-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KsruvM4SY0KG6HMk4sdUNcks0s5WdLPNqaQ7J/qLIxD3y8x/YOtPGy7hJRR+jwS0 pY58cNRJlS/E+j3Ml31woQ== 0000944209-98-000119.txt : 19980121 0000944209-98-000119.hdr.sgml : 19980121 ACCESSION NUMBER: 0000944209-98-000119 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980120 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAVANAUGHS HOSPITALITY CORP CENTRAL INDEX KEY: 0001052595 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 911032187 STATE OF INCORPORATION: WA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-44491 FILM NUMBER: 98508977 BUSINESS ADDRESS: STREET 1: 201 W. NORTH RIVER DRIVE STREET 2: SUITE 100 CITY: SPOKANE STATE: WA ZIP: 99201 BUSINESS PHONE: 5094596100 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on January 20, 1998 Registration No. 333-_________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- CAVANAUGHS HOSPITALITY CORPORATION (Exact name of Registrant as specified in its charter)
WASHINGTON 7011 91-1032187 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Organization) Classification Code Number) Identification Number)
201 W. North River Drive, Suite 100 Spokane, Washington 99201 (509) 459-6100 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ----------------- DONALD K. BARBIERI President and Chief Executive Officer Cavanaughs Hospitality Corporation 201 W. North River Drive, Suite 100 Spokane, Washington 99201 (509) 459-6100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: BARRY LAWRENCE, ESQ. JAY L. BERNSTEIN, ESQ. BRIAN HOYE, ESQ. ROGERS & WELLS KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP 200 Park Avenue 1999 Avenue of the Stars, Suite 1600 New York, New York 10166 Los Angeles, California 90067 (212) 878-8000 (310) 788-1000 ----------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ----------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================== PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------- Common stock, par value $.01 per share.............. 5,951,250 $14.00 $83,317,500 $24,579 ====================================================================================================================
(1) Includes 776,250 shares subject to the Underwriters' over-allotment option. (2) Estimated solely for the purpose of determining the registration fee. ----------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ - -------------------------------------------------------------------------------- Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. - -------------------------------------------------------------------------------- Subject to Completion, Dated January 20, 1998 PROSPECTUS 5,175,000 SHARES [LOGO OF CAVANAUGHS HOSPITALITY CORPORATION] CAVANAUGHS HOSPITALITY CORPORATION COMMON STOCK All of the shares of common stock, par value $.01 per share (the "Common Stock"), offered hereby (the "Offering") are being sold by Cavanaughs Hospitality Corporation (the "Company"). Prior to the Offering, there has been no public market for the Common Stock of the Company. The Company anticipates that the initial public offering price per share will be between $12.00 and $14.00. See "Underwriting" for a discussion of the factors that will be considered in determining the initial public offering price. Application has been made to list the Common Stock on the New York Stock Exchange (the "NYSE") under the symbol "CVH." SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN MATERIAL RISKS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================ PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNTS AND COMPANY (2) COMMISSIONS (1) - -------------------------------------------------------------------------------- Per Share............ $ $ $ Total (3)............ $ $ $ ================================================================================ (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated to be $ . (3) The Company has granted the several Underwriters a 30-day over-allotment option to purchase up to 776,250 additional shares of Common Stock on the same terms and conditions set forth above. If such additional shares are purchased by the Underwriters, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the Underwriters when, as and if delivered to and accepted by them, subject to their right to withdraw, cancel or reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of certificates representing the shares of Common Stock will be made against payment on or about , 1998 at the office of CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, One World Financial Center, New York, New York 10281. ------------------ CIBC OPPENHEIMER NATIONSBANC MONTGOMERY SECURITIES LLC The date of this Prospectus is ____________, 1998 [ON THE INSIDE FRONT COVER OF THE PROSPECTUS IS A MAP OF CERTAIN STATES IN THE NORTHWESTERN UNITED STATES HIGHLIGHTING VARIOUS CITIES AND, BELOW, THE LOCATIONS WHERE THE COMPANY HAS PROPERTIES AND PROVIDES ENTERTAINMENT, MANAGEMENT AND SERVICES.] [ON THE INSIDE BACK COVER OF THE PROSPECTUS IS A COLLAGE REPRESENTING FEATURES OF THE ENTERTAINMENT, MANAGEMENT AND SERVICES DIVISION AND PHOTOS OF SOME OF THE COMPANY'S HOTELS, OFFICE AND RETAIL BUILDINGS] CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial data, including the Combined Financial Statements and notes thereto, appearing elsewhere in this Prospectus. Unless the context otherwise requires, all references in this Prospectus to the "Company" include Cavanaughs Hospitality Corporation, its subsidiaries, including Cavanaughs Hospitality Limited Partnership, a Delaware limited partnership (the "Operating Partnership"), and its predecessors. Unless otherwise indicated, all information in this Prospectus (i) assumes an initial public offering price of $13.00 per share (which is the midpoint of the range set forth on the cover page of this Prospectus), (ii) gives retroactive effect to the merger of Goodale & Barbieri Companies, the Company's predecessor, and Barbieri Investment Company which occurred in November 1997 (the "Merger"), whereby the Company was recapitalized and 7,084,251 shares of common stock, par value $.01 per share (the "Common Stock"), were issued to the existing shareholders and (iii) assumes that the Underwriters' over-allotment option is not exercised. As used herein, the term "Northwest" includes the states of Washington, Oregon, Idaho, Montana, Utah and Alaska, northern California and the Canadian provinces of Alberta and British Columbia. THE COMPANY Cavanaughs Hospitality Corporation is a hotel operating company that owns, operates, acquires, develops, renovates and repositions full service hotels throughout the Northwest under its proprietary brand name, "Cavanaughs". The Company's hotel portfolio contains 11 full service hotels (the "Hotels"), with 2,369 guest rooms and approximately 120,000 square feet of meeting space, located in Seattle, Spokane, Yakima and Kennewick, Washington; Idaho Falls and Post Falls, Idaho; and Kalispell, Montana. The Company plans to pursue additional growth opportunities by continuing to acquire and develop full service hotels in the Northwest. The Company has entered into purchase agreements to acquire two additional full service hotels, containing 343 guest rooms and approximately 14,500 square feet of meeting space, located in Kalispell, Montana and Portland, Oregon. With an average of more than 20 years of experience in the lodging industry, management believes the Company enjoys an excellent reputation in, and its Cavanaughs brand name is well recognized throughout, the Northwest. The Company also provides entertainment services, including event ticketing and theatrical presentations and other special events, property management services for third parties and owns and manages retail and office properties. The Company is seeking to become the dominant full service hotel company in the Northwest by providing customers with access to a Cavanaughs brand hotel in multiple locations throughout the region. As a result of consolidation among hotel chains, the Company believes there is an absence of a dominant Northwest based, regionally focused hotel company. The Company's growth strategy focuses on: (i) the acquisition and re-branding of full service hotels with the Cavanaughs name, (ii) the acquisition, conversion and redevelopment of non-hotel properties into Cavanaughs brand hotels, (iii) the construction of new Cavanaughs hotels and (iv) the expansion of existing Cavanaughs Hotels. The Company's operating strategy is designed to enhance its revenue and operating margins by increasing revenue per available room ("REVPAR"), average daily rates ("ADR"), occupancy and operating efficiencies at the Hotels. This strategy includes: (i) building brand name recognition by maintaining its strategic focus on the Northwest; (ii) promoting a coordinated marketing program utilizing corporate level sales and marketing departments in conjunction with local hotel-based