. 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 to 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.
b. Consisted 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. As of September 30,
1996, the loan and all accrued interest had been paid in full.
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
December 31, 1996.
F-12
<PAGE>
d. Represents a loan made to an Officer of the Company. The loan was
made in August 1996 in the principal amount of $753,750 and is
secured by a first mortgage lien on the Officer's principal
residence. The terms stipulate that the principal is due and
payable in full two years from the commencement date with
interest due and payable in monthly installments commencing on
September 1, 1996. The rate at which interest accrues shall be
the same as that on the Credit Facility (Note 8). A principal
payment in the amount of $153,750 was made in September 1996.
6. INVESTMENTS
Investments consist of the following (amount in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Investment in Boomtown (a) $ - $ 4,840
Investment in Prescott (b) - 4,767
Investments in common stock (c) - 425
Investment in Odyssey (d) - 3,752
Investment in Funtricity (e) 500 1,836
Warrants (f) - 1,080
Other 380 -
----- --------
Total $ 880 $ 16,700
===== ========
</TABLE>
a. The Boomtown, Mississippi investment approximates $4.8 million
prior to the write-down. 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, Inc. 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 written off
its investment as of June 30, 1996.
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 written off its investment of $4.8 million as of
December 31, 1996.
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. 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. The 200,000 shares of
Century stock were sold during 1996.
d. Includes nonvoting preferred stock convertible into common stock
epresenting a 20% interest in Odyssey Gaming Corporation
("Odyssey ") acquired for approximately $3.8 million plus
F-13
<PAGE>
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 had 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
written off this asset through the provision for losses on gaming
assets.
e. Consists of the Company's allocation of Rainbow loan payments
(see Note 5(a)) to CL Associates as an inducement to CL
Associates to own and finance 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 CL Associates 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 CL Associates based on the same scheduled
percentages. CL Associates agreed to share with HFS 50% of the
net cash flow payable to CL Associates 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 CL Associates each year. The
entertainment center commenced operations on May 1, 1995. The
Company paid approximately $290,000 and $215,000 in 1996 and
1995, respectively, in connection with the agreement. Based on
analysis of expected future cash flows and the estimated net
realizable value upon disposition, the Company reduced its
investment to the estimated fair value at December 31, 1996.
f. The Company holds warrants to acquire 600,000 shares of Alpha
Hospitality Corp. ("Alpha") common stock at $14 per share which
expire in October 1998. The fair value of the underlying common
stock approximated $1.43 per share at December 31, 1996 and $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
subsequently written down to zero as a result of a comparison to
the fair market value of similar marketable securities issued by
Alpha at December 31, 1996.
F-14
<PAGE>
7. JOINT VENTURE INTERESTS
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.
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 (amount in
thousands):
<TABLE>
<CAPTION>
December 31,
1996
<S> <C>
Joint Venture Balance Sheet Data:
Joint venture assets:
Current assets $ 7,206
Long-term assets 45,518
Less joint venture liabilities
Current liabilities (3,803)
Long-term liabilities (8,780)
----------
Joint venture equity 40,141
Less equity of other investors (21,193)
----------
Investment in joint ventures, end of year $ 18,948
==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
<S> <C>
Joint Venture Statements of Operation Data:
Hotel revenue $ 46,559
Operating costs (33,245)
Interest expense (693)
----------
Joint venture net income $ 12,621
==========
Equity in earnings of the unconsolidated joint ventures 5,793
==========
</TABLE>
F-15
<PAGE>
8. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (amount in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
<S> <C>
Land $ 20,610
Buildings and improvements 130,120
Furniture and equipment 13,548
Capitalized lease 2,214
Construction in progress and land held for development 4,386
--------
170,878
Less accumulated depreciation 13,112
--------
$157,766
========
</TABLE>
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follows
(amount in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Other $ 5,879 $ -
Payroll and payroll benefits 1,574 486
Accrued rent payable 1,962 -
Accrued interest payable 1,082 -
Taxes 1,356 -
Joint venture funds held on deposit 286
-------- --------
$ 12,139 $ 486
======== ========
</TABLE>
F-16
<PAGE>
10. LONG-TERM DEBT
Long-term debt is summarized as follows (amount in thousands):
<TABLE>
<CAPTION>
December 31,
1996
<S> <C>
Credit facility - Weighted average rate of 4.9 % at December 31, 1996.
See below for a description of terms. $ 76,700
HFS note - Fixed interest rate of 6%. Interest-only payments due semi-annually
commencing July 1, 1997 through 2005. Principal payments of $1,000,000 due
annually beginning January 1, 1999 and ending 2005. 7,000
Canadian mortgage debt - Weighted average variable interest rate of 7.98%
due 1997. 6,499
Bank of America loan - Weighted average rate of 8.75% at December 31, 1996.
See below for a description of terms. 2,065
--------
92,264
Less current portion 7,236
--------
Long-term debt $ 85,028
========
</TABLE>
Future principal payments required on the Company's debt are as follows
(amount in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1997 $ 7,236
1998 654
1999 1,393
2000 1,164
2001 1,114
Thereafter 80,703
--------
$ 92,264
========
</TABLE>
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 U.S. 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
F-17
<PAGE>
obligations under the Credit Facility. On October 1, 1996, in connection
with the CPLP acquisition, the Company borrowed C$90 million ($65.9 U.S.
million) under the Credit Facility. Total borrowings and letters of
credit outstanding as of December 31, 1996 under the Credit Facility were
$76.7 U.S. million and $15.0 U.S. million, respectively. All outstanding
obligations under the Credit Facility mature in August 2002, except for
mandatory Credit Facility reduction payments, noted below. 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 write-off 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. All loans
outstanding at December 31, 1996 were Eurodollar loans. 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.
The aggregate revolving credit commitment will reduce by $7.5 million in
1998, $17.5 million in 1999, $20 million in 2000, $20 million in 2001,
and $85 million in 2002. 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 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.
The Credit Facility contains a restrictive covenant based upon the ratio
of pro-forma earnings to debt as defined in the Credit Facility document.
Additionally, 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
F-18
<PAGE>
restricted payments; and (vi) modifying the agreements relating to the
Credit Facility's indebtedness and preferred stock or its corporate
charter documents.
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
March 31, 1997. 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. 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.
Total borrowings under the B of A Loan Agreement were approximately $7.1
million at December 31, 1996.
Interest expense paid approximated $5.0 million for 1996 and $0 for 1995.
11. LEASES
Capital Lease - 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 was
9.75%.
The present value of the future minimum lease payments as of December 31,
1996 is as follows (amount in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1997 $ 713
1998 713
1999 713
2000 713
2001 713
Thereafter 5,885
-------
Total minimum lease payments 9,450
Less amounts representing interest 4,154
-------
Present value of minimum lease payments 5,296
Less current portion 206
-------
Long-term capitalized lease obligations $ 5,090
=======
</TABLE>
F-19
<PAGE>
Operating Leases - The Company operates many of its hotels under
long-term ground leases expiring at various dates through 2063. 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 gross revenue, are also required by most
leases. Additionally, the Company leases various office space and
equipment, which leases are classified as operating leases.
The Company is obligated to pay future minimum rentals under
noncancellable operating leases as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1997 $ 2,792
1998 2,875
1999 2,796
2000 2,766
2001 2,831
Thereafter 29,449
-------
$43,509
=======
</TABLE>
Rental expense on operating leases is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Minimum rentals $2,506 $ 130 $ 54
Contingent rentals 2,886 - -
------ ------ -------
$5,392 $ 130 $ 54
====== ====== =======
</TABLE>
Expenses related to certain office equipment leases are classified as
General and Administrative expenses.
F-20
<PAGE>
12. INCOME TAXES
The components of income tax provision (benefit) for the years ended
December 31, 1996, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ - $ - $ (1,551)
State 1,474 65 (436)
------ ------- --------
1,474 65 (1,987)
------ ------- --------
Deferred:
Federal - 472 558
State 1,200 172 156
------ ------- --------
1,200 644 714
------ ------- --------
Total income tax provision
(benefit) $ 274 $ 709 $ (1,273)
====== ======= ========
</TABLE>
The following contains the major components of the deferred tax assets
at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Amount in thousands (000) December 31,
1996 1995
<S> <C> <C>
Net operating loss carryforwards $ 5,262 $ 5,629
Gaming asset writedowns 8,286 1,994
HFS service contract cancellation 3,040 -
Bad debt reserve 480 -
Vacation pay 240 -
Capital loss carryforward 1,520 -
Depreciation 1,120 -
-------- ---------
Deferred tax assets 19,948 7,623
Less: Valuation allowance 18,748 7,623
-------- ---------
Net deferred tax asset $ 1,200 $ -
======== =========
</TABLE>
The Company has approximately $16.9 million of tax loss carryforwards.
The amount of $16.9 million includes net operating loss carryforwards of
approximately $13.1 million of which $1.1 million expires in 2009, $9.9
expires in 2010, and $2.2 million expires in 2011. Also included in the
$16.9 million of tax loss carryforwards are capital loss carryforwards
of approximately $3.8 million which expire at December 31, 2001. The
loss carryforwards will be restricted over several years pursuant to
Section 382 of the Internal Revenue Code of 1986.
F-21
<PAGE>
Due to the Company's recurring operating losses, the Company has not
recorded any tax benefit for net operating loss carryforwards. As a
result, the Company's net tax expense is limited to certain state and
local taxes paid in 1996 and the write-off of deferred tax assets in
1995.
13. 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 ( Note 2). 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 December 31, 1996 and
1995, options to acquire 360,310 and 294,830 shares,
respectively, were exercisable.
b. Stock Options - Pursuant to the Company's 1994 Stock Option
Plan, as amended, options to purchase up to two million shares
of common stock, which have been reserved for issuance, may be
granted to employees of the Company and certain other persons
over the 10-year term of the plan. In November 1996, the Board
of Directors authorized an additional 1 million shares for
grant. Options granted prior to November 7, 1996 become
exercisable at the rate of 33-1/3% per year beginning one year
after the date of grant. Shares granted on or subsequent to
November 7, 1996 become exercisable at the rate of 66-2/3% in
the year beginning one year after the date of grant and 33-1/3%
the following year. All options granted generally expire 10
years from the date of grant. The following table summarizes the
Company's stock option activity since the Effective Date
(November 22, 1994).
<TABLE>
<CAPTION>
Weighted
Average Options
Shares Price Exercisable
<S> <C> <C> <C>
Granted 675,000 $ 16.75 -
-------- -------- --------
Balance, December 31, 1994 675,000 16.75 -
Granted 90,000 9.88 -
-------- -------- --------
Balance, December 31, 1995 765,000 15.94 20,000
-------- -------- --------
Granted 2,054,500 13.57 -
Cancelled (657,000) 16.43 -
--------- -------- --------
Balance, December 31, 1996 (1)2,162,500 $ 13.62 62,000
========= ======== ========
</TABLE>
(1) Based upon agreements with terminated employees 247,000
options will never be exercisable.
The weighted average fair values of options granted during 1996
and 1995 were $7.94 and $5.82, respectively.
The Company applies APB 25 and related interpretations in
accounting for its stock option plan. Accordingly, no
compensation cost has been recognized in the accompanying
consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 for options granted during those
years. Had compensation cost for these plans been determined
F-22
<PAGE>
consistent with FAS 123, the Company's net loss would have been
increased from the following as-reported amounts to the
following pro forma amounts (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net loss
As reported $ (30,106) $ (18,182)
Pro forma (32,154) (20,703)
</TABLE>
The effect of FAS 123 on primary and fully diluted EPS is not
shown as it is anti-dilutive.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1996
and 1995: risk-free interest rate of 6.5% representing the risk-
free interest rate at the date of grant; expected dividend
yields of 0%; expected lives of 7.5 years; and expected
volatility of 25%.
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.
14. MASTER FRANCHISE AGREEMENT
On September 30, 1996, the Company entered into an exclusive 30 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.
15. RELATED PARTY TRANSACTION
Leases - During March 1996, the Company entered into a lease with an
affiliate of CL Associates 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.