sales and marketing personnel; (iii) controlling operating expenses and achieving cost reductions through operating efficiencies and economies of scale; (iv) enhancing guest satisfaction and loyalty by providing high quality service; (v) utilizing the Company's yield management and proprietary management information systems to enable the general managers of each Hotel to optimize REVPAR, ADR, occupancy and net income; (vi) maintaining a consistent level of quality at the Hotels through its maintenance and capital expenditure programs; (vii) emphasizing the quality of the Company's food and beverage services to attract convention, group and special event business and to create local awareness of the Hotels; (viii) providing valuable guest benefit programs that promote customer loyalty, such as frequent flier mileage and repeat guest programs; and (ix) attracting and retaining qualified employees by providing on-going training and stock incentive programs at all levels of employment to enhance productivity and align the efforts of employees with the Company's objectives. For the fiscal year ended October 31, 1997, the Company's 3 revenues were $52.0 million, operating income was $10.7 million, net income was $1.8 million, REVPAR was $45.72 and ADR was $73.43. On a pro forma basis, giving effect to the three Hotels acquired since October 31, 1997, the two hotels under contract to be acquired and the Offering, for the year ended October 31, 1997, the Company's revenues were $77.4 million, operating income was $14.6 million, net income was $5.6 million, REVPAR was $39.09 and ADR was $65.40. The Company has received a commitment from U.S. Bank to provide, upon consummation of the Offering, up to $80.0 million under a revolving credit facility (the "Revolving Credit Facility") which will be used by the Company to finance property acquisitions, development and capital improvements and for general corporate purposes. As an alternative to debt financing, the Company may issue shares of Common Stock or units of limited partner interests in the Operating Partnership ("OP Units") as consideration in future hotel acquisitions. The issuance of OP Units in exchange for hotels may allow the current owners of such hotels to achieve certain tax advantages when selling such hotels to the Company. In addition to the Hotels, the Company operates two other divisions: (i) entertainment, management and services and (ii) rental operations. The entertainment, management and services division includes computerized event ticketing through G&B Select-a-Seat, which was founded in 1987 and distributed in excess of 2.0 million tickets in 1997, and the presentation of shows and special events through G&B Presents, which was also founded in 1987 and has presented over 79 Broadway theatrical presentations and special events in the last ten years. These services generate income from ticket sales and handling fees as well as additional room occupancy at the Hotels. The entertainment, management and services division is supported by the same Company-operated toll- free call center (the "Toll-Free Call Center") used for hotel reservations. The Company's rental operations division includes ownership of three office properties and one retail property containing in excess of 590,000 square feet of leasable space, the majority of which are located near the Hotels, and third- party management of more than 3.1 million square feet of retail and office properties and approximately 2,200 residential units throughout the Northwest. The Company, which was formerly known as Goodale & Barbieri Companies, has been a family-owned enterprise since it was founded in 1937. Between 1937 and 1976, the Company focused on third-party property management services and real estate development in Spokane, Washington. The Company's history of owning and operating hotels commenced in 1976 when it constructed the River Inn in Spokane. In 1980, the Company established its proprietary Cavanaughs brand name. After changing its name in October 1997 to Cavanaughs Hospitality Corporation, the Company merged with Barbieri Investment Company, an affiliated Washington corporation ("BIC"), on November 3, 1997. In connection with its merger with BIC, the Company contributed certain assets not related to its core hospitality business, including, among other things, a long-term residence inn and a milk processing and distribution business, to a wholly-owned subsidiary and distributed the capital stock of such subsidiary, as well as the capital stock of another wholly-owned subsidiary owning recreation real estate in Priest Lake, Idaho and a retail sales operation, to the shareholders of the Company. Shortly thereafter, the Company contributed substantially all of its assets, including its interests in various family limited partnerships, to the Operating Partnership in exchange for general and limited partner interests therein. The Company is the sole general partner of the Operating Partnership and owns a controlling 98.8% interest therein. All of the Hotels and the other assets of the Company are held by or for the benefit of, and substantially all of the Company's operations are conducted through, the Operating Partnership. Since 1968 when Donald Barbieri, the Company's Chairman, President and Chief Executive Officer, joined the Company, the Company has grown from five employees to approximately 1,900 employees. The Company's principal executive offices are located at 201 W. North River Drive, Suite 100, Spokane, Washington 99201 and its telephone number is (509) 459-6100. The Company's website address is www.cavanaughs.com. INDUSTRY OVERVIEW The domestic lodging industry completed its third year of record profitability in 1996, during which it produced record income of $12.5 billion. Coopers & Lybrand L.L.P.'s Hospitality Directions (November 1997) ("Coopers & Lybrand Hospitality Directions") estimates that the industry is expected to again achieve record profitability in 1997. 4 Coopers & Lybrand Hospitality Directions indicates that average U.S. hotel occupancy reached 65.1% in 1996, its highest level in 13 years. U.S. hotel occupancy is expected to decline slightly in 1997 to 64.6% due to supply growth exceeding demand growth. The increase in room supply in the full service hotel segment has been lower than the limited service hotel segment due, in part, to the higher cost of developing a full service hotel. High occupancy during 1992 to 1997 has provided hotel operators with the ability to support increases in ADR without affecting occupancy percentages. Sustained ADR growth has contributed to total lodging industry revenue growth which was 8.6% in 1996 and is expected to be 8.5% in 1997. The following table reflects the percentage changes in REVPAR, ADR and occupancy in 1996 and 1997, compared to 1995 and 1996, respectively, for (i) the Hotels that were open for each of the periods presented and (ii) all U.S. hotels.
PERCENTAGE CHANGE VERSUS PRIOR PERIOD ----------------------------------------------------------------- REVPAR(1) ADR OCCUPANCY(2) --------------------- --------------- --------------- 1996 1997 1996 1997 1996 1997 ---- ---- ---- ---- ---- ---- Cavanaughs Hotels........ 8.3% 8.7% 9.3% 9.1% -1.5% -1.6% U.S. Hotels (3).......... 6.2% 5.5% 6.2% 6.1% 0.0% -0.7%
_____________________________________________________________ (1) Determined by dividing annual room revenue by annual available rooms. (2) The occupancy as a percentage of available rooms declined slightly, primarily because of the addition of new rooms associated with the opening of Cavanaughs on Fifth Avenue, which management believes has not reached stabilized occupancy. (3) Source: Coopers & Lybrand Hospitality Directions (November 1997). Lodging room demand has historically tracked the national economy. In 1997, the U.S. economy's ongoing expansion has been marked by low inflation and unemployment and, in the northwest states of Idaho, Oregon and Washington, employment and population growth has been above national averages. In addition, according to the Federal Reserve Bank of San Francisco, for the twelve months ended August 1997 the metropolitan areas of Seattle, Washington and Portland, Oregon were the fourth and tenth fastest growing metropolitan economies in the nation, respectively. The northwest region of the United States is expected to continue to achieve above average economic performance and population growth through the year 2000, according to the U.S. Bank 1997 Regional Economic Review and Forecast. 5 HOTEL PROPERTIES The Company's hotel portfolio currently contains 11 full service Hotels, with 2,369 guest rooms and approximately 120,000 square feet of meeting space, located in the Northwest. In addition, the Company has entered into purchase agreements to acquire two additional full service hotels. The following table sets forth certain information regarding the Company's hotel portfolio and hotels under contract.
YEAR ENDED OCTOBER 31, 1997 MEETING ------------------------------ YEAR BUILT/ YEAR GUEST SPACE AVERAGE LOCATION ACQUIRED RENOVATED ROOMS (SQ. FT.) REVPAR ADR OCCUPANCY ------------- --------- --------- ------- --------- -------- ------- ---------- Hotels Owned as of October 31, 1997: Cavanaughs on Fifth Avenue Seattle, WA 1996 1996 297 12,500 $73.55 $116.24 64.9% Cavanaughs Inn at the Park Spokane, WA 1983 1997 402 26,300 48.61 80.90 61.1 Cavanaughs River Inn Spokane, WA 1976 1997 245 3,700 40.17 53.01 74.2 Cavanaughs Fourth Avenue Spokane, WA 1991 1997 153 2,600 23.63 48.33 51.7 Cavanaughs at Yakima Center Yakima, WA 1991 1997 155 11,000 37.13 55.98 63.3 Cavanaughs Gateway Hotel Yakima, WA 1997 (1) 1997 172 8,000 34.16 58.96 57.9 Cavanaughs at Columbia Center Kennewick, WA 1978 1997 162 9,700 31.15 55.86 58.9 Cavanaughs at Kalispell Center Kalispell, MT 1986 1997 132 10,500 36.89 59.30 63.2 ------ ------- ------ ------- ---- Total/Weighted Average for Owned Hotels (2) 1,718 84,300 $45.72 $73.43 63.0% Hotels Acquired since October 31, 1997: Cavanaughs Ridpath Hotel Spokane, WA 1998(3) 1996 342 16,000 $33.49 $58.43 57.3% CCavanaughs on the Falls Idaho Falls, ID 1998(4) 1994 142 8,800 34.49 57.38 60.1 Cavanaughs Templins Resort Post Falls, ID 1998(5) 1996 167 11,000 36.45 62.65 58.2
Hotels Currently Under Contract:
Cavanaughs Outlaw Hotel Kalispell, MT 1998(6) 1995 220 11,000 $29.88 $68.88 43.4% Cavanaughs Hillsboro Hotel Portland, OR 1998(7) 1997 123 3,500 50.13 72.38 69.3 ------ ------- ------- ------- ---- Total/Weighted Average for Hotels Acquired or Under Contract Since October 31, 1997 994 134,600 $35.40 $62.99 56.2% Total/Weighted Average for All Hotels 2,712 218,900 $39.09 $65.40 59.8% - ------------------------------------------------------
(1) Leased by the Company on October 15, 1997. See "Business and Properties -- Hotel Properties." (2) The total/weighted average for owned Hotels includes REVPAR, ADR and average occupancy of Cavanaughs Gateway Hotel for the period from October 15, 1997 through October 31, 1997. (3) Leased by the Company on January 1, 1998. See "Business and Properties -- Hotel Properties." (4) Acquired by the Company on January 7, 1998. (5) Expected to be acquired by the Company in February 1998. (6) The Company has entered into a purchase agreement to acquire this hotel, subject to the satisfaction of normal closing conditions, for a purchase price of $9.9 million within 60 days of the closing of the Offering. This hotel, which is currently known as the Outlaw Inn, will be re-branded as the "Cavanaughs Outlaw Hotel" upon acquisition. (7) The Company has entered into a purchase agreement to acquire this hotel, subject to the satisfaction of normal closing conditions, for a purchase price of $5.7 million. This hotel, currently known as the Hallmark Inn, will be re-branded as the "Cavanaughs Hillsboro Hotel" upon acquisition. 6 STRUCTURE OF THE COMPANY The Company is the sole general partner of the Operating Partnership. The Company will conduct substantially all of its business, and will hold substantially all of the Hotels and other assets through, the Operating Partnership. As sole general partner of the Operating Partnership, the Company has exclusive power to manage and conduct the operations of the Operating Partnership. Subject to certain holding period requirements, OP Units will be exchangeable, at the option of the holders thereof, for cash in an amount equal to the market value of the shares of Common Stock. The Company has the right, however, if OP Units are presented for exchange, to deliver to the holder of such OP Units, in lieu of cash, shares of Common Stock, on a one-for-one basis (subject to adjustment in the event of stock splits, dividends, combinations and reorganizations). As general partner of the Operating Partnership, whenever the Company shall issue shares of capital stock, such as in the Offering, the Company will contribute the net proceeds therefrom to the Operating Partnership and the Operating Partnership will issue to the Company an equivalent number of OP Units with rights corresponding to the shares of capital stock issued by the Company. See "Partnership Agreement of the Operating Partnership." In addition to the Operating Partnership, the Company holds a 50% general partner interest in Cowley Street Limited Partnership, a Washington limited partnership which owns Cavanaughs Fourth Avenue. Each of G&B Select-a-Seat, G&B Presents and G&B Real Estate Services are fictitious business names of the Company and operate within the Company's entertainment, management and services division which will continue to be operated by the Company following the Offering for the benefit of the Operating Partnership. The following diagram depicts the ownership structure of the Company upon completion of the Offering: [GRAPH APPEARS HERE] 7 THE OFFERING Common Stock Offered by the Company........ 5,175,000 shares Common Stock Outstanding after the Offering................................. 12,270,251 shares (1) Use of Proceeds............................ The Company expects to use the net proceeds of the Offering to repay certain indebtedness, including indebtedness incurred with respect to certain acquisitions, and for general corporate purposes. See "Use of Proceeds." Proposed NYSE symbol....................... "CVH" ______________ (1) Includes 7,084,251 restricted shares owned by David Barbieri, Donald Barbieri, Mark Barbieri, Richard Barbieri, Stephen Barbieri, Thomas Barbieri, David Bell and certain family trusts (collectively, the "Barbieri Family") and an aggregate of 11,000 restricted shares to be issued to five of the Company's employees concurrently with the Offering. See "Management --Restricted Stock and Certain Stock Option Grants." Excludes 150,817 shares issuable upon exchange of currently outstanding OP Units, which units may not be exchanged by the holders thereof for one year from the date of this Prospectus. See "Partnership Agreement of the Operating Partnership." Excludes 1,489,000 shares reserved for issuance with respect to options or stock awards to be granted under the Company's 1998 Stock Incentive Plan (the "1998 Plan"), Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and the Company-Wide Stock Option Plan (the "Company-Wide Plan" and together with the Employee Stock Purchase Plan and the 1998 Plan, the "Plans."). See "Management." 8 SUMMARY COMBINED FINANCIAL AND OTHER DATA The following table sets forth summary combined financial data of the Company as of and for the five years ended October 31, 1997. The summary combined statement of income data for the fiscal years ended October 31, 1993 and 1994 and the summary combined balance sheet data as of October 31, 1993, 1994 and 1995 are derived from the Company's unaudited financial statements and reflect all normal recurring adjustments, which in the opinion of management, are necessary for a fair presentation. The summary combined statement of income data for the fiscal years ended October 31, 1995, 1996 and 1997 and the summary combined balance sheet data as of October 31, 1996 and 1997 are derived from the Company's audited financial statements included elsewhere in this Prospectus. The pro forma combined statement of income data and balance sheet data as of and for the year ended October 31, 1997 are unaudited and are derived from the pro forma financial statements included elsewhere in this Prospectus as adjusted for the Offering. The summary combined financial data set forth below should be read in conjunction with, and are qualified in their entirety by, the Historical Combined Financial Statements and related notes, Pro Forma Combined Financial Statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this Prospectus.