Development Agreement - In connection with the Canadian Acquisition (see
Note 2), 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 Company made payments of
$266,454 through
F-23
<PAGE>
December 31, 1996. The Development Agreement is terminable at will by
either party after October 1, 1997.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments at December 31, 1996 is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated
fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect
on the estimated fair values.
<TABLE>
<CAPTION>
December 31, 1996
(In Thousands)
Carrying Fair
Value Value
<S> <C> <C>
Loans receivable $ 12,454 $ 12,719
Investments 880 880
Long-term debt 92,264 91,863
</TABLE>
Loans - The fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings.
Investments- The Company's investment in Funtricity generates no current
or determinable cash flow. As a result, management believes that a fair
value assessment is not practicable. The value of this investment is
impacted by the status of gaming legislation and the potential timing
and uncertainty of future cash flows (Note 6). Management believes that
the investment has been written down to its realizable value. Management
believes that the carrying value of the other investment balance
reflected here approximates its fair market value.
Long-Term Debt - The fair value is estimated by discounting the future
cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings.
F-24
<PAGE>
17. FOREIGN OPERATIONS
The information presented below, in management's judgment, provides a
reasonable representation of each region's contributions to the
consolidated amounts as of, and for the year ended December 31, 1996.
There were no foreign operations until 1996. Please see Notes 1 and 4
for description of operations.
<TABLE>
<CAPTION>
Revenues Net Loss Assets
<S> <C> <C> <C>
Canada $ 11,789 $ (1,181) $ 88,044
United States 77,239 (31,245) 143,994
Eliminations - 2,320 -
-------- --------- ----------
Total $ 89,028 $ (30,106) $ 232,038
======== ========= ==========
</TABLE>
18. COMMITMENTS AND CONTINGENCIES
a. 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 30 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.
b. Century Casinos, Inc. - The Company also holds options in
Century Casinos Inc. 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's common stock and
Century's historical results of operations, the Company believes
the options will not become exercisable and, therefore, have no
value.
c. Brahman Funds - Related to the sale of common stock to Brahman
Funds (see Note 20), the Company is required to hold the
proceeds of the of the Brahman Private Placement in a segregated
interest-bearing account until CL Associates and FSNL have
purchased at least 1,071,428 shares of Common Stock in the
Rights Offering by April 15, 1997. If that condition is not
satisfied, Brahman may require the Company to repurchase the
shares sold to Brahman at a price of $14 per share plus the
accrued interest in that segregated account. CL Associates and
FSNL have informed the Company that they intend to exercise
their basic subscription privileges (for approximately 1,128,134
shares of Common Stock) under the rights offering in full.
F-25
<PAGE>
d. Litigation - In the normal course of business, certain litigation
is initiated against the Company. Generally, these claims are
insured and in the opinion of management, disposition of
litigation will not have a material adverse effect on the
Company's liquidity, consolidated financial position, or
consolidated results of operation.
19. FOURTH QUARTER RESULTS
Included in fourth quarter results are charges of (i) $2.2 million in
noncash provisions for losses on gaming assets, (ii) a charge of $9.5
million for cancellation of a corporate services agreement with HFS,
(iii) an additional $.8 million charge for the Company's termination of
its San Diego Harbor Island Travelodge franchise agreement in connection
with the planned conversion of that hotel to a Hilton franchise.
20. SUBSEQUENT EVENTS
Alliance with Hilton Inns - On January 20, 1997, the Company announced
that it formed an alliance with Hilton Hotels Corporation's franchising
subsidiary, Hilton Inns, Inc., in which Chartwell will own, develop,
manage and operate at least 20 Hilton Garden Inn hotels in target markets
nationwide under a franchise license. The initial term of the agreement
is three years and represents a total investment of approximately $200
million by Chartwell. Construction financing and permanent mortgage
financing are expected to be arranged for the Hilton Garden Inn
development program through Nationsbank and Nomura Securities. Of the
total construction costs, Nationsbank is expected to provide up to 80% of
the financing, with Hilton guaranteeing 25% of the loan. Chartwell will
fund the remaining 20% of the capital as equity. Upon obtaining a
certificate of occupancy, the construction loan is expected to convert to
a 15-year permanent mortgage through an arrangement with Nomura
Securities.
In addition to the Hilton Garden Inn agreement, Hilton has formally
approved the conversion of the 207-room, Chartwell-owned San Diego
Travelodge to a full-service Hilton Hotel. The property, on Harbor Island
Drive, will undergo a $3.3 million renovation, to be completed by this
summer.
Rights Offering - On January 23, 1997, the Company announced its intent
to offer to its existing stockholders shares of common stock, par value
$.01 per share, pursuant to a rights offering (the "Rights Offering"). CL
Associates and FSNL LLC, the Company's two principal stockholders, have
invested $15.8 million in the Company through the Rights Offering.
Through the Rights Offering, which closed on March 13, 1997, the Company
sold 2,228,977 shares for total proceeds of approximately $31.2 million
including the $15.8 million described above.
In addition, the Company announced that it had sold 1,000,000 shares of
common stock to funds managed by affiliates of Brahman Management, LLC
(the "Brahman Private Placement") and approximately 658,929 shares of
common stock to Baron Funds at $14 per share, for a total investment of
$14 million by Brahman and $9.2 million by Baron Funds.
The proceeds of the rights offering and the private placements will be
used to fund the construction of Hilton Garden Inns under the Company's
recently announced alliance with Hilton Hotels Corporation, to fund the
Company's Mexican joint venture, the redevelopment of the Company's
existing hotels, and for general corporate purposes.
F-26
<PAGE>
Bond Offering - The company is in the process of completing a $100
million offering of 10% senior notes due 2007. The net proceeds from the
Offering will be used by the Company to refinance certain existing
indebtedness and to fund future capital expenditures. An extraordinary
charge of $1.6 million would be incurred as a result of the early
extinguishment of debt and the write-off of the deferred financing costs
associated with the prior credit facility if the bond offering is
completed. As part of the recapitalization, it is contemplated that the
Company's existing $150 million credit facility would be terminated and
replaced with a new secured facility of approximately $60 million and the
HFS guarantee and related $1.5 million annual fee would be eliminated.
On March 4, 1997 the Company entered into a $50 million, 6.559% 10 year
treasury instrument with a locked rate of 6.631% to partially hedge the
proposed bond offering. The settlement date is May 15, 1997.
On March 7, 1997, the Company entered into a $20 million, 6.5478% 10 year
treasury instrument with a locked rate of 6.620% to partially hedge the
proposed bond offering. The settlement date is May 15, 1997.
On March 12, 1997, the Company entered into a $10 million, 6.605% 10 year
treasury instrument with a locked rate of 6.675% to partially hedge the
proposed bond offering. The settlement date is May 15, 1997.
The notes will be unsecured, senior obligations of the Company ranking
pari passu in right of payment with all other existing and future
unsecured, senior indebtedness of the Company and senior in right of
payment to all other existing and future subordinated indebtedness of the
Company.
New Accounting Pronouncements - In February 1997, FASB Statement No. 128,
"Earnings Per Share" was released. The statement establishes standards
for computing and presenting earnings per share ("EPS") for publicly
traded companies. The statement simplifies the standards for computing
earnings per share and makes them comparable to international EPS
standards. The statement is effective for financial statements issued for
periods ending after December 15, 1997. The Company does not believe that
the requirements of the statement will have a significant impact on the
presentation of EPS in the financial statements.
* * * * * *
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of National Lodging Corporation
We have audited the accompanying consolidated statements of operations and cash
flows for the period from February 1, 1995 to January 23, 1996 of the Acquired
Business (or "Company" as defined in Note 1 to the accompanying financial
statements) These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and cash flows for
the period from February 1, 1995 to January 23, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
April 19, 1996
F-28
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
of National Lodging Corporation
In our opinion, the accompanying consolidated statements of operations and of
cash flows present fairly, in all material respects, the results of operations
and cash flows of the Acquired Business (or the "Company", as defined in Note 1
to the accompanying financial statements) for the year ended January 31, 1995 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
February 20, 1996
F-29
<PAGE>
TRAVELODGE/THRIFTLODGE
(Business Acquired by National Lodging Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period
February 1,
1995 to Year Ended
January 23, January 31,
1996 1995
<S> <C> <C>
REVENUES:
Hotels and motels $ 65,790 $ 63,636
Management fees
3,351 2,822
---------- ----------
69,141 66,458
---------- ----------
OPERATING COSTS AND EXPENSES:
Hotels and motels 28,904 27,844
Administrative and general 13,059 12,272
Depreciation and amortization 8,385 7,982
Rent 4,700 5,074
Sales and marketing 4,459 4,202
Maintenance 3,673 3,453
Property taxes 1,864 2,110
Other 2,693 1,909
---------- ----------
67,737 64,846
---------- ----------
OPERATING INCOME 1,404 1,612
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 838 757
Interest expense (785) (1,662)
Equity in earnings of joint ventures 5,338 4,878
---------- ----------
5,391 3,973
---------- ----------
MINORITY INTEREST (1,073) (960)
---------- ----------
INCOME BEFORE INCOME TAX PROVISION
5,722 4,625
INCOME TAX PROVISION (2,288) (1,850)
---------- ----------
NET INCOME $ 3,434 $ 2,775
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
TRAVELODGE/THRIFTLODGE
(Business Acquired by National Lodging Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands of Dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period
February 1,
1995 to Year Ended
January 23, January 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,434 $ 2,775
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,385 7,982
Minority interest 1,073 960
Equity in earnings of joint ventures (5,338) (4,878)
Increase (decrease) of cash resulting from changes in:
Trade accounts receivable (1,115) 738
Receivables from joint ventures and franchisees (510) 1,484
Prepaid expenses and other current assets 1,105 (220)
Other assets (155) 7
Trade accounts payable 1,645 (218)
Accrued expenses and other current liabilities (2,294) 36
--------- ---------
Net cash provided by operating activities 6,230 8,666
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of notes receivable (398) (887)
Principal payments received on notes receivable 2,328 534
Capital expenditures (3,841) (5,201)
Purchase of management contracts (1,932) -
Capital contributed to joint ventures (201) (820)
Capital distributions from joint ventures 6,040 4,898
Capital distributions to consolidated joint venture minority interest (973) (738)
--------- ---------
Net cash provided by (used in) investing activities 1,023 (2,214)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings (468) 50
Principal payments under capital lease obligations (158) (5,356)
Net transactions with Seller (7,124) (1,993)
--------- ---------
Net cash (used in) financing activities (7,750) (7,299)
--------- ---------
NET (DECREASE) IN CASH (497) (847)
CASH, BEGINNING OF PERIOD 3,221 4,068
--------- ---------
CASH, END OF PERIOD $ 2,724 $ 3,221
========= =========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
TRAVELODGE/THRIFTLODGE
(Business Acquired by National Lodging Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands of Dollars)
- --------------------------------------------------------------------------------
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Forte Hotels, Inc. ("FHI"), is a subsidiary of Forte USA Inc. ("FUSA" or
the "Seller"), whose ultimate parent is Forte Plc of London ("FPL"). FHI
is primarily an owner, manager, and franchisor of hotels and motels in
the United States, Canada, Mexico and South America. FHI operates hotels
and motels under the Travelodge Hotel, Travelodge Motel and Thriftlodge
names. In addition, FHI has an ownership interest in certain
non-Travelodge related hotels, residential apartments, and other
hospitality-related business ("Exclusive Properties and other business").
On January 23, 1996, two separate groups of FHI assets were purchased by
two independent companies. One company purchased 19 motel properties,
while the other purchased the Travelodge franchise system in North
America, including the Travelodge and Thriftlodge service marks,
franchise agreements and the assets comprising the reservation system in
North America. Additionally, a special distribution was made by FHI to
FUSA of the Exclusive Properties and other business. The stock of FHI was
then purchased by National Lodging Corporation ("NLC", formerly known as
National Gaming Corporation). Through such stock purchase, NLC acquired
15 wholly-owned properties and interest in 97 "joint venture" properties,
certain management contracts, and retail space ("Acquired Business" or
the "Company"). The accompanying financial statements include only those
assets, liabilities, revenues and expenses arising from the operations of
the Acquired Business. In connection with the anticipated sale of FHI, 23
management contracts for Canadian franchise properties were assigned to
FHI from an affiliate of FPL. While the assets, amortization expense and
management fees related to these contracts were not included in the
historical financial statements of FHI, such amounts have been included
in the accompanying financial statements of the Acquired Business from
the time of the affiliate's acquisition of such contracts in June 1992.