FISCAL YEAR ENDED OCTOBER 31, (1) ----------------------------------------------------------------------- PRO FORMA 1993 1994 1995 1996 1997 1997(2) --------- --------- --------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS) STATEMENTS OF INCOME DATA: Revenues: Hotels and restaurants............... $28,417 $30,573 $ 31,244 $ 35,205 $ 41,662 $ 67,001 Entertainment, management and services...................... 4,468 3,205 3,092 3,168 3,842 3,842 Rental operations.................... 4,572 4,987 6,027 6,790 6,539 6,539 ------- ------- -------- -------- -------- -------- Total revenues.................... 37,457 38,765 40,363 45,163 52,043 77,382 ------- ------- -------- -------- -------- -------- Operating income (3)................. 8,528 8,178 7,984 8,930 10,658 14,578 Interest expense..................... 5,301 5,649 6,866 7,319 8,817 5,939 Income before taxes and extraordinary item (3)............ 3,539 2,745 1,749 2,148 2,742 9,346 Income taxes......................... 1,254 574 542 730 932 3,216 Extraordinary item (4)............... 191 --- --- --- --- 541 ------- ------- -------- -------- -------- -------- Net income (3)....................... $ 2,476 $ 2,171 $ 1,207 $ 1,418 $ 1,810 $ 5,589 Pro forma income per share before extraordinary item................ --- --- --- --- $ 0.26 $ 0.50 Pro forma extraordinary item per share......................... --- --- --- --- --- $ 0.04 Pro forma net income per share (5)......................... --- --- --- --- $ 0.26 $ 0.46 Shares used in the pro forma per share calculation (5)......... --- --- --- --- 7,084 12,259 BALANCE SHEET DATA: Total assets......................... $80,220 $86,924 $107,037 $120,271 $124,448 $160,162 Long-term debt and capital leases excluding current maturities...... $57,100 $66,755 $ 77,636 $ 88,799 $ 96,026 $ 70,039 Stockholders' equity (6)............. $ 6,017 $ 5,483 $ 9,384 $ 10,409 $ 9,423 $ 70,640 OTHER DATA: EBITDA (3)(7)........................ $11,645 $11,813 $ 12,043 $ 13,682 $ 16,334 $ 21,132 EBITDA as a percentage of revenues.......................... 31.1% 30.5% 29.8% 30.3% 31.4% 27.3% HOTEL STATISTICS: Hotels open (at end of period)....... 6 6 6 7 8 13 Available rooms (at end of period)... 1,242 1,242 1,242 1,539 1,718 2,712 REVPAR (8)........................... $ 38.69 $ 38.70 $ 38.83 $ 42.04 $ 45.72 $ 39.09 ADR (9).............................. $ 56.40 $ 60.27 $ 61.54 $ 67.29 $ 73.43 $ 65.40 Average occupancy percentage (10).... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8%
9 - -------------------------- (1) The summary combined financial and other data has been presented as though the predecessor businesses of Cavanaughs Hospitality Corporation, Barbieri Investment Company and their respective subsidiaries and partnership interests which they controlled had been combined as of October 31, 1993, 1994, 1995, 1996 and 1997. (2) Pro forma results reflect the historical financial and other data as of October 31, 1997 after reflecting (i) the Merger which occurred in November 1997, (ii) the acquisitions which occurred or are probable of occurring as of January 16, 1998 as if they occurred on November 1, 1996 for purposes of the statement of income and as of October 31, 1997 for purposes of the balance sheet, and (iii) the Offering and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (3) Operating income, income before income taxes and extraordinary item, net income and EBITDA reflect a nonrecurring charge of $421,000 related to final settlement of litigation in 1997. (4) Extraordinary item in the 1997 pro forma presentation includes charges for the write-off of deferred loan fees and prepayment penalties, net of income taxes, related to long-term debt which is being repaid out of the proceeds of the Offering. (5) Due to the Merger in November 1997, the historical earnings per share is not relevant or meaningful. Therefore, pro forma earnings per share for the year ended October 31, 1997 has been presented based upon the number of shares of Common Stock of the Company which were outstanding after the Merger. (6) Changes in stockholders' equity between fiscal years reflect (i) net income, (ii) cash dividends and (iii) distributions to or contributions from shareholders for the activities related to the subsidiaries, investments or divisions which have been excluded from the combined financial statements. See Note 1 to the Historical Combined Financial Statements. (7) EBITDA represents income before income taxes and extraordinary item, interest expense, depreciation and amortization. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and such information should not be considered as an alternative to net income, cash flow from operations or any other measure of performance prescribed by generally accepted accounting principles. EBITDA is included herein because management believes that certain investors find it to be a useful tool for measuring the Company's ability to service debt. (8) REVPAR represents the total revenues divided by total available rooms, net of rooms out of service due to significant renovations. (9) ADR represents total room revenues divided by the total number of rooms occupied by hotel guests on a paid basis. (10) Average occupancy percentage represents total rooms occupied divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. 10 RISK FACTORS An investment in the Common Stock of the Company involves various risks. Prospective investors should carefully consider the following risk factors in conjunction with other information contained in this Prospectus before making a decision to purchase Common Stock in the Offering. OPERATING RISKS IN THE LODGING INDUSTRY. The Company's business is subject to the operating risks inherent in the lodging industry. These risks include adverse changes in national or local economic conditions, overbuilding in the lodging industry or a reduction in demand for hotel rooms and related services in the Northwest generally and, in particular, the markets where the Hotels are concentrated, competition from other hotels, changes in travel patterns, extreme weather conditions, cancellation of, or changes in, events scheduled to occur in the Company's markets, changes in governmental regulations which influence or determine wages, prices or construction costs, changes in interest rates, the availability of financing for operating or capital needs and changes in real estate tax rates and other operating expenses. Further, the Hotels are located in the Northwest where a number of major industries, including agriculture, tourism, technology, timber and aerospace, are concentrated. These industries may be affected by changes in governmental regulations and economic conditions, such as the relative strength of national and local economies, the rate of national and local unemployment and the rate of inflation, all of which could materially affect the local economies in which these industries and the Company operate. There is no assurance that downturns or prolonged adverse conditions in these industries or in national or local economies will not have a material adverse impact on the Company's results of operations. COMPETITION IN THE LODGING INDUSTRY. The lodging industry is highly competitive. The Company competes with other national limited and full service hotel companies, as well as with various regional and local hotels. Many of the Company's competitors have a larger network of locations and greater financial resources than the Company. Competition in the United States lodging industry is based generally on brand name recognition, convenience of location, price, range of services and guest amenities offered, quality of customer service and overall product. Demographic or other changes in one or more of the Company's markets could impact the convenience or desirability of the sites of certain of the Hotels which would adversely affect the operations of those Hotels. Further, there can be no assurance that new or existing competitors will not offer significantly lower rates or greater convenience, services or amenities or significantly expand or improve facilities in a market in which the Hotels compete, thereby adversely affecting the Company's operations. GEOGRAPHIC CONCENTRATION. Because all of the Hotels currently are located in the Northwest, the Company's results of operations and financial condition are dependent on the economy of the Northwest. To the extent that general economic or other relevant conditions in the Northwest decline and result in a decrease in consumer demand in this region, the Company's performance and results of operations will be adversely affected. In addition, four of the Hotels are located in Spokane, Washington, two are located in Yakima, Washington and two are located in Kalispell, Montana. A downturn in general economic or other relevant conditions in these specific markets or in any other market in which the company operates could adversely impact the Company's results of operations and financial condition. CONSTRAINTS ON GROWTH OPPORTUNITIES. The Company intends to continue to pursue an aggressive growth strategy for the foreseeable future. Since December 1996, the Company has acquired four Hotels and has entered into agreements to acquire two additional hotels. The Company's ability to successfully pursue new growth opportunities will depend on a number of factors, including, among others, the Company's ability to identify suitable hotels for acquisition or development, to finance acquisitions and renovations and to successfully integrate new hotels into its operations. There is no assurance that suitable hotels for acquisition or development will be available or, if available, will be on terms acceptable to the Company or that capital will be available on terms acceptable to the Company. While the Company believes that it will have sufficient capital following the Offering to fund its growth strategy in the near term, this belief is based on adequate cash being generated from operations and the availability of the Revolving Credit Facility. There is no assurance that the Company will generate adequate cash from operations or that the Company will ultimately be successful in obtaining the Revolving Credit Facility. Even if the Company generates anticipated cash from operations and obtains the Revolving Credit Facility, the Company may seek to obtain additional debt or equity 11 financing, depending upon the amount of capital required to pursue future growth opportunities or address other liquidity needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations --Liquidity and Capital Resources." INTEGRATION OF NEW HOTELS. There is no assurance that the Company will be able to successfully integrate new hotels or new hotel products into its operations, that new hotels or new hotel products will achieve revenue and profitability levels comparable to the Hotels or that the combined business will be profitable. Newly acquired, developed or converted hotels typically begin with lower occupancy and room rates. Furthermore, the Company's expansion within its existing markets could adversely affect the financial performance of the Hotels in such markets or the Company's overall results of operations. Expansion into new markets may present operating and marketing challenges that are different from those currently encountered by the Company in its existing markets. There is no assurance that the Company will be able to anticipate all of the changing demands that expanding operations will impose on its management and management information and reservation systems, and the failure to adapt its systems and procedures could have a material adverse effect on the Company's business. COMPETITION FOR GROWTH OPPORTUNITIES. The Company intends to pursue a full range of growth opportunities, including acquisitions and new construction. The Company competes for growth opportunities with national and regional hospitality companies, some of which have greater name recognition, marketing support, reservation system capacity and financial resources than the Company. The Company's ability to make acquisitions is dependent upon the Company's relationships with owners of existing hotels and certain major hotel investors. The Company's failure to compete successfully for acquisitions or to attract or maintain relationships with hotel owners and major hotel investors could adversely affect the Company's ability to expand its portfolio of hotels. The Company's inability to implement its external growth strategy would limit its ability to grow its revenue base. ACQUISITION, DEVELOPMENT AND REDEVELOPMENT RISKS. The Company intends to acquire additional hotels in the future. Acquisitions entail the risk that investments will fail to perform in accordance with the Company's expectations. The Company also intends to continue the redevelopment and re-branding of other acquired hotels into "Cavanaughs" hotels. In addition, the Company expects to develop new hotels in the future, depending on market conditions. Hotel redevelopment and new project development is subject to a number of risks, including, without limitation, risks of construction delays or cost overruns, risks that the hotels will not achieve anticipated performance levels and new project commencement risks such as receipt of zoning, occupancy and other required governmental permits and authorizations. These and other risks could result in the incurrence of substantial costs for a project that is never completed. There is no assurance that financing for these projects will be available or, if available, will be on terms acceptable to the Company. In addition, the renovation of the Hotels is subject to a number of risks, including, without limitation, construction delays or cost overruns due to various factors. Any unanticipated delays or expenses in connection with the renovation of the Hotels could have an adverse effect on the results of operations and financial condition of the Company. REAL ESTATE OWNERSHIP RISKS. Upon closing of the Offering, the Company's portfolio will contain 15 properties, including the 11 Hotels, three office properties and one retail property. Accordingly, the Company is subject to varying degrees of risk generally related to owning real estate. These risks, many of which are beyond the control of the Company, include, among others, changes in national, regional and local economic conditions, local real estate market conditions, changes in interest rates, the availability, cost and terms of financing, lease obligations, the potential for uninsured casualty and other losses, the impact of present or future environmental legislation and compliance with environmental laws, and adverse changes in zoning laws and other regulations. In addition, real estate investments are relatively illiquid; therefore, the ability of the Company to vary its portfolio in response to changes in economic and other conditions may be limited. CONTROL BY PRINCIPAL SHAREHOLDERS. Upon completion of the Offering, members of the Barbieri Family will beneficially own, in the aggregate, 57.7% of the outstanding shares of Common Stock. Donald Barbieri, Chairman, President and Chief Executive Officer of the Company, will have sole voting and investment power with respect to 21.6% of the outstanding shares of Common Stock. So long as the Barbieri Family owns a substantial portion of the 12 outstanding Common Stock, it will have the ability to control the management and affairs of the Company and will have the power to approve or block most actions requiring the approval of the shareholders of the Company, including the sale of all the assets of the Company. See "Ownership of Common Stock." ENVIRONMENTAL MATTERS. The Company's operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of compliance with future legislation. Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the ability of the owner of the property to borrow using such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated, and may impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could materially adversely affect the Company's results of operations and financial condition. In connection with the Company's acquisition of a property, a Phase I environmental assessment is conducted by a qualified independent environmental engineer. Phase I environmental assessments have been performed on all of the Company's properties and it is expected that all future hotel acquisitions will be subject to a Phase I environmental assessment. A Phase I environmental assessment involves researching historical usages of a property, databases containing registered underground storage tanks and other matters, including an on-site inspection, to determine whether an environmental issue exists with respect to the property which needs to be addressed. If the results of a Phase I environmental assessment reveal potential issues, a Phase II environmental assessment, which may include soil testing, ground water monitoring or borings to locate underground storage tanks, may, depending upon the circumstances, be ordered for further evaluation. A Phase I environmental assessment conducted with respect to the Kalispell Center Mall has revealed a potential environmental concern. Specifically, the report determined that underground storage tanks had been located on the site as part of previous historical uses, and due to lack of documentation regarding their removal, there exists a possibility that soils and/or groundwater below the site could have been contaminated due to leakage. While the Phase I assessment recommended further analysis, the Company has determined that such action is unwarranted at this time. Based on the information provided by the Phase I environmental assessments, the Company is not aware of any environmental liability or compliance concern at the properties that the Company believes would have a material adverse effect on the Company's business, assets, results of operations or liquidity. It is possible that Phase I environmental assessments will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns of which the Company will not be aware. While the Company has not been notified by any governmental authority, and has no other knowledge of, any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of its properties, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Company's existing and future properties will not be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties (whether neighbors such as dry cleaners or others) unrelated to the Company. REGULATORY RISKS. The lodging industry is subject to numerous federal, state and local government regulations, including building and zoning requirements. Also, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could adversely affect the Company. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. 13 Although the Company believes it is in compliance with the ADA, there is no assurance that a material ADA claim will not be asserted against the Company. SEASONAL FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS. The lodging industry is seasonal in nature, with the months from May through October generally accounting for a greater portion of annual revenues than the months from November through April. Quarterly earnings also may be adversely affected by events beyond the Company's control such as extreme weather conditions, economic factors and other considerations affecting travel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality." DEPENDENCE ON SENIOR MANAGEMENT. The Company will place substantial reliance on the lodging industry experience and the continued availability of its senior management led by Donald Barbieri, Chairman, President and Chief Executive Officer, Arthur Coffey, Executive Vice President and Chief Financial Officer, Richard Barbieri, Senior Vice President and General Counsel, Thomas Barbieri, Senior Vice President-Acquisitions and Commercial Operations and David Bell, Senior Vice President-Project Design, Development and Construction. The Company believes that its future success and its ability to manage future growth depends in large part upon the efforts of the senior management and on the Company's ability to attract and retain other highly qualified personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The Company intends to enter into employment agreements with Donald Barbieri, Arthur Coffey, Richard Barbieri, Thomas Barbieri and David Bell for terms which expire on December 31, 1999. See "Management -- Employment Agreements." The Company does not carry key man insurance on any of its senior management. RENTAL INCOME RISKS. The Company owns approximately 590,000 square feet of office and retail space in Spokane, Washington and Kalispell, Montana. The Company will be subject to the risk that upon expiration, leases may not be renewed, the space may not be relet or the terms of renewal or reletting (including the cost of required renovations) may be less favorable than current lease terms. There is no assurance that the Company will be able to locate tenants for rental spaces vacated in the future or receive satisfactory rents from tenants. Delays or difficulties in attracting tenants and costs incurred by the Company in preparing for tenants could reduce cash flow, decrease the value of a property or jeopardize the Company's ability to pay its expenses. Vacancies could subsequently result due to termination of a tenant's tenancy, the tenant's financial failure or a breach of the tenant's obligations. RISKS ASSOCIATED WITH TERMINATION OF MANAGEMENT AND LEASING CONTRACTS. The Company expects to continue to manage and lease properties owned by third parties. Risks associated with these activities include the risk that the related contracts (which are typically cancelable upon 30-days' notice or upon certain events, including sale of the property) will be terminated by the property owner or will be lost in connection with a sale of such property, that contracts may not be renewed upon expiration or may not be renewed on terms consistent with current terms and that the rental revenues upon which management and leasing fees are based will decline as a result of general real estate market conditions or specific market factors affecting properties managed or leased by the Company, resulting in decreased management or leasing fee income. RISK ASSOCIATED WITH ENTERTAINMENT, MANAGEMENT AND SERVICES DIVISION. The Company's entertainment services include computerized event ticketing and the presentation of touring Broadway shows. In addition, the Company attracts additional hotel guests through cross-selling the products of its entertainment, management and services division. This division is vulnerable to risks associated with changes in general regional and economic conditions, the potential for significant competition and a change in consumer trends, among others. In addition, there is no assurance that Broadway shows will continue to tour the Northwest or that such productions will use the Company as a promoter. CERTAIN TYPES OF LOSSES MAY EXCEED INSURANCE COVERAGE. The Company carries comprehensive liability, public area liability, fire, flood, boiler and machinery, extended coverage and rental loss insurance covering