The balances reflected in the financial statements include allocations
from FHI, which were based on the number of properties acquired,
percentage of acquired share of total account balance, or other
appropriate bases. These allocations reflect the share of corporate
overhead, results from operations, and assets and liabilities that
pertain to the Acquired Business. Management believes the foregoing
allocations were made on a reasonable basis and reflect the costs which
would have been incurred on a stand-alone basis.
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. The financial information included herein may not necessarily
reflect the financial position and results of operations of the Acquired
Business in the future or what the financial position, results of
operations, and cash flows of the Acquired Business would have been had
it been a separate stand-alone company.
F-32
<PAGE>
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 (Note 2).
Property and Equipment - Property and equipment is recorded 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; buildings - 40 years,
furniture and equipment - three to ten years. 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.
Although adoption is not required until its fiscal year 1997, the Company
has assessed the impact of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Based on current conditions, the
Company does not believe that adoption will have an adverse impact on its
financial position or results of operations.
The Company considers interest expense on funds borrowed for the
development and construction of new hotels and motels 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 period February 1, 1995 to January 23, 1996 and the year ended
January 31, 1995, respectively.
Other Assets - The management contracts for Canadian properties of
$8,661,000 and $7,120,000 at January 23, 1996 and January 31, 1995,
respectively 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.
Income Taxes- The Acquired Business was included in the consolidated
income tax returns of Forte Holdings, Inc. and its predecessor. Income
tax expense for the Acquired Business has been computed on a stand-alone
basis based on the operating results of the Acquired Business.
Pursuant to the terms of the acquisition and its income tax structure, a
new income tax basis in the acquired assets and liabilities will be
established by NLC. No historical income tax attributes will transfer to
NLC.
2. INVESTMENT IN JOINT VENTURES
The Company is a partner in joint ventures that own and operate motels
and hotels. The Company has a fifty percent interest in many of its joint
ventures. The Company consolidates the joint ventures in
F-33
<PAGE>
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.
Results of operations of joint ventures accounted for under the equity
method are reflected in the following statements of operations (in
thousands of dollars):
<TABLE>
<CAPTION>
Period
February 1, 1995 Year Ended
to January 31,
January 23, 1996 1995
<S> <C> <C>
Joint Venture Statements of Operations
Revenue $ 49,006 $ 45,006
Operating costs (35,738) (32,923)
Interest expense (915) (1,258)
-------- --------
$ 12,353 $ 10,825
======== ========
</TABLE>
3. LONG-TERM DEBT
Interest paid approximated interest expense of $785,000 and $1,662,000
during fiscal 1996 and 1995, respectively.
4. LEASES
Operating Leases - The Company operates many of its hotels and motels
under long-term leases expiring at various dates through 2035.
Substantially all leases have renewal options exercisable after a
specified number of years and require the payment of real estate taxes
and insurance. Contingent rentals, based on sales volume, are also
required by most leases.
Rental expense on operating leases is summarized as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Period
February 1, 1995 Year Ended
to January 31,
January 23, 1996 1995
<S> <C> <C>
Minimum rentals $ 2,087 $ 1,969
Contingent rentals 2,613 3,105
-------- --------
$ 4,700 $ 5,074
======== ========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
Defined Benefit Plan - The employees of the Acquired Business
participated in the Seller's retirement plan (the "Plan"). The Plan is a
noncontributory, defined benefit plan. The normal retirement benefit
provided for by the Plan is determined based upon a covered employee's
earnings and length of service at the time of retirement. The pension
costs were funded by the Seller as they accrued in accordance
F-34
<PAGE>
with the provisions of the Plan. In connection with the acquisition, the
Plan was frozen, participants became fully vested in their accrued
benefits and no further service benefit will accrue. The Plan obligations
were retained by the Seller.
Pension expense of $540,000 and $574,000 was charged to the Acquired
Business during the fiscal period February 1, 1995 to January 23, 1996
and the year ended January 31, 1995, respectively.
The weighted average discount rate used in determining the actuarial
present value of projected benefit obligations was 7.0% and 8.5% in 1996
and 1995, respectively. The assumed rate of increase in future
compensation levels was 5.0%. The expected long-term rate of return on
assets was 9.0%.
6. OTHER RELATED PARTY BALANCES AND TRANSACTIONS
The Seller provided certain services to the Acquired Business including
management, legal, accounting, income tax, treasury, employee benefits
and human resource administration services. Costs related to these
services as well as other overhead costs of the Seller have been
allocated to the Acquired Business using allocation methods considered
reasonable by management. The allocated costs were approximately
$6,670,000 and $6,858,000 during the period February 1, 1995 to January
23, 1996 and the year ended January 31, 1995, respectively.
An affiliate of the Seller provided certain marketing and promotional
services to the Acquired Business. Additionally, the Seller maintained
and operated a reservation system network and provided such service to
the Acquired Business. These services were charged to the properties
under a cost reimbursement program and did not contain a profit margin.
Amounts charged for these services were $1,912,000 and $1,908,000 during
the period February 1, 1995 to January 23, 1996 and the year ended
January 31, 1995, respectively, for the wholly-owned properties and
consolidated joint ventures. Additionally, nonconsolidated joint ventures
were charged $1,732,000 and $1,604,000 during the period February 1, 1995
to January 23, 1996 and the year ended January 31, 1995 , respectively,
for such services.
The Seller also provided administrative and financial services to the
joint ventures. The Company charged the joint ventures $432,000 and
$436,000 for these services in the period February 1, 1995 to January 23,
1996 and the year ended January 31, 1995, respectively. Per agreement,
charges for these services are primarily calculated at the rate of $8 per
room per month.
******
F-35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
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/A, 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/A, 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/A, dated December 31,
1995, Exhibit 2.8).
2.9 Securities Purchase Agreement, dated as of January 31, 1997, among
the Company and the Investors listed therein. (Incorporated by
reference to the Company's Amendment No. 1 to Form S-3
Registration Statement, filed February 10, 1997, Exhibit 2.9).
2.10 Securities Purchase Agreement, dated as of March 6, 1997, between
the Company and Baron Asset Fund.*
2.11 Contract of Sale, dated as of July 17, 1996, by and among Capital
Properties Limited Partnership, Syndicated Capital Properties,
Inc., Syncap Properties Inc., Tegrad Properties (Winnipeg) Inc.,
Tegrad Montreal I Inc., 1002370 Ontario, Inc. and Chartwell Canada
Corp. (Incorporated by reference to the Company's Current Report on
Form 8-K/A, dated October 1, 1996, Exhibit 2.1).
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
3.1 Restated Certificate of Incorporation of the Company. (Incorporated
by reference to the Company's Current Report on Form 8-K, dated
December 2, 1994, Exhibit 3.1).
3.2 Amended and Restated Bylaws of the Company. (Incorporated by
reference to the Company's Current Report on Form 8-K, dated
December 2, 1994, Exhibit 3.2).
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).
4.2 Form of Subscription Certificate. (Incorporated by reference to the
Company's Amendment No. 1 to Form S-3 Registration Statement, filed
February 10, 1997, Exhibit 4.2).
10.1 Interim Financing 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 10.1).
10.2 Gaming Related Marketing Services 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 10.2).
10.3 Gaming Related Advisory Services 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 10.3).
10.4 Corporate Services 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 10.4).
10.5 Facility Lease, 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
10.5).
10.6 Tax Sharing and Indemnification 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 10.6).
10.7 Employment Agreement, dated as of November 22, 1994, between
the Company and Henry R. Silverman. (Incorporated by reference to
the Company's Current Report on Form 8-K, dated December 2,
1994, Exhibit 10.7)./1/
10.8 Employment Agreement, dated as of June 6, 1994, between Robert S.
Kingsley and HFS (Incorporated by reference to Amendment No. 1 to
the Company's Registration Statement on Form 10/A (File No.
0-024794), dated October 21, 1994, Exhibit 10.8)./1/
10.9 1994 Stock Option Plan of the Company. (Incorporated by reference
to the Company's Current Report on Form 8-K, dated December 2,
1994, Exhibit 10.8)./1/
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.10 Lease Agreement between HFS Gaming Corp. as Landlord and
Mississippi-I Gaming, L.P. as Tenant, dated as of April 27, 1994.
(Incorporated by reference to HFS' Form 10-Q for the quarter ended
March 31, 1994, Exhibit 10.2).
10.11 Marketing Services Agreement, dated as of April 27, 1994, by and
among Boomtown, Inc. and HFS Gaming Corp. (Incorporated by
reference to HFS' Form 10-Q for the quarter ended March 31, 1994,
Exhibit 10.3).
10.12 Asset Purchase and Sale Agreement, dated as of April 27, 1994, by
and between HFS Gaming Corp. and Mississippi-I Gaming, L.P.
(Incorporated by reference to HFS' Form 10-Q for the quarter ended
March 31, 1994, Exhibit 10.1).
10.13 Casino Financing Agreement, dated as of August 3, 1993, between
HFS and Rainbow Casino Corporation. (Incorporated by reference to
HFS' Form 10-K for the year ended December 31, 1993, Exhibit
10.31).
10.13(a) Amendment of Casino Financing Agreement, dated as of February
25, 1994, between HFS and Rainbow Casino Corporation.
(Incorporated by reference to HFS' Form 10-K for the year ended
December 31, 1993, Exhibit 10.31(a)).
10.13(b) Second Amendment of Casino Financing Agreement, dated as of
August 11, 1994, among HFS, Rainbow Casino Corporation,
Rainbow Development Corporation and Rainbow Casino - Vicksburg
Partnership, L.P. (Incorporated by reference to the Company's
Annual Report on Form 10-K, dated December 31, 1994, Exhibit
10.13(b)).
10.14 Marketing Services Agreement, dated as of March 15, 1994, between
Rainbow Casino Corporation and HFS Gaming Corp. (Incorporated
by reference to HFS' Form 10-K for the year ended December 31,
1993, Exhibit 10.32).
10.15 Consolidation Agreement, dated as of March 29, 1995, among
Rainbow Casino Corporation, National Gaming Mississippi Inc., HFS
Gaming Corp., Alliance Gaming Corp., United Gaming Corp.,
Rainbow Casino - Vicksburg Partnership, L.P., Mr. John A. Barlett,
Jr., Mr. Leigh Seipel, Rainbow Development Corporation and the
Company. (Incorporated by reference to the Company's Annual
Report on Form 10-K, dated December 31, 1994, Exhibit 10.15).
10.16 Agreement, dated as of March 29, 1995, between the Rainbow
Casino Corporation and National Gaming Mississippi, Inc.
(Incorporated by reference to the Company's Annual Report on Form
10-K, dated December 31, 1994, Exhibit 10.16)
10.17 Loan Agreement, dated as of October 26, 1993, among Alpha
Hospitality Corporation, Alpha Gulf Coast, Inc., as Borrower, and
HFS Gaming Corp., as Lender. (Incorporated by reference to HFS'
Registration Statement on Form S-1 (Registration No. 33-70706,
Exhibit 10.40).
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.18 Marketing Services Agreement, dated as of October 26, 1993, among
Alpha Gulf Coast, Inc., HFS Gaming Corp. and HFS. (Incorporated
by reference to Amendment No. 1 to the Company's Registration
Statement on Form 10/A (File No. 0-024794), dated October 21,
1994, Exhibit 10.17).
10.19 Subscription Agreement, dated March 4, 1994, between Century
Casinos Management, Inc. and HFS. (Incorporated by reference to
HFS' Form 10-K for the year ended December 31, 1993, Exhibit
10.36).
10.20 Marketing Services Agreement, dated as of March 4, 1994, between
Century Casinos Management, Inc. and HFS Gaming Corp.
(Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A (File No. 0-024794), dated
October 21, 1994, Exhibit 10.19).
10.21 Assignment Agreement, dated as of April 14, 1994, by and among
Bennett Funding, Inc. and Gamma International, Ltd., as Assignors,
HFS as Assignee, and Alfred J. Luciani D/B/A Luciani & Associates
LLC. (Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form 10/A (File No.
0-024794), dated October 21, 1994, Exhibit 10.20).
10.22 Preliminary Development Agreement, dated February 28, 1994,
between HFS and the Urban Redevelopment Authority of the City of
Pittsburgh. (Incorporated by reference to HFS' Form 10-K for the
year ended December 31, 1993, Exhibit 10.35).
10.23 Letter of Intent, dated March 1, 1994, between the Urban
Redevelopment Authority of the City of Pittsburgh and HFS.
(Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A (File No. 0-024794), dated
October 21, 1994, Exhibit 10.22).
10.24 Memorandum of Understanding, dated April 14, 1994, between HFS and
The Erie Professional Associates. (Incorporated by reference to
Amendment No. 1 to the Company's Registration Statement on Form
10/A (File No. 0-024794), dated October 21, 1994, Exhibit 10.23).
10.25 Joint Venture Agreement of Erie Casino Associates, dated as of May
18, 1994, between The Erie Professional Associates and Keystone
Erie Gaming, Inc. (Incorporated by reference to Amendment No. 1
to the Company's Registration Statement on Form 10/A (File No.
0-024794), dated October 21, 1994, Exhibit 10.24).
10.26 Letter of Intent, dated February 24, 1994, between Jumers of
St. Charles, Inc. and HFS. (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement on Form 10/A (File
No. 0-024794), dated October 21, 1994, Exhibit 10.25).
10.27 Joint Venture Agreement, dated as of October 1, 1994, between
Keystone Pittsburgh Gaming, Inc. and The Pittsburgh Professional
Associates. (Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form 10/A (File No.
0-024794), dated October 21, 1994, Exhibit 10.26).
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.28 Amended and Restated Preferred Stock Purchase Agreement, dated as
of October 6, 1993, between HFS Gaming Corp. and Odyssey
Gaming Corporation. (Incorporated by reference to HFS'
Registration Statement on Form S-1 (Registration No. 33-70706,
Exhibit 10.39).
10.29 Earnout Agreement, dated as of September 30, 1991, and amended
and restated as of December 20, 1991 among HFS and Messrs.
Stanley S. Tollman and Monty D. Hundley. (Incorporated by
reference to HFS' Registration Statement on Form S-1 (Registration
No. 33-51422), Exhibit 10.17).
10.29(a) Letter Agreement, dated as of May 26, 1993, among HFS and
Bryanston Group, Inc. relating to the modification of the Earnout
Agreement. (Incorporated by reference to HFS' Registration
Statement on Form S-1 (Registration No. 33-63398), Exhibit
10.18(a)).
10.29(b) Amendment to Agreement, dated December 1993, between HFS and
Bryanston Group, Inc. (Incorporated by reference to HFS' Form 10-K
for the year ended December 31, 1993, Exhibit 10.9(b)).
10.30 Option Agreement, dated as of September 30, 1994, between HFS
and the Urban Redevelopment Authority of the City of Pittsburgh.
(Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A (File No. 0-024794), dated
October 21, 1994, Exhibit 10.29).
10.31 Memorandum of Understanding, dated October 1, 1994, between
HFS and The Pittsburgh Professional Associates. (Incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form 10/A (File No. 0-024794), dated October 21,
1994, Exhibit 10.31).
10.32 Option Agreement, dated as of October 26, 1993, between HFS
Gaming Corp. and Alpha Hospitality Corporation. (Incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form 10/A (File No. 0-024794), dated October 21,
1994, Exhibit 10.32).
10.33 Agreement, dated as of June 30, 1994, between HFS and Chartwell
Leisure Associates, L.P. (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement on Form 10/A (File
No. 0-024794), dated October 21, 1994, Exhibit 10.33).
10.33(a) Sharing Agreement, dated November 22, 1994, among HFS,
Chartwell Leisure Associates, L.P. and the Company. (Incorporated
by reference to the Company's Annual Report on Form 10-K, dated
December 31, 1994, Exhibit 10.33(a)).
10.34 Letter Agreement, dated September 11, 1994, between HFS and
Century Casinos, Inc. (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement on Form 10/A (File
No. 0-024794), dated October 21, 1994, Exhibit 10.34).
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.35 Letter Agreement, dated March 4, 1994, between HFS and Century
Casinos Management, Inc. (Incorporated by reference to Amendment
No. 1 to the Company's Registration Statement on Form 10/A (File
No. 0-024794), dated October 21, 1994, Exhibit 10.35).
10.36 Guarantee Letter, dated January 17, 1995, by and among HFS, the
Company and Boomtown. (Incorporated by reference to the
Company's Current Report on Form 8-K dated February 1, 1995,
Exhibit 10.1).
10.37 Form of Option Agreement, dated as of November 6, 1995, between
National Gaming Mississippi, Inc. and Mississippi - I Gaming, L.P.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, Exhibit 10.1).
10.38 Form of Lease Amendment, dated as of November 6, 1995, between
National Gaming Mississippi, Inc. and Mississippi - I Gaming, L.P.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, Exhibit 10.2).
10.39 Letter Agreement, dated August 18, 1995, among the Company, HFS
Incorporated and Bryanston Group, Inc. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995, Exhibit 10.3).
10.40 Registration Rights Agreement, dated as of December 20, 1995,
between Chartwell Leisure Associates L.P. II and the Company.
(Incorporated by reference to the Company's Annual Report on
Form 10-K/A, dated December 31, 1995, Exhibit 10.40).
10.41 Agreement Among Purchasers, dated as of January 22, 1996, among
HFS Incorporated, Motels of America, Inc. and the Company.
(Incorporated by reference to the Company's Current Report on Form
8-K, dated January 23, 1996, Exhibit 10.1).
10.42 Credit Agreement, dated as of January 23, 1996, among Chemical
Bank, Bankers Trust Company, various banks named therein and the
Company. (Incorporated by reference to the Company's Current
Report on Form 8-K, dated January 23, 1996, Exhibit 10.2).
10.43 Pledge Agreement, dated as of January 23, 1996, among the
Company, Forte Hotels, Inc. and the other parties named therein, as
Pledgors, and Bankers Trust Company, as Pledgee and Collateral
Agent. (Incorporated by reference to the Company's Current Report
on Form 8-K, dated January 23, 1996, Exhibit 10.3).
10.44 Form of Agreement of Lease between Fisher 40th & 3rd Company
and Hawaiian Realty, Inc., as landlord, and the Company, as tenant.
(Incorporated by reference to the Company's Annual Report on
Form 10-K/A, dated December 31, 1995, Exhibit 10.44).
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.45 Employment and Noncompetition Agreement, dated as of March 1,
1996, by and between Kenneth J. Weber and the Company.
(Incorporated by reference to the Company's Annual Report on
Form 10-K/A, dated December 31, 1995, Exhibit 10.45)./1/
10.46 Employment Letter Agreement, dated as of January 23, 1996,
between Douglas H. Verner and the Company. (Incorporated by
reference to the Company's Annual Report on Form 10-K/A, dated
December 31, 1995, Exhibit 10.46)./1/
10.47 Letter Loan Agreement, dated January 22, 1996, between Bank of
America National Trust and Savings Association and Forte Hotels,
Inc. (Incorporated by reference to the Company's Annual Report on
Form 10-K/A, dated December 31, 1995, Exhibit 10.47).
10.48 Employment Letter Agreement, dated as of January 23, 1996, by and
between Carl Winston and the Company. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, Exhibit 10.1)./1/
10.49 License Agreement, dated as of January 23, 1996, between Bear
Acquisition Corp., as Licensor, and Forte Hotels, Inc., as
Licensee. (Incorporated by reference to the Company's Annual Report
on Form 10-K/A, dated December 31, 1995, Exhibit 10.49).
10.50 Form of Future Payments Agreement, by and between Chartwell Canada
Corp. and Syndicated Capital Properties Inc., as agent for Capital
Properties Limited Partnership. (Incorporated by reference to the
Company's Current Report on Form 8-K/A, dated October 1, 1996,
Exhibit 10.1).
10.51 Credit Agreement, dated as of August 28, 1996, among the
Registrant, Chartwell Canada Corp., The Bank of Nova Scotia, The
Chase Manhattan Bank and the various banks named therein.
(Incorporated by reference to the Company's Current Report on
Form 8-K/A, dated October 1, 1996, Exhibit 10.2).
10.52 Development Agreement, dated as of October 1, 1996, by and
between NRG Management Services Inc. and the Registrant.
(Incorporated by reference to the Company's Current Report on
Form 8-K/A, dated October 1, 1996, Exhibit 10.3).
10.53 Form of Indemnification Agreement, by and among Chartwell Canada
Corp., the Registrant, NL Hotels, Inc., Capital Properties Limited
Partnership, Syndicated Capital Properties Inc., Royco Hotels &
Resorts Ltd. and NRG Management Services Inc. (Incorporated by
reference to the Company's Current Report on Form 8-K/A, dated
October 1, 1996, Exhibit 10.4).
10.54 Guaranty Letter, dated as of October 1, 1996, by Royco Hotels &
Resorts Ltd., Peter P. Sikora, Terrence Royer, Randy Royer and
Gregory Royer. (Incorporated by reference to the Company's
Current Report on Form 8-K/A, dated October 1, 1996, Exhibit
10.5).
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.55 Non-Competition Agreement, dated as of October 1, 1996, by and
among Royco Hotels & Resorts Ltd., Peter P. Sikora, Terrence
Royer, Randy Royer, Gregory Royer, NL Hotels, Inc. and the
Registrant. (Incorporated by reference to the Company's Current
Report on Form 8-K/A, dated October 1, 1996, Exhibit 10.6).
10.56 Debt Restructuring Letter Agreement, dated as of August 15, 1996,
by and among the Registrant, Bank of Montreal, Scotia Mortgage
Corporation, Canadian Imperial Bank of Commerce and Province of
Alberta Treasury Branches. (Incorporated by reference to the
Company's Current Report on Form 8-K/A, dated October 1, 1996,
Exhibit 10.7).
10.57 First Amendment, dated as of September 30, 1996, to the Credit
Agreement, dated as of August 28, 1996, among Chartwell Leisure
Inc., Chartwell Canada Corp., The Bank of Nova Scotia, The Chase
Manhattan Bank and the various banks named therein. (Incorporated
by reference to the Company's Current Report on Form 8-K/A, dated
October 1, 1996, Exhibit 10.8).
10.58 Hotel Management Agreement, dated October 1, 1996, among
Chartwell Canada Corp., Chartwell Canada Nominee Corp., Tegrad
Montreal Inc., Edmonton South Nominee Corp., Calgary North
Nominee Corp. and Chartwell Lodging Corp. (Incorporated by
reference to the Company's Current Report on Form 8-K/A, dated
October 1, 1996, Exhibit 10.9).
10.59 Amended and Restated Management Services and Franchise
Development Agreement, dated as of October 1, 1996, among
Chartwell Canada Hospitality Corp., Chartwell Lodging Inc., Royco
Hotels and Resorts Ltd. and Chartwell Leisure Inc. (Incorporated by
reference to the Company's Current Report on Form 8-K/A, dated
October 1, 1996, Exhibit 10.10).
10.60 Master License Agreement for the Territory of the Dominion of
Canada, dated September 30, 1996, between Travelodge Hotel, Inc.
and Chartwell Canada Hospitality Corp. (Incorporated by reference
to the Company's Current Report on Form 8-K/A, dated October 1,
1996, Exhibit 10.11).
10.61 Master License Agreement for the Territory of The United Mexican
States, dated September 18, 1996, between Travelodge Hotels, Inc.
and Chartwell Mexico, S.A. de C.V. (Incorporated by reference to
the Company's Current Report on Form 8-K/A, dated October 1,
1996, Exhibit 10.12).
10.62 Termination Letter Agreement, dated as of November 20, 1996, by
and between the Registrant and HFS Incorporated. (Incorporated by
reference to the Company's Current Report on Form 8-K/A, dated
October 1, 1996, Exhibit 10.13).