its properties. There are, however, certain types of losses that are not generally insured because it is not economically feasible to insure against such losses. Should an uninsured loss or a loss in excess of insured limits occur with respect to any particular property, the Company could lose its capital invested in the property, as well as the anticipated future 14 revenue from the property and, in the case of debt which is with recourse to the Company, would remain obligated for any mortgage debt or other financial obligations related to the property. Although the Company believes that its properties are adequately insured, any such loss would adversely affect the Company. There is no assurance that material losses in excess of insurance proceeds will not occur in the future. RISK OF DEBT FINANCING; NO LIMIT ON INDEBTEDNESS. As described under "Use of Proceeds," the Company will use $61.7 million of the net proceeds of the Offering to repay a portion of its outstanding indebtedness. After giving effect to such repayment and the acquisition of the five Hotels acquired by the Company since October 31, 1997, the Company's outstanding indebtedness will be approximately $72.4 million. Borrowings under the Revolving Credit Facility, if obtained, will be used by the Company to repay existing indebtedness, to fund the acquisition of hotels, to fund renovations and capital improvements to hotels and for general working capital needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." There is no assurance that the Company will ultimately enter into an agreement with U.S. Bank regarding the Revolving Credit Agreement. Failure to enter into the Revolving Credit Facility or to obtain other financing required to repay the Company's indebtedness could have a material adverse effect on the Company. Neither the Company's Amended and Restated Articles of Incorporation (the "Articles") nor its Amended and Restated By-Laws (the "By-Laws") limit the amount of indebtedness that the Company may incur. Subject to limitations in its debt instruments, including those expected to be included in the Revolving Credit Facility, the Company expects to incur additional debt in the future to finance acquisitions and renovations and for general corporate purposes. The Company's continuing indebtedness could increase its vulnerability to general economic and lodging industry conditions (including increases in interest rates) and could impair the Company's ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. The Company's indebtedness is, and will likely continue to be, secured by mortgages on the Hotels. There is no assurance that the Company will be able to meet its debt service obligations and, to the extent that it cannot, the Company risks the loss of some or all of its assets, including the Hotels, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if the Company is in need of capital to repay indebtedness in accordance with its terms or otherwise, it could be required to liquidate one or more investments in Hotels at times which may not permit realization of the maximum return on such investments. Upon completion of the Offering, most of the Company's outstanding indebtedness, including the Revolving Credit Facility, if obtained, will bear interest at a variable rate. Economic conditions could result in higher interest rates, which would increase debt service requirements on variable rate debt and could reduce the amount of cash available for various corporate purposes. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." IMMEDIATE AND SUBSTANTIAL DILUTION. As set forth more fully under "Dilution," the pro forma net tangible book value per share of the Company after the Offering will be substantially less than the initial public offering price per share in the Offering. Accordingly, purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution of $7.35 per share (based on an assumed initial public offering price of $13 per share) in the net tangible book value of the Common Stock. See "Dilution." ABSENCE OF PUBLIC MARKET. Prior to the Offering, there has been no public market for the Common Stock. There is no assurance that an active public market will develop or continue after the Offering. The initial public offering price of the Common Stock was determined through negotiations between the Company and representatives of the Underwriters and there is no assurance that the Common Stock will trade at or in excess of the initial public offering price. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. PRICE VOLATILITY. The market price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. In addition, the securities markets have experienced significant price and volume fluctuations from time to time in recent years that have often been unrelated 15 or disproportionate to the operating performance of particular companies. These broad fluctuations may adversely affect the market price of the Common Stock. SHARES AVAILABLE FOR FUTURE SALE. Upon completion of the Offering, the Company will have 12,270,251 shares of Common Stock outstanding (13,046,501 shares if the Underwriters' over-allotment option is exercised in full). Of the shares outstanding after the Offering 7,084,251 of such shares will be shares of "restricted" common stock as such term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). In addition to shares of Common Stock sold by the Company in the Offering, the Company will issue an aggregate of 55,000 shares of "restricted" Common Stock over four years to certain members of management, of which 11,000 shares will be issued upon closing of the Offering. In addition, concurrently with the Offering, options to purchase up to 900,000 shares of Common Stock may be granted to certain officers, directors and employees of the Company. Sales of a substantial number of shares of Common Stock (including shares issued upon the exercise of stock options), or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. No prediction can be made about the effect that future sales of Common Stock will have on the market prices of shares. NO DIVIDENDS ON COMMON STOCK. The Company anticipates that for the foreseeable future, all earnings, if any, will be retained for the operation and expansion of its business and that it will not pay cash dividends on Common Stock. See "Dividend Policy." ANTI-TAKEOVER MATTERS. The Articles and By-Laws contain provisions that may have the effect of delaying, deterring or preventing a takeover of the Company that shareholders purchasing shares in the Offering may consider to be in their best interest. The Articles and By-Laws provide for a classified board of directors serving staggered terms of three years, and advance notice requirements for shareholder proposals and director nominations. The Articles also grant the Board of Directors (the "Board") the authority to issue up to 5,000,000 shares of preferred stock, having such rights, preferences and privileges as designated by the Board without shareholder approval. See "Description of Capital Stock." 16 THE COMPANY The Company, which was formerly known as Goodale & Barbieri Companies, has been a family-owned enterprise since it was founded in 1937 by Louis Barbieri and Frank Goodale. Between 1937 and 1976, the Company focused on third-party property management services and real estate development in Spokane, Washington. The Company's history of owning and operating hotels commenced in 1976 when it constructed the River Inn in Spokane. In 1980, the Company established its proprietary Cavanaughs brand name. After changing its name in October 1997 to Cavanaughs Hospitality Corporation, the Company merged with BIC on November 3, 1997. In connection with its merger with BIC, the Company contributed certain assets not related to its core hospitality business, including, among other things, a long-term residence inn and a milk processing and distribution business, to a wholly-owned subsidiary and distributed the capital stock of such subsidiary, as well as the capital stock of another wholly-owned subsidiary owing recreational real estate in Priest Lake, Idaho and a retail sales operation, to the shareholders of the Company. Shortly thereafter, the Company contributed substantially all of its assets, including its interests in various family limited partnerships, to the Operating Partnership in exchange for general and limited partner interests therein. The Company is the sole general partner of the Operating Partnership and owns a controlling 98.8% interest therein. All of the Hotels and the other assets of the Company are held by or for the benefit of, and substantially all of the Company's operations are conducted through, the Operating Partnership. As sole general partner of the Operating Partnership, the Company has exclusive power to manage and conduct the operations of the Operating Partnership. See "Partnership Agreement of the Operating Partnership." In addition to the Operating Partnership, the Company holds a 50% general partner interest in Cowley Street Limited Partnership, a Washington limited partnership which owns Cavanaughs Fourth Avenue. The Company's principal executive offices are located at 201 W. North River Drive, Suite 100, Spokane, Washington 99201 and its telephone number is (509) 459-6100. The Company's website address is www.cavanaughs.com. USE OF PROCEEDS The net proceeds to the Company from the Offering, after giving effect to underwriting discounts and commissions and estimated expenses, are expected to be approximately $61.7 million (approximately $71.1 million if the Underwriters' over-allotment option is exercised in full). The Company expects to use the net proceeds from the Offering to repay approximately $61.7 million of indebtedness outstanding, of which $850,000 was incurred in connection with the purchase of the Cavanaughs on the Falls hotel. Any remaining proceeds will be used by the Company for future investments in, or acquisitions of, hotel properties and for other general corporate purposes. Pending such uses, the Company intends to invest the net proceeds in short-term investment grade, interest-bearing securities, certificates of deposit or guaranteed obligations of the United States of America. The indebtedness to be repaid bears interest at fixed and variable rates, with a weighted average annual rate of 8.6% and a weighted average maturity of seven years and two months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DIVIDEND POLICY The Company does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. The Company intends to retain earnings to provide funds for the continued growth and development of its business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Any determination to pay cash dividends in the future will be at the discretion of the Board and will depend upon, among other things, the Company's results of operations, financial condition, contractual restrictions (including those expected to be set forth in the Revolving Credit Facility) and other factors deemed relevant by the Board. 17 CAPITALIZATION The following table sets forth the capitalization of the Company as of October 31, 1997 (i) on a combined historical basis and (ii) on a pro forma basis, giving effect to (a) the Offering and the application of the net proceeds therefrom and (b) the five hotels acquired, or contracted for, since October 31, 1997. The information set forth in the following table should be read in conjunction with the Historical Combined Financial Statements and related notes, Pro Forma Combined Financial Statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this Prospectus.