10.63 Unsecured Note, dated as of November 20, 1996, for the principal
amount of $7,000,000, by the Registrant, in favor of HFS
Incorporated. (Incorporated by reference to the Company's Current
Report on Form 8-K/A, dated October 1, 1996, Exhibit 10.14).
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
10.64 Development Advance Agreement, dated as of October 15, 1996,
between the Registrant and HFS Incorporated. (Incorporated by
reference to the Company's Current Report on Form 8-K/A, dated
October 1, 1996, Exhibit 10.15).
10.65 Second Amended and Restated Financing Agreement, dated as of
July 24, 1996, between the Registrant and HFS Incorporated.
(Incorporated by reference to the Company's Current Report on
Form 8-K/A, dated October 1, 1996, Exhibit 10.16).
10.66 Amendment No. 1 to Second Amended and Restated Financing
Agreement, dated as of August 1996, between the Registrant and HFS
Incorporated. (Incorporated by reference to the Company's Current
Report on Form 8-K/A, dated October 1, 1996, Exhibit 10.17).
10.67 Employment Letter Agreement, dated as of July 17, 1996, by and
between Ronald E. Jackson and the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q, dated
June 30, 1996, Exhibit 10.1)./1/
10.68 Joint Venture Agreement, dated as of July 12, 1996, by and between
Desarrolladora y Operadora de Hoteles Piasa, S.A. de C.V.,
Chartwell Mexico Corp., Xavier D. Autrey Maza and Alonson Ancira
Elizondo. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q, dated June 30, 1996, Exhibit 10.2).
10.69 Waiver and Consent, dated as of August 7, 1996, among the
Company and the lenders party to the Credit Agreement.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, dated June 30, 1996, Exhibit 10.3).
10.70 Termination letter, dated as of February 12, 1997, between Ronald
Jackson and the Company.*
21.1 Subsidiaries of the Company.
23.1(a) Consent of Deloitte & Touche LLP.*
23.1(b) Consent of Deloitte & Touche LLP.*
23.2 Consent of Price Waterhouse LLP.*
24.1 Powers of Attorney (included on the signature pages hereto).*
27.1 Financial Data Schedule.*
</TABLE>
- ---------------
/*/ Filed herewith.
/1/ Management contract or compensatory plan or arrangement.
E-9
<PAGE>
EXHIBIT 2.10
SECURITIES PURCHASE AGREEMENT
between
CHARTWELL LEISURE INC.
and
BARON ASSET FUND
March 6, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
SECTION 1. AUTHORIZATION OF SECURITIES.............................. 1
SECTION 2. PURCHASE AND SALE OF SECURITIES.......................... 1
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............ 2
3.1 Corporate Organization.............................. 2
3.2 Business............................................ 2
3.3 Financial Statements................................ 4
3.4 Capitalization...................................... 4
3.5 Corporate Proceedings, etc.......................... 5
3.6 Consents and Approvals.............................. 5
3.7 Absence of Defaults, Conflicts, etc................. 5
3.8 Compliance with Law................................. 5
3.9 Pending Actions..................................... 6
3.10 Private Offering.................................... 6
3.11 Brokerage........................................... 6
3.12 Material Facts...................................... 7
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR........... 7
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES...................... 8
5.1 Resale of Securities................................ 8
5.2 Covenants Pending Closing........................... 9
5.3 Further Assurance................................... 9
SECTION 6. INVESTOR'S CLOSING CONDITIONS............................ 9
6.1 No Material Adverse Change.......................... 9
6.2 Representations and Warranties...................... 9
6.3 Compliance with Agreement........................... 9
6.4 Officer's Certificate............................... 10
6.5 Approval of Proceedings............................. 10
6.6 Injunction.......................................... 10
6.7 Opinion............................................. 10
SECTION 7. COMPANY'S POST-CLOSING CONDITIONS........................ 10
7.1 Closing of Related Transactions..................... 10
7.2 Sale Right.......................................... 10
7.3 Officer's Certificate............................... 11
SECTION 8. COMPANY'S CLOSING CONDITIONS............................. 11
8.1 Representations and Warranties...................... 11
8.2 Compliance with Agreement........................... 11
8.3 Investor Certificate................................ 11
8.4 Injunction.......................................... 11
</TABLE>
<PAGE>
<TABLE>
Page
----
<C> <S> <C>
SECTION 9. COVENANTS................................................. 12
9.1 Financial and Business Information................... 12
SECTION 10. REGISTRATION RIGHTS.......... .......................... 13
10.1 Required Registration................................ 13
10.2 Registration Procedures.............................. 13
10.3 Further Information.................................. 15
SECTION 11. INDEMNIFICATION........................................... 16
11.1 Indemnification Generally............................ 16
11.2 Indemnification Relating to Registration Rights....... 16
11.3 Indemnification Procedures........................... 17
SECTION 12. INTERPRETATION OF THIS AGREEMENT.......................... 18
12.1 Terms Defined........................................ 18
12.2 Directly or Indirectly............................... 19
12.3 Governing Law........................................ 19
12.4 Paragraph and Section Headings....................... 19
SECTION 13. MISCELLANEOUS............................................. 19
13.1 Notices.............................................. 19
13.2 Expenses............................................. 20
13.3 Survival............................................. 20
13.4 Entire Agreement; Amendment and Waiver................ 20
13.5 Counterparts......................................... 20
13.6 Successors and Assigns............................... 20
</TABLE>
<PAGE>
SECURITIES PURCHASE AGREEMENT
Dear Sirs:
Chartwell Leisure Inc., a Delaware corporation (the "Company"), hereby
agrees with Baron Asset Fund (the "Investor") as follows:
SECTION 1. AUTHORIZATION OF SECURITIES
---------------------------
(a) The Company has authorized 100,000,000 shares of Common Stock,
$.01 par value (the "Common Stock"), of which 10,501,850 shares were issued and
outstanding as of the close of business on March 4, 1997 and 10,000,000 shares
of Preferred Stock, $1.00 par value the ("Preferred Stock"), of which no shares
were issued and outstanding as of March 4, 1997.
SECTION 2. PURCHASE AND SALE OF SECURITIES
-------------------------------
(a) Subject to the terms and conditions set forth in this Agreement
and in reliance upon the Company's and the Investor's representations set forth
below, on the Closing Date (as defined below) the Company shall sell to the
Investor, and the Investor shall purchase from the Company, 658,929 shares of
Common Stock (the "Shares") at $14.00 per share for an aggregate cash purchase
price of $9,225,006 (the "Purchase Price"). Such sale and purchase shall be
effected on the Closing Date by the Company executing and delivering to the
Investor, duly registered in the Investor's name, a duly executed stock
certificate evidencing the Shares being purchased by it, against delivery by the
Investor to the Company of the Purchase Price by wire transfer of immediately
available funds to such account as the Company shall designate on the Closing
Date. The Company shall maintain such funds in a segregated interest-bearing
account (the "Segregated Account") for the sole benefit of the Investor until
such time as the conditions set forth in Section 7 of this Agreement are met or
the Investor exercises its rights under Section 7.2, in which case the funds
shall immediately, but in no event more than one Business Day after exercise of
such right, be returned to the Investor against delivery of such Shares as
provided in Section 7.2.
(b) The closing (the "Closing") of such sale and purchase shall take
place at 10:00 A.M., New York City time, on March 6, 1997 or on such other date
as the Investor and the Company agree to in writing (the "Closing Date"), at the
offices of Battle Fowler LLP, 75 East 55th Street, New York, New York,
<PAGE>
10022, or at such other location as the Investor and the Company shall mutually
select and agree to.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Except as otherwise disclosed in the written Schedules delivered
separately but concurrently herewith, the Company represents and warrants to the
Investor that:
3.1 Corporate Organization
----------------------
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
(b) The Company has all requisite power and authority and has all
necessary approvals, licenses, permits and authorization to own and lease its
properties and to carry on its business as now conducted, except where the
failure to have such approvals, licenses, permits or authorizations would not
have a material adverse effect on the business or financial position of the
Company and its subsidiaries, taken as a whole.
(c) The Company has filed all necessary documents to qualify to do
business as a foreign corporation in, and the Company is in good standing under
the laws of, each jurisdiction in which the conduct of the Company's business or
the nature of the property owned require such qualification, except where the
failure to so qualify would not have a material adverse affect on the business
or financial position of the Company and its subsidiaries taken as a whole.
3.2 Business
--------
The Company has caused to be delivered to the Investor copies of the
following, without exhibits thereto (collectively, including the exhibits
thereto the "SEC Reports and Filings"):
(i) The Company's Annual Report on 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
2
<PAGE>
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;
(vi) The Company's Current Report on Form 8-K, dated October 1,
1996, filed with the Commission on October 15, 1996, as amended by the Company's
Current Report on Form 8-K/A filed with the Commission on December 12, 1996, as
amended by the Company's Current Report on Form 8-K/A filed with the Commission
on February 7, 1997, as amended by the Company's Current Report on Form 8-K/A
filed with the Commission on February 26, 1997;
(vii) The Company's registration statement on Form S-8 (File
No. 333-15359) dated November 1, 1996;
(viii) The Company's registration statement on Form S-3 (File No.
333-16661) dated November 22, 1996, Amendments No. 1 and 2 thereto filed with
the Commission on February 10, 1997 and February 12, 1997, respectively, and the
final form of prospectus constituting Part I of such registration statement; and
(ix) The Company's registration statement (File No. 333-21777)
dated February 13, 1997.
The SEC Reports and Filings include all filings required to be made by
the Company since January 1, 1996 under the Securities Act of 1933, as amended
(the "Securities Act), and the Exchange Act of 1934, as amended (the "Exchange
Act"), and any rules and regulations promulgated thereunder. The SEC Reports
and Filings, when filed, complied in all material respects with all applicable
requirements of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder. None of the SEC Reports and Filings, at the
time of filing contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading in light of the circumstances in
which they were made. The Company has taken all necessary actions to ensure its
continued inclusion in, and the continued eligibility of the Common Stock
3
<PAGE>
for trading on The NASDAQ Stock Market under all currently effective and, to the
Company's knowledge, currently proposed inclusion requirements. Each balance
sheet included in the SEC Reports and Filings (including any related notes and
schedules) fairly presents in all material respects the consolidated financial
position of the Company and its Subsidiaries as of its date, and each of the
other financial statements included in the SEC Reports and Filings (including
any related notes and schedules) fairly presents in all material respects the
consolidated results of operations or other information therein of Company and
its Subsidiaries for the periods or as of the dates therein set forth in
accordance with GAAP consistently applied during the periods involved (except
that the interim reports are subject to adjustments which might be required as a
result of year end audit and except as otherwise stated therein).
3.3 Financial Statements
--------------------
The audited consolidated balance sheet of the Company as at
December 31, 1995 and the unaudited consolidated balance sheet of the Company as
at September 30, 1996 fairly present in all material respects the consolidated
financial position of the Company as at the dates thereof, and the related
consolidated statements of operations, equity and cash flows for the year ended
December 31, 1995 and the nine months ended September 30, 1996 fairly present
the results of operations of the Company and its subsidiaries for the respective
periods indicated (except that the interim reports are subject to adjustments
which might be required as a result of year end audit and except as otherwise
stated therein). All such financial statements, including the schedules and
notes thereto, were prepared in accordance with generally accepted accounting
principles ("GAAP") applied consistently throughout the periods involved, except
as otherwise stated therein.
3.4 Capitalization
--------------
(a) As of the date hereof, the Company has authorized 100,000,000
shares of Common Stock, of which 10,501,850 shares were issued and outstanding
as of the close of business on March 4, 1997, and 10,000,000 shares of Preferred
Stock, of which no shares were issued and outstanding as of March 4, 1997.
(b) All the outstanding shares of capital stock of the Company have
been duly and validly issued and are fully paid and non-assessable. Upon
issuance, sale and delivery as contemplated by this Agreement, the Shares will
be duly authorized, validly issued, fully paid and non-assessable shares of the
Company, free of all preemptive or similar rights.
(c) Except pursuant to the Rights Offering (as defined herein),
there are no shares of Common Stock issuable upon exercise or conversion of any
security of the Company nor any rights, options or warrants outstanding or other
agreements to acquire shares of Common Stock nor is the Company contractually
obligated to purchase, redeem
4
<PAGE>
or otherwise acquire any of its outstanding shares of Common Stock. No
shareholder of the Company is entitled to any preemptive or similar rights to
subscribe for shares of capital stock of the Company. No shareholders have
registration rights with respect to their shares.
3.5 Corporate Proceedings, etc.
--------------------------
The Company has authorized the execution, delivery, and performance
of this Agreement and each of the transactions and agreements contemplated
hereby (the "Related Transactions"). No other corporate action (including
shareholder approval) is necessary to authorize such execution, delivery and
performance of this Agreement or the transactions contemplated hereby (other
than various actions to be taken in connection with the Rights Offering (as
defined herein) and the transactions contemplated by Section 10 hereof), and
upon such execution and delivery, this Agreement shall constitute the valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except that such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights and general principles of equity.
3.6 Consents and Approvals
----------------------
The execution and delivery by the Company of this Agreement, the
performance by the Company of its obligations hereunder and the consummation by
the Company of the transactions contemplated hereby (other than the Rights
Offering (as defined herein) and the matters contemplated by Section 10 hereof)
do not require the Company to obtain any consent, approval or action of, or make
any filing with or give any notice to, any corporation, person or firm or any
public, governmental or judicial authority.
3.7 Absence of Defaults, Conflicts, etc.
-----------------------------------
The execution and delivery of this Agreement do not, and the
fulfillment of the terms hereof by the Company, and the issuance of the Shares
will not, result in a breach of any of the terms, conditions or provisions of,
or constitute a default under, or permit the acceleration of rights under or
termination of, any indenture, mortgage, deed of trust, credit agreement, note
or other evidence of indebtedness, or other material agreement of the Company
(collectively the "Key Agreements and Instruments"), or the Restated Certificate
of Incorporation or the Amended and Restated By-Laws of the Company, or any rule
or regulation of any court or federal or state regulatory board or body or
administrative agency having jurisdiction over the Company or over its
properties or businesses. No event has occurred and no condition exists which,
upon notice or the passage of time, would constitute a default under any such
Key Agreements and Instruments or in any material license, permit or
authorization to which the Company is a party or by which it may be bound.
3.8 Compliance with Law
-------------------
(a) The Company is not in violation of any laws, ordinances,
governmental rules or regulations to which it is subject,
5
<PAGE>
including without limitation, laws or regulations relating to the environment or
to occupational health and safety which violation would or might materially
adversely affect the properties, business, prospects, profits or condition
(financial or otherwise) of the Company.
(b) The Company has all licenses, permits, franchises or other
governmental authorizations necessary to the ownership of its property or to the
conduct of its business, which if violated or not obtained would or be
reasonably likely to materially adversely affect the properties, business,
prospects, profits or condition (financial or otherwise) of the Company and its
subsidiaries, taken as a whole. The Company has not finally been denied any
application for any such licenses, permits, franchises or other governmental
authorizations necessary to its business.
3.9 Pending Actions
---------------
There is no action, suit, investigation or proceeding pending or, to
the Company's knowledge, threatened against the Company or any of its properties
or assets by or before any court, arbitrator or governmental body, department,
commission, board, bureau, agency or instrumentality, which questions the
validity of this Agreement, the Related Transactions, the issuance or validity
of the Shares or any action taken or to be taken pursuant hereto or thereto, or
which is reasonably likely to result in any material adverse change in the
business or financial condition of the Company and its subsidiaries, taken as a
whole, nor has the Company been notified that either it or any of its officers,
directors or affiliates is the subject of any investigation or inquiry, informal
or otherwise, conducted by the SEC or NASDAQ and the Company is not in default
with respect to any judgment, order, writ, injunction, decree, or award having
applicability to it or its business or properties, other than any such defaults
which would not have a material adverse effect on the business or financial
position of the Company and its subsidiaries, taken as a whole.
3.10 Private Offering
----------------
Neither the Company nor anyone acting on its behalf has sold or has
offered any of the Shares for sale to, or solicited offers to buy from, or
otherwise approached or negotiated with respect thereto with, any prospective
purchaser, other than the Investor. Neither the Company nor anyone acting on
its behalf shall offer the Shares for issue or sale to, or solicit any offer to
acquire any of the same from, anyone so as to bring the issuance and sale of
such Shares, or any part thereof, within the provisions of Section 5 of the
Securities Act. Based upon the representations of the Investor set forth in
Section 4, the offer, issuance and sale of the Shares are and will be exempt
from the registration and prospectus delivery requirements of the Securities
Act, and have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws.
6
<PAGE>
3.11 Brokerage
---------
There are no claims for brokerage commissions or finder's fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement made by or on behalf of the Company.
3.12 Material Facts
--------------
This Agreement, the schedules furnished contemporaneously herewith,
and the other agreements, documents, certificates or written statements
furnished or to be furnished to the Investor, including the SEC Reports and
Filings, through the Closing Date by or on behalf of the Company in connection
with the transactions contemplated hereby, do not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements contained therein or herein, in light of the circumstances in which
they were made, not misleading.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
----------------------------------------------
The Investor represents and warrants to the Company as follows:
(a) It is acquiring the Shares for its own account for investment
and not with a view towards the resale, transfer or distribution thereof, nor
with any present intention of distributing the Shares, but subject,
nevertheless, to any requirement of law that the disposition of the Investor's
property shall at all times be within the Investor's control, and without
prejudice to the Investor's right at all times to sell or otherwise dispose of
all or any part of such securities under a registration under the Securities Act
or under an exemption from said registration available under the Securities Act.
(b) It has full power and legal right to execute and deliver this
Agreement and to perform its obligations hereunder.
(c) The Investor is a business trust, validly formed and existing
under the laws of the State of Massachusetts.
(d) It has taken all action necessary for the authorization,
execution, delivery, and performance of this Agreement and its obligations
hereunder, and, upon execution and delivery by the Company, this Agreement shall
constitute the valid and binding obligations of the Investor, enforceable
against the Investor in accordance with its terms, except that such enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and
general principles of equity.
(e) There are no claims for brokerage commissions or finder's fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement made by or on behalf of the Investor.
7
<PAGE>
(f) It has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of its investment
in the Company as contemplated by this Agreement, and is able to bear the
economic risk of such investment for an indefinite period of time. It has been
furnished access to such information and documents as it has requested and has
been afforded an opportunity to ask questions of and receive answers from
representatives of the Company concerning the terms and conditions of this
Agreement and the purchase of the Shares contemplated hereby and the business
and financial condition of the Company.
(g) It is an "accredited investor" as such term is defined in Rule
501 under the Securities Act and is a Qualified Institutional Buyer as defined
under Rule 144A of the Securities Act.
(h) The Investor (a) acknowledges that the Shares are not registered
under the Securities Act or under any state securities laws and that the Shares
to be acquired by it must be held indefinitely by it unless they are
subsequently registered under the Securities Act and under any applicable state
securities laws or an exemption from registration is available, (b) is aware
that any routine sales pursuant to Rule 144 promulgated under the Securities Act
of the Shares may be made only in limited amounts and in accordance with the
terms and conditions of that Rule and that in such cases where the Rule is not
applicable, compliance with some other registration exemption will be required,
(c) is aware that Rule 144 is not presently available for use by the Investor
for resale of the Shares and (d) is aware that, except as provided in Section 10
of this Agreement, the Company is not obligated to register under the Securities
Act any sale, transfer or other disposition of the Shares.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
-----------------------------------
5.1 Resale of Securities
--------------------
(a) The Investor covenants that it will not sell or otherwise
transfer the Shares except pursuant to an effective registration under the
Securities Act or unless it delivers to the Company an opinion of counsel, in
form and substance reasonably acceptable to the Company, to the effect that the
sale or transfer qualifies as an exempt transaction under the Securities Act and
the rules and regulations promulgated thereunder.
(b) The certificates evidencing the Shares will bear the following
legend reflecting the foregoing restrictions on the transfer of such securities:
"The securities evidenced hereby have not been registered under the
Securities Act of 1933, as amended (the "Act"), and may not be
transferred except pursuant to an effective registration under the
Act or in a transaction which, in the opinion of counsel reasonably
satisfactory to the Company, qualifies as an
8
<PAGE>
exempt transaction under the Act and the rules and regulations
promulgated thereunder.
5.2 Covenants Pending Closing
-------------------------
Until the Closing, the Company will not, without the Investor's prior
written consent, take any action which would result in any of the covenants
contained in this Agreement becoming incapable of performance. The Company will
promptly advise the Investor of any action or event of which it becomes aware
which has the effect of rendering any of such covenants incapable of
performance.
5.3 Further Assurance
-----------------
Each of the parties shall execute such documents and other papers and
take such further actions as may be reasonably required or desirable to carry
out the provisions hereof and the transactions contemplated hereby. Each such
party shall use its reasonable efforts to fulfill or obtain the fulfillment of
the conditions to the Closing and the Post-Closing Conditions as promptly as
practicable.
SECTION 6. INVESTOR'S CLOSING CONDITIONS
-----------------------------
The obligation of the Investor to purchase and pay for the Shares on
the Closing Date, as provided in Section 2 hereof, shall be subject to the
performance by the Company of its agreements theretofore to be performed
hereunder and to the satisfaction, prior thereto or concurrently therewith, of
the following further conditions:
6.1 No Material Adverse Change
--------------------------
There shall not have occurred any event which has resulted in or is
likely to result in a material adverse change in the condition (financial or
otherwise), business, operations, assets, properties, financial results or
prospects of the Company.
6.2 Representations and Warranties
------------------------------
The representations and warranties of the Company contained in this
Agreement shall be true in all material respects on and as of the Closing Date
as though such representations and warranties were made at and as of such date,
except (i) as otherwise affected by the transactions contemplated hereby or (ii)
the Rights Offering.
6.3 Compliance with Agreement
-------------------------
The Company shall have performed and complied with all agreements,
covenants and conditions contained in this Agreement which are required to be
performed or complied with by the Company prior to or on the Closing Date.
9
<PAGE>
6.4 Officer's Certificate
---------------------
The Investor shall have received a certificate, dated the Closing
Date, signed by the Chief Financial Officer of the Company, certifying that the
conditions specified in the foregoing Sections 6.1, 6.2 and 6.3 hereof have been
fulfilled.
6.5 Approval of Proceedings
-----------------------
All proceedings to be taken in connection with the transactions
contemplated by this Agreement, and all documents incident thereto, shall be
satisfactory in form and substance to the Investor and its counsel; and the
Investor shall have received copies of all documents or other evidence which
they and such counsel may request in connection with such transactions and of
all records of corporate proceedings in connection therewith in form and
substance satisfactory to the Investor and its counsel.
6.6 Injunction
----------
There shall be no effective injunction, writ, preliminary restraining
order or any order of any nature issued by a court of competent jurisdiction
directing that the transactions provided for herein or any of them not be
consummated as herein provided.
6.7 Opinion
-------
The Investor shall receive an opinion of counsel to the Company,
Battle Fowler LLP, substantially in the form of Exhibit 6.7 hereto.
SECTION 7. COMPANY'S POST-CLOSING CONDITIONS
---------------------------------
7.1 Closing of Related Transactions
-------------------------------
The Company shall have: (i) on or before March 15, 1997 commenced the
currently contemplated rights offering at a price of $14.00 per share (the
"Rights Offering"); and (ii) on or before April 15, 1997 consummated the sale of
an aggregate of no less than 1,071,428 shares of Common Stock to Chartwell
Leisure Associates L.P. II and FSNL LLC at a price of no less than $14.00 per
share (collectively, the "Post-Closing Conditions").