AS OF OCTOBER 31, 1997 ---------------------- HISTORICAL COMBINED PRO FORMA ---------- --------- (IN THOUSANDS) Debt, including current portion:........................... Existing long-term debt.................................. $ 98,056 $ 42,955 Existing capital lease obligations....................... 2,754 2,754 Borrowings under Revolving Credit Facility............... --- 26,748 -------- -------- Total debt........................................... 100,810 72,357 -------- -------- Stockholders' equity (1): Preferred Stock, $.01 par value, 5,000,000 authorized; no shares issued and outstanding..................... --- --- Common Stock, $.01 par value, 50,000,000 authorized; 7,095,251 shares issued and outstanding (2); 12,270,251 shares issued and outstanding as adjusted (2)......................................... 71 123 Additional paid-in capital............................... 3,935 65,549 Retained earnings........................................ 5,417 4,968 -------- -------- Total stockholders' equity........................... 9,423 70,640 -------- -------- Total capitalization................................. $110,233 $142,997 ======== ========
______________________ (1) The historical amounts reflect the number and amount of shares of Common Stock outstanding after the Merger which occurred in November 1997. See Note 1 to the Historical Combined Financial Statements. (2) Includes 7,084,251 restricted shares owned by the Barbieri Family and an aggregate of 11,000 restricted shares to be issued to five of the Company's employees concurrently with the Offering. Excludes 150,817 shares issuable upon exchange of currently outstanding OP Units, which units may not be exchanged for one year from the date of this Prospectus. See "Partnership Agreement of the Operating Partnership." Excludes 1,489,000 shares reserved for issuance with respect to options or stock awards to be granted under the Plans. See "Management." 18 DILUTION The net tangible book value of the Company at October 31, 1997 was approximately $7,633,000, or approximately $1.08 per share of Common Stock. Net tangible book value per share is equal to the Company's total tangible assets less its total liabilities divided by the number of outstanding shares of Common Stock. After giving pro forma effect to the sale by the Company of the 5,175,000 shares offered hereby (at an assumed initial public offering price of $13 per share) and the application of the net proceeds from the Offering, the pro forma net tangible book value per share of the Company at October 31, 1997 would have been approximately $69,299,000, or approximately $5.65 per share of Common Stock. This amount represents an immediate increase in the pro forma net tangible book value per share of $4.57 per share to the existing shareholders and an immediate dilution in pro forma net tangible book value per share to new investors of approximately $7.35 per share. The following table illustrates this per share dilution.
Assumed initial public offering price per share......................... $13.00 Net tangible book value per share before the Offering....................................................... $ 1.08 Pro forma net tangible book value increase per share attributable to the Offering................................ 4.57 ------ Pro forma net tangible book value per share after the Offering.......... 5.65 ------ Pro forma net tangible book value dilution per share to new investors... $ 7.35 ======
The following table sets forth: (i) the number of shares of Common Stock held by the existing shareholders and the number of shares of Common Stock purchased by new investors in this Offering, (ii) the net book value on a pro forma basis as of October 31, 1997 of the consideration received by the Company from the existing shareholders and (iii) the net tangible book value of the consideration received by the Company in this Offering (assuming the sale of 5,175,000 shares of Common Stock by the Company at an initial public offering price of $13.00 per share).
Total Shares Acquired Contribution Book Value of -------------------- ----------------- Consideration Received Number (1) Percent Amount Percent By Company Per Share ---------- ------- ------ ------- ---------------------- (in thousands, except per share data) Existing shareholders....... 7,084 57.8% $ 9,423 12.3% $ 1.33 Common Stock purchased by new investors in the Offering.................. 5,175 42.2 67,275 87.7 13.00 ------ ----- ------- ----- ------ Total................. 12,259 100.0% $76,698 100.0% $ 6.26 ====== ===== ======= ===== ======
- -------------------------------- (1) Include 7,084,251 restricted shares owned by the Barbieri Family. Excludes 150,817 shares issuable upon exchange of currently outstanding OP Units, which OP Units cannot be exchanged for one year from the date of this Prospectus, and an aggregate of 11,000 restricted shares to be issued to five of the Company's employees concurrently with the Offering. See "Partnership Agreement of the Operating Partnership." Excludes 1,489,000 shares reserved for issuance with respect to options or stock awards to be granted under the Plans. See "Management." 19 SELECTED COMBINED FINANCIAL AND OTHER DATA The following table sets forth selected combined financial data of the Company as of and for the five years ended October 31, 1997. The selected combined statement of income data for the fiscal years ended October 31, 1993 and 1994 and the selected combined balance sheet data as of October 31, 1993, 1994 and 1995 are derived from the Company's unaudited financial statements and reflect all normal recurring adjustments, which in the opinion of management, are necessary for a fair presentation. The selected combined statement of income data for the fiscal years ended October 31, 1995, 1996 and 1997 and the selected combined balance sheet data as of October 31, 1996 and 1997 are derived from the Company's audited financial statements included elsewhere in this Prospectus. The pro forma combined statement of income data and balance sheet data as of and for the year ended October 31, 1997 are unaudited and are derived from the pro forma financial statements included elsewhere in this Prospectus as adjusted for the Offering. The selected combined financial data set forth below should be read in conjunction with, and are qualified in their entirety by, the Historical Combined Financial Statements and related notes, Pro Forma Combined Financial Statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this Prospectus.
FISCAL YEAR ENDED OCTOBER 31, (1) ------------------------------------------------------------------- PRO FORMA 1993 1994 1995 1996 1997 1997 (2) -------- -------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND HOTEL STATISTICS) - -------------------------------- STATEMENTS OF INCOME DATA: Revenues: Hotels and restaurants: Rooms............................. $16,276 $17,531 $ 17,587 $ 20,972 $ 25,147 $ 39,809 Food and beverage................. 11,469 12,027 12,397 12,141 13,926 23,547 Other............................. 672 1,015 1,260 2,092 2,589 3,645 ------- ------- -------- -------- -------- -------- Total hotels and restaurants.... 28,417 30,573 31,244 35,205 41,662 67,001 Entertainment, management and services.................... 4,468 3,205 3,092 3,168 3,842 3,842 Rental operations................. 4,572 4,987 6,027 6,790 6,539 6,539 ------- ------- -------- -------- -------- -------- Total revenues.................. 37,457 38,765 40,363 45,163 52,043 77,382 ------- ------- -------- -------- -------- -------- Operating Expenses: Direct: Hotels and restaurants: Rooms........................... 4,822 4,868 4,931 5,719 6,820 11,420 Food and beverage............... 9,193 9,657 10,034 10,181 11,483 19,312 Other........................... 503 808 716 1,008 1,066 1,409 ------- ------- -------- -------- -------- -------- Total hotels and restaurants................ 14,518 15,333 15,681 16,908 19,369 32,141 Entertainment, management and services................. 2,310 1,519 1,802 2,204 2,052 2,052 Rental operations............... 364 783 1,026 1,464 1,506 1,506 ------- ------- -------- -------- -------- -------- Total direct operating expenses..................... 17,192 17,635 18,509 20,576 22,927 35,699 ------- ------- -------- -------- -------- -------- Undistributed operating expenses:
20