7.2 Sale Right
----------
In the event that each of the Post-Closing Conditions are not met on
or before April 15, 1997 (the "Section 7.2 Exercise Date"), the Investor will
have the right to sell the Shares purchased herein to the Company by notifying
the Company in writing (the "Notice") of its intention to sell Shares back to
the Company and the Company shall be required to repurchase such Shares at a
price of $14.00 per share plus interest accrued in the Segregated Account from
the Investor within two (2) Business Days of receipt of such Notice. The
Investor may elect to exercise such right by notifying the Company in writing of
its intention to sell such Shares to the Company. The Closing of
10
<PAGE>
such sale and purchase shall take place at 10:00 a.m. at the offices of Battle
Fowler LLP, 75 East 55th Street, New York, New York 10022, within two (2)
Business Days of receipt of such Notice. The Company shall pay the purchase
price in immediately available funds against delivery of such Shares and such
certificates representing the Shares shall be duly endorsed to the Company or
accompanied by duly executed stock power naming the Company as transferee. The
Investor's right to sell the Shares back to the Company pursuant to this Section
7.2 shall expire on May 30, 1997, after which date the Company shall no longer
be obligated to repurchase the Shares.
7.3 Officer's Certificate
---------------------
The Investor shall have received a certificate signed by the Chief
Financial Officer of the Company, certifying that the conditions specified in
Section 7.1 hereof have been fulfilled.
SECTION 8. COMPANY'S CLOSING CONDITIONS
----------------------------
The obligation of the Company to issue and deliver the Shares on the
Closing Date, as provided in Section 2 hereof, shall be subject to the
performance by the Investor of its agreements theretofore to be performed
hereunder and to the satisfaction, prior thereto or concurrently therewith, of
the following further conditions:
8.1 Representations and Warranties
------------------------------
The representations and warranties of the Investor contained in this
Agreement shall be true on and as of the Closing Date as though such warranties
and representations were made at and as of such date, except as otherwise
affected by the transactions contemplated hereby.
8.2 Compliance with Agreement
-------------------------
The Investor shall have performed and complied with all agreements,
covenants and conditions contained in this Agreement which are required to be
performed or complied with by it prior to or on the Closing Date.
8.3 Investor Certificate
--------------------
The Company shall have received a certificate from the Investor,
dated the Closing Date, signed by a duly authorized representative of the
Investor, certifying that the conditions specified in the foregoing Sections 8.1
and 8.2 hereof have been fulfilled.
8.4 Injunction
----------
There shall be no effective injunction, writ, preliminary restraining
order or any order of any nature issued by a court of competent jurisdiction
directing that the transactions provided for herein or any of them not be
consummated as herein provided.
11
<PAGE>
SECTION 9. COVENANTS
---------
9.1 Financial and Business Information
----------------------------------
From and after the date hereof, the Company shall deliver to the
Investor so long as the Investor collectively holds beneficially (within the
meaning of Rule 13d-3 under the Exchange Act) at least 50% of the Shares being
purchased by the Investor on the date hereof:
(a) Quarterly Statements - as soon as practical, and in any event
--------------------
within 50 days after the close of each of the first three fiscal quarters of
each fiscal year of the Company, a copy of the Company's Quarterly Report on
Form 10-Q for such quarter or, if the Company is not required to file such a
report with the SEC, an unaudited consolidated balance sheet and statements of
operations, stockholders' equity and cash flows of the Company and any
subsidiaries as at the close of such quarter and covering operations for such
quarter, and the portion of the Company's fiscal year ending on the last day of
such quarter, all in reasonable detail and prepared in accordance with GAAP
consistently applied, subject to audit and year-end adjustments, setting forth
in each case in comparative form the figures for the comparable period of the
previous fiscal year.
(b) Annual Statements - as soon as practical after the end of each
-----------------
fiscal year of the Company, and in any event within 105 days thereafter, a copy
of the Company's Annual Report on Form 10-K for such year or, if the Company is
not required to file such a report with the SEC duplicate copies of:
(i) consolidated balance sheets of the Company and any
subsidiaries at the end of such year; and
(ii) consolidated statements of operations, stockholders, equity
and cash flows of the Company and any subsidiaries for such year, setting forth
in each case in comparative form the figures for the previous fiscal year, all
in reasonable detail and accompanied by an opinion thereon of Deloitte & Touche
LLP or such other independent certified public accountants of recognized
national standing selected by the Company, which opinion shall state that such
financial statements fairly present the financial position of the Company and
any subsidiaries on a consolidated basis and have been prepared in accordance
with GAAP consistently applied (except for changes in application in which such
accountants concur) and that the examination of such accountants in connection
with such financial statements has been made in accordance with generally
accepted auditing standards, and accordingly included such tests of the
accounting records and such other auditing procedures as were considered
necessary in the circumstances.
(c) Other Reports - promptly upon their becoming available, one
-------------
copy of each financial statement, report, notice or proxy statement sent by the
Company to stockholders generally;
12
<PAGE>
(d) Requested Information - with reasonable promptness, the Company
---------------------
shall furnish the Investor with such other data and information as from time to
time may be reasonably requested.
(e) Access to Data - The Investor shall be allowed reasonable
--------------
access to the Company's records, financial data and facilities and it shall have
the opportunity to discuss the Company's business, management and financial
affairs with the Company's Chief Executive Officer, its Chief Financial Officer
and its Treasurer/Controller on a reasonable basis. The Investor shall also have
the right to ask questions of the Company's officers on a reasonable basis and
the Investor shall have the right to receive answers to its satisfaction. As to
so much of the information and other material furnished pursuant to this
subsection as constitutes or contains confidential business, financial or other
information of the Company or any subsidiary and which is marked "Confidential"
or which the Investor is notified is confidential, the Investor, covenants for
itself and its directors, officers and partners that it will use due care to
prevent its officers, directors, partners, employees, counsel, accountants and
other representatives from disclosing such information to persons other than
their respective authorized employees, counsel, accountants, shareholders,
partners, limited partners and other authorized representatives; provided,
however, that the Investor may disclose or deliver any information or other
material disclosed to or received by it should the Investor be advised by its
counsel that such disclosure or delivery is required by law, regulation or
judicial or administrative order. For purposes of this Section 9.1(e), "due
care" means at least the same level of care that the Investor would use to
protect the confidentiality of its own sensitive or proprietary information, and
this obligation shall survive termination of this Agreement.
SECTION 10. REGISTRATION RIGHTS
-------------------
The Investor shall have the following registration rights with
respect to the Shares purchased by it pursuant to this Agreement:
10.1 Required Registration
---------------------
The Company agrees to register the Shares purchased hereunder
pursuant to a registration statement on Form S-3. The Company undertakes to file
a registration statement on Form S-3 covering resale of the Shares (the "Shelf
Registration") and to use its best efforts to cause such registration statement
to become effective within ninety (90) days of Closing. The Company shall
maintain the effectiveness of the Shelf Registration until such time as the
Investor has sold all of its Shares or is able to sell its Shares under Rule 144
of the Securities Act without limitation.
10.2 Registration Procedures
-----------------------
(a) With respect to the registration, qualification or compliance
effected by the Company subject to this Section 10, the Company shall keep the
Investor advised in writing as to the initiation of such registration,
qualification and compliance and as
13
<PAGE>
to the completion thereof. In addition, the Company shall at its own expense:
(i) prepare and file with the SEC such amendments and
supplements to such registration statement as may be necessary to keep such
registration, qualification or compliance effective and comply with provisions
of the Securities Act with respect to the disposition of all securities covered
thereby during such period;
(ii) update, correct, amend and supplement such registration,
qualification or compliance as necessary;
(iii) if such offering is to be underwritten, in whole or in part,
enter into a written agreement which is customary in form and substance and
reasonably satisfactory to the managing underwriter and the registering
Investor;
(iv) furnish such number of prospectuses, including preliminary
prospectuses, and other documents incident thereto as Investor may reasonably
request from time to time;
(v) register or qualify such Shares under such other securities
or blue sky laws of such jurisdictions of the United States as the Investor may
reasonably request to enable it to consummate the disposition in such
jurisdiction of the Shares (provided that Company will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this provision, or (ii) consent to
general service of process in any such jurisdiction) or otherwise take action
that would subject it to general jurisdiction of the courts of any jurisdiction
in which it is not so subject or (iii) subject itself to taxation in any
jurisdiction where it is not subject.
(vi) notify the Investor at any time when a prospectus relating
to the Shares is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statement therein not misleading, and at the
request of the Investor, the Company will prepare a supplement or amendment to
such prospectus, so that, as thereafter delivered to purchasers of such shares,
such prospectus will not contain any untrue statements of a material fact or
omit to state any fact necessary to make the statements therein not misleading;
(vii) cause all such Shares to be listed on each securities
exchange on which similar securities issued by the Company are then listed and
obtain all necessary approvals from The NASDAQ Stock Market for trading thereon;
(viii) provide a transfer agent and registrar for all such Shares
not later than the effective date of such registration statement;
14
<PAGE>
(ix) upon the sale of any Shares pursuant to such registration
statement, remove all restrictive legends from all certificates or other
instruments evidencing the Shares; and
(x) At any time when the registration statement effected
pursuant to this Section 10 is effective, upon written notice from the Company
to the Investor that the Company determines in the good faith judgment of the
Board of Directors or a committee of the Board of Directors of the Company, with
the advice of counsel, that the Investor's sale of the Shares pursuant to the
registration statement would require disclosure of non-public material
information the disclosure of which would have a material adverse effect on the
Company (an "Information Blackout"), the Investor shall suspend sales of the
Shares pursuant to such registration statement until the earlier of: (X) the
date upon which such material information is disclosed to the public or ceases
to be material, or (Y) such time as the Company notifies the Investor that sales
pursuant to such registration statement may be resumed, but in no event, in
either case, later than 5 days after the date of such notice.
(b) Notwithstanding anything herein to the contrary, except as
required by law, all expenses incurred by the Company in complying with this
Section 10, including but not limited to, all registration, qualification and
filing fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, blue sky fees and expenses (including fees and
disbursements of counsel related to all blue sky matters and the fees and
expenses of legal counsel to the Investor) ("Registration Expenses") incurred in
connection with any registration, qualification or compliance pursuant to this
Section 10 shall be borne by the Company. All underwriting discounts and
selling commissions applicable to a sale or disposition of the Shares incurred
in connection with any registration of the Shares and all transfer taxes, if
any, relating to the sale or disposition of the Shares by the Investor shall be
borne by the Investor.
10.3 Further Information
-------------------
If the Shares owned by the Investor are included in the
registration, the Investor shall furnish the Company such information regarding
itself as the Company may reasonably request and as shall be required in
connection with any registration, qualification or compliance referred to in
this Agreement and the Investor shall indemnify the Company with respect thereto
in accordance with Section 10 hereof. The Investor hereby represents and
warrants to the Company that it has accurately and completely provided the
requested information, and the Investor agrees and acknowledges that the Company
may rely on such information as being true and correct for purposes of preparing
and filing the Shelf Registration at the time of filing thereof and at the time
it is declared effective, unless the Investor has notified the Company in
writing to the contrary prior to such time.
15
<PAGE>
SECTION 11. INDEMNIFICATION
---------------
11.1 Indemnification Generally
-------------------------
The Company, on the one hand, and the Investor, on the other hand
(each an "Indemnifying Party"), shall indemnify the other from and against any
and all losses, damages, liabilities, claims, charges, actions, proceedings,
demands, judgments, settlement costs and expenses of any nature whatsoever
(including, without limitation, attorneys' fees and expenses) or deficiencies
resulting from any breach of a representation, warranty or covenant by the
Indemnifying Party and all claims, charges, actions or proceedings incident to
or arising out of the foregoing.
11.2 Indemnification Relating to Registration Rights
-----------------------------------------------
(a) With respect to any registration, qualification or compliance
effected or to be effected pursuant to Section 10 of this Agreement, the Company
shall indemnify the Investor, each of the Investor's directors and officers,
each underwriter (as defined in the Securities Act) of the securities sold by
the Investor (if any), and each Person who controls (within the meaning of the
Securities Act) the Investor or underwriter (a "Controlling Person") from and
against all losses, damages, liabilities, claims, charges, actions, proceedings,
demands, judgments, settlement costs and expenses of any nature whatsoever
(including, without limitation, reasonable attorneys' fees and expenses) or
deficiencies of any the Investor or any such underwriter or Controlling Person
concerning:
(i) any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance;
(ii) any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statement
therein, in the light of the circumstances under which it was made, not
misleading; or
(iii) any violation by the Company of the Securities Act or any
rule or regulation promulgated thereunder applicable to the Company, or of any
blue sky or other state securities laws or any rule or regulation promulgated
thereunder applicable to the Company,
in each case, relating to any action or inaction required of the Company in
connection with any such registration, qualification or compliance, and subject
to Section 11 below will reimburse each such Person entitled to indemnity under
this Section 11 for all legal and other expenses reasonably incurred in
connection with investigating or defending any such loss, damage, liability,
claim, charge, action, proceeding, demand, judgment, settlement or deficiency;
provided, however, that, the foregoing indemnity and reimbursement obligation
- -------- -------
shall not be applicable to the extent that any such matter arises out of or is
based on any untrue statement (or alleged untrue statement) or omission (or
alleged omission) made in reliance upon and in
16
<PAGE>
conformity with written information furnished to the Company by or on behalf of
the Investor or by or on behalf of such an underwriter specifically for use in
such prospectus, offering circular or other document.
(b) With respect to any registration, qualification or compliance
effected or to be effected pursuant to this Agreement, the Investor shall
indemnify the Issuer from and against all losses, damages, liabilities, claims,
charges, actions, proceedings, demands, judgments, settlement costs and expenses
of any nature whatsoever (including, without limitation, reasonable attorneys'
fees and expenses) or deficiencies of the Company concerning:
(i) any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering, circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance;
(ii) any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statement
therein, in the light of the circumstances under which it was made, not
misleading; or
(iii) any violation by the Investor of the Securities Act or any
rule or regulation promulgated thereunder applicable to the Company or the
Investor or of any blue sky or other state securities laws or any rule or
regulation promulgated thereunder applicable to the Company or the Investor,
in each case, relating to any action or inaction required of the Investor in
connection with any such registration, qualification or compliance, and subject
to Section 11 below will reimburse the Company for all legal and other expenses
reasonably incurred in connection with investigating or defending any such loss,
damage, liability, claim, charge, action, proceeding, demand, judgment,
settlement or deficiency; provided, however, that, the foregoing indemnity and
-------- ------- ----
reimbursement obligation of the Investor shall only be applicable to the extent
that any such matter solely arises out of or is based on any untrue statement
(or alleged untrue statement) or omission (or alleged omission) made in reliance
upon and in conformity with written information furnished to the Company by the
Investor specifically for use in such prospectus, offering circular or other
document; and provided, further, however, that, the obligation of the Investor
-------- ------- ------- ----
hereunder shall be limited to an amount equal to the proceeds to the Investor
for the Shares sold as contemplated hereunder.
11.3 Indemnification Procedures
--------------------------
Each Person entitled to indemnification under this Section (an
"Indemnified Party") shall give notice as promptly as reasonably practicable to
each party required to provide indemnification under this Section (an
"Indemnifying Party") of any action commenced against or by it in respect of
which indemnity may be sought hereunder, but failure to so notify an
Indemnifying Party shall not relieve such Indemnifying Party from any liability
that it may have otherwise than
17
<PAGE>
on account of this indemnity agreement so long as such failure shall not have
materially prejudiced the position of the Indemnifying Party. Upon such
notification, the Indemnifying Party shall assume the defense of such action if
it is a claim brought by a third party, and after such assumption the
Indemnifying Party shall not be entitled to reimbursement of any expenses
incurred by it in connection with such action except as described below. In any
such action, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the contrary or (ii) the named parties in
any such action (including any impleaded parties) include both the Indemnifying
Party and the Indemnified Party and representation of both parties by the same
counsel would be inappropriate due to actual or potential differing or
conflicting interests between them. The Indemnifying Party shall not be liable
for any settlement of any proceeding effected without its written consent (which
shall not be unreasonably withheld or delayed by such Indemnifying Party), but
if settled with such consent or if there be final judgment for the plaintiff,
the Indemnifying Party shall indemnify the Indemnified Party from and against
any loss, damage or liability by reason of such settlement or judgment.
SECTION 12. INTERPRETATION OF THIS AGREEMENT
--------------------------------
12.1 Terms Defined
-------------
As used in this Agreement, the following terms have the respective
meanings set forth below or set forth in the Section hereof following such term:
Business Day: shall mean a day other than a Saturday, Sunday or
------------
other day on which banks in the State of New York are not required or authorized
to close.
Closing: shall mean the consummation of the purchase and sale of
-------
the Shares described in Section 2(a).
Common Stock: shall have the meaning set forth in Section 1.
------------
Exchange Act: shall mean the Securities Exchange Act of 1934.
------------
GAAP: shall have the meaning set forth in Section 3.3.
----
Governmental Authority: any nation or government, any state or
----------------------
other political subdivision thereof, and any entity or official exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
Person: shall mean an individual, partnership, corporation, trust
------
or unincorporated organization, and a government or agency or political
subdivision thereof.
18
<PAGE>
Requirements of Law: means as to any Person, the articles of
-------------------
incorporation, bylaws or other organizational or governing documents of such
person, and any domestic or foreign and federal, state or local law, rule,
regulation, statute or ordinance or determination of any arbitrator or a court
or other Governmental Authority, in each case applicable to or binding upon such
Person or any of its properties or to which such Person or any of its property
is subject.
SEC: shall mean the Securities and Exchange Commission.
---
Securities Act: shall mean the Securities Act of 1933, as amended.
--------------
Subsidiary: shall mean a corporation of which a Person owns,
----------
directly or indirectly, more than 50% of the Voting Stock.
Voting Stock: shall mean securities of any class or classes of a
------------
corporation the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate directors (or
Persons performing similar functions).
12.2 Directly or Indirectly
----------------------
Where any provision in this Agreement refers to action to be taken
by any Person, or which such Person is prohibited from taking, such provision
shall be applicable whether such action is taken directly or indirectly by such
Person.
12.3 Governing Law
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
12.4 Paragraph and Section Headings
------------------------------
The headings of the sections and subsections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
thereof.
SECTION 13. MISCELLANEOUS
-------------
13.1 Notices
-------
(a) All communications under this Agreement shall be in writing and
shall be mailed by first class mail, postage prepaid, or by overnight courier:
(i) if to the Investor, at 767 Fifth Avenue, 24th Floor, New
York, New York 10153, Attn: Linda S. Martinson, Esq., or at such other address
as the Investor may have furnished the Company in writing, with a copy to Cliff
Greenberg, 767 Fifth Avenue, 24th Floor, New York, New York 10153 or
19
<PAGE>
(ii) if to the Company, at 605 Third Avenue, New York, New York
10158, marked for the attention of the Chairman of the Board, or at such other
address as it may have furnished in writing to the Investor with a copy to
Battle Fowler LLP, 75 East 55th Street, New York, New York 10022,
Attn: John N. Turitzin, Esq.
(b) Any notice so addressed and mailed (i) by registered or
certified mail shall be deemed to be given on the third Business Day after the
date the same is so mailed or (ii) by courier shall be deemed to be given on the
date on which such notice is received.
13.2 Expenses
--------
The Company shall pay the fees and expenses of the Investor,
including the Investor's legal fees and expenses incurred in connection with the
preparation, execution and delivery of this Agreement and the transactions
contemplated hereby and the enforcement of any of the Investor's rights
hereunder.
13.3 Survival
--------
All warranties, representations, and covenants made by the Investor
and the Company herein or in any certificate or other instrument delivered by
the Investor or the Company under this Agreement shall be considered to have
been relied upon by the Company or the Investor, as the case may be, and shall
survive all deliveries to the Investor of the Shares, or payment to the Company
for such Shares, regardless of any investigation made by the Company or the
Investor, as the case may be, or on the Company's or the Investor's behalf.
All statements in any such certificate or other instrument shall constitute
warranties and representation by the Company or the Investor, as the case may
be, hereunder.
13.4 Entire Agreement; Amendment and Waiver
--------------------------------------
This Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of each of the parties. This Agreement and the
agreements attached as Exhibits hereto constitute the entire understandings of
the parties hereto and supersede all prior agreements or understandings with
respect to the subject matter hereof between such parties. This Agreement may be
amended, and the observance of any term of this Agreement may be waived, with
(and only with) the written consent of the Company and the Investor.
13.5 Counterparts
------------
This Agreement may be executed in one or more counterparts with the
same effect as if the parties executing the counterparts had each executed one
instrument as of the day and year first above written.
13.6 Successors and Assigns
----------------------
This Agreement and all of the provisions hereof, including all of
rights of the Investor hereunder, shall inure to the benefit of the parties
hereto and their respective successors and assigns.
20
<PAGE>
Very truly yours,
CHARTWELL LEISURE INC.
By:
-----------------------------------
Name: Martin L. Edelman
Title: President
BARON ASSET FUND
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.70
[LETTERHEAD OF CHARTWELL LEISURE APPEARS HERE]
MEMORANDUM
TO: Ron E. Jackson
FROM: Chartwell Leisure, Inc.
DATE: February 12, 1997
- --------------------------------------------------------------------------------
This will confirm the terms of our agreement relating to your contract
with Chartwell Leisure:
1. You will continue to work on projects designated by Richard L. Fisher
until you obtain other employment or December 31, 1997, whichever occurs first.
2. You shall have adequate time to pursue any opportunities for
employment that you determine.
3. You shall maintain your office and secretary support at Chartwell
Leisure for so long as you are working on some activity identified under
paragraph 1 above.
4. You shall be paid in accordance with your contract including the
salary and the benefits portion thereof for the remainder of 1997.
5. You shall be entitled to that share of the bonus which reflects the
amount of time that you have continued to work at Chartwell in 1997.
6. If you are unemployed at the expiration of the contract term,
Chartwell will pay you the severance payment described in your contract. If you
are not unemployed at that time you will not be entitled to the severance
payment.
7. You will be entitled to exercise 1/3 of your options at any time
until 12 months following your last day of work at Chartwell provided, however,
that you agree that you will not sell more than 2,000 shares in any one
week period or more than 6,000 in any 30 day period.
8. Please confirm that this is our understanding by signing below.
Very truly yours,
/s/ Martin L. Edelman
-----------------------------
Martin L. Edelman, President
/s/ Ron E. Jackson
- ---------------------------
Ron E. Jackson
<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 Registration Statement No.
333-16661 of Chartwell Leisure Inc. (formerly National Lodging Corp.) on Form
S-3 and Registration Statement No. 333-15359 on Form S-8 of our report dated
April 19, 1996 appearing in this Annual Report on Form 10-K of Chartwell
Leisure Inc. for the year ended December 31, 1996 on the financial statements
of Travelodge/Thriftlodge for the period from February 1, 1995 to January 23,
1996.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 24, 1997
<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 Registration Statement No.
333-16661 of Chartwell Leisure Inc. (formerly National Lodging Corp.) on Form
S-3 and Registration Statement No. 333-15359 on Form S-8 of our report dated
February 12, 1997 appearing in this Annual Report on Form 10-K of Chartwell
Leisure Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 24, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-16661) and
in the Registration Statement on Form S-8 (No. 333-15359) of Chartwell Leisure
Inc. (formerly National Lodging Corp.) of our report dated February 20, 1996
appearing on page F-29 of this Form 10-K of Chartwell Leisure Inc.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
March 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,590
<SECURITIES> 0
<RECEIVABLES> 10,043
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,643
<PP&E> 170,878
<DEPRECIATION> 13,112
<TOTAL-ASSETS> 232,038
<CURRENT-LIABILITIES> 23,175
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 111,123
<TOTAL-LIABILITY-AND-EQUITY> 232,038
<SALES> 89,028
<TOTAL-REVENUES> 89,028
<CGS> 0
<TOTAL-COSTS> 113,290
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,481
<INCOME-PRETAX> (28,355)
<INCOME-TAX> (274)
<INCOME-CONTINUING> (28,629)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,479)
<CHANGES> 0
<NET-INCOME> (30,106)
<EPS-PRIMARY> (4.04)
<EPS-DILUTED> (4.04)
</TABLE>