FISCAL YEAR ENDED OCTOBER 31, (1) ------------------------------------------------------------------- PRO FORMA 1993 1994 1995 1996 1997 1997 (2) -------- -------- --------- --------- --------- --------- (in thousands, except per share data and hotel statistics) Selling, general and administrative............... 4,909 3,979 5,420 6,445 8,165 12,075 Property operating costs (3).... 4,023 5,554 5,022 4,997 5,518 9,183 Depreciation and amortization................. 2,805 3,419 3,428 4,215 4,775 5,847 ------- ------- -------- -------- -------- -------- Total undistributed operating expenses........... 11,737 12,952 13,870 15,657 18,458 27,105 ------- ------- -------- -------- -------- -------- Total expenses............... 28,929 30,587 32,379 36,233 41,385 62,804 ------- ------- -------- -------- -------- -------- Operating income (3)................ 8,528 8,178 7,984 8,930 10,658 14,578 Interest expense.................... 5,301 5,649 6,866 7,319 8,817 5,939 Other............................... 312 216 631 537 901 707 Income before income taxes and extraordinary item (3).......... 3,539 2,745 1,749 2,148 2,742 9,346 Income taxes........................ 1,254 574 542 730 932 3,216 Extraordinary item (4).............. 191 -- -- -- -- 541 Net income (3)...................... $ 2,476 $ 2,171 $ 1,207 $ 1,418 $ 1,810 $ 5,589 Pro forma income per share before extraordinary item....... -- -- -- -- $ 0.26 $ 0.50 Pro forma extraordinary item per share.................. -- -- -- -- -- $ 0.04 Pro forma net income per share (5)................... -- -- -- -- $ 0.26 $ 0.46 Shares used in the pro forma per share calculation (5)........... -- -- -- -- 7,084 12,259 Dividends per share (6) BALANCE SHEET DATA: Total assets.................... $80,220 $86,924 $107,037 $120,271 $124,448 $160,162 Current maturities of long- term debt and capital leases.. 2,652 2,458 10,306 10,509 4,784 2,318 Long-term debt and capital leases excluding current maturities.................... 57,100 66,755 77,636 88,799 96,026 70,039 Stockholders' equity (7)........ 6,017 5,483 9,384 10,409 9,423 70,640 OTHER DATA: EBITDA (3)(8)................... $11,645 $11,813 $ 12,043 $ 13,682 $ 16,334 $ 21,132 EBITDA as a percentage of revenues...................... 31.1% 30.5% 29.8% 30.3% 31.4% 27.3% HOTEL STATISTICS: Hotels open (at end of year)........ 6 6 6 7 8 13 Available rooms (at end of period)....................... 1,242 1,242 1,242 1,539 1,684 2,712 REVPAR (9).......................... $38.69 $38.70 $38.83 $42.04 $ 45.72 $ 39.09 ADR (10)............................ $56.40 $60.27 $61.54 $67.29 $ 73.43 $ 65.40 Average occupancy percentage (11)............... 70.3% 65.2% 65.5% 64.5% 63.5% 59.8% - ------------------------------
21 (1) The summary combined financial and other data has been presented as though the predecessor businesses of Cavanaughs Hospitality Corporation, Barbieri Investment Company and their respective subsidiaries and partnership interests which they controlled had been combined as of October 31, 1993, 1994 1995, 1996 and 1997. (2) Pro forma results reflect the historical financial and other data as of October 31, 1997 after reflecting (i) the Merger which occurred in November 1997, (ii) the acquisitions which occurred or are probable of occurring as of January 16, 1998 as if they occurred on November 1, 1996 for purposes of the statement of income and as of October 31, 1997 for purposes of the balance sheet, and (iii) the Offering and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (3) Property operating costs, operating income, income before income taxes and extraordinary item, net income and EBITDA reflect a nonrecurring charge of $421,000 related to final settlement of litigation in 1997. (4) Extraordinary item included in the 1997 pro forma presentation includes charges for the write-off of deferred loan fees and prepayment penalties, net of income taxes related to long-term debt, which is being repaid out of the proceeds of the Offering. (5) Due to the Merger, which was consummated in November 1997, the historical earnings per share is not relevant or meaningful. Therefore, pro forma earnings per share for the year ended October 31, 1997 has been presented based upon the number of shares of Common Stock of the Company which were outstanding after the Merger. (6) Due to the Merger in November 1997, historical dividends per share is not relevant or meaningful and therefore is not presented. Dividends historically have been paid to the stockholders of Cavanaughs Hospitality Corporation and Barbieri Investment Companies. See Combined Statement of Changes in Stockholders' Equity in the historical financial statements included elsewhere herein. (7) Changes in stockholders' equity between fiscal years reflect (i) net income, (ii) cash dividends and (iii) distributions to or contributions from shareholders for the activities related to the subsidiaries, investments or divisions which have been excluded from the combined financial statements. See Note 1 to the Historical Combined Financial Statements. (8) EBITDA represents income before income taxes and extraordinary item, interest expense, depreciation and amortization. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and such information should not be considered as an alternative to net income, cash flow from operations or any other measure of performance prescribed by generally accepted accounting principles. EBITDA is included herein because management believes that certain investors find it to be a useful tool for measuring the Company's ability to service debt. (9) REVPAR represents the total revenues divided by total available rooms, net of rooms out of service due to significant renovations. (10) ADR represents total room revenues divided by the total number of rooms occupied by hotel guests on a paid basis. (11) Average occupancy percentage represents total rooms occupied divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis addresses the results of operations for the Company for the fiscal years ended October 31, 1995, 1996, and 1997. The following should be read in conjunction with the Historical Combined Financial Statements and the notes thereto and the "Selected Combined Financial and Other Data" included elsewhere in this Prospectus. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in "Risk Factors" and elsewhere in this Prospectus. The financial statements of the Company, which have been audited by Coopers & Lybrand L.L.P., have been presented as though the predecessor businesses of Cavanaughs Hospitality Corporation (formerly known as Goodale and Barbieri Companies), Barbieri Investment Company and their respective subsidiaries and partnership interests which they controlled had been combined as of October 31, 1995, 1996 and 1997. These companies were merged on November 1, 1997. The audited financial statements also include Lincoln Building Limited Partnership, a partnership controlled by the Barbieri Family. See Note 1 to the Combined Financial Statements. Income or losses attributed to the minority interests of partners in Lincoln Building Limited Partnership and Cowley Street Limited Partnership are reported as minority interest in partnerships. The Company has changed its fiscal year end from October 31 to December 31, which change shall take effect with the fiscal year beginning on January 1, 1998. The Company's revenues are derived primarily from the Hotels and reflect revenue from rooms, food and beverage and other sources, including telephone, guest services, banquet room rentals, gift shops and other amenities. Hotel revenues accounted for 80.0% of total revenue in 1997 and increased at a compound annual rate of 15.5% from $31.2 million in 1995 to $41.7 million in 1997. This increase was primarily the result of the addition of Cavanaughs on Fifth Avenue and an increase in REVPAR from $38.83 in 1995 to $45.71 in 1997. The balance of the Company's revenues are derived from its entertainment, management and services and rental operations divisions. These revenues are generated from ticket distribution handling fees, real estate management fees, sales commissions and rents. In 1997, entertainment, management and services accounted for 7.4% of total revenues and rental operations accounted for 12.6% of total revenues. These two divisions are expected to represent a smaller percent of total revenues in the future as the Company continues to pursue its hotel growth strategy. As is typical in the hospitality industry, REVPAR, ADR and occupancy levels are important performance measures. The Company's operating strategy is focused on enhancing revenue and operating margins by increasing REVPAR, ADR, occupancy and operating efficiencies of the Hotels. These performance measures are impacted by a variety of factors, including national, regional and local economic conditions, degree of competition with other hotels in their respective market areas and, in the case of occupancy levels, changes in travel patterns. The following table sets forth selected items from the combined statements of income as a percent of total revenues and certain other selected data:
Fiscal Year Ended October 31, -------------------------------- 1995 1996 1997 --------- --------- -------- Revenues: Hotels and restaurants 77.4% 78.0% 80.0% Entertainment, management and services 7.7 7.0 7.4 Rental operations 14.9 15.0 12.6 ----- ----- ----- Total revenues 100.0% 100.0% 100.0% ===== ===== =====
23
Fiscal Year Ended October 31, -------------------------------- 1995 1996 1997 --------- --------- -------- Direct operating expenses 45.9% 45.6% 44.0% Undistributed operating expenses: Selling, general and administrative 13.4 14.3 15.7 Property operating costs 12.5 11.1 10.6 Depreciation and amortization 8.5 9.3 9.2 ------ ------ ------ Total undistributed operating expenses: 34.4 34.7 35.5 Operating income 19.8 19.8 20.5 Interest (net) 17.0 16.2 16.9 Income before income taxes 4.3 4.7 5.3 Income tax provision 1.3 1.6 1.8 ------ ------ ------ Net income 3.0% 3.1% 3.5% ====== ====== ====== REVPAR $38.83 $42.04 $45.71 ADR $61.54 $67.29 $73.43 Occupancy 65.5% 64.5% 63.5%
RESULTS OF OPERATIONS Comparison of year ended October 31, 1997 to year ended October 31, 1996 Total revenues increased $6.9 million, or 15.2%, from $45.2 million in 1996 to $52.0 million in 1997. This increase is attributed primarily to revenue generated from increases in total rooms occupied and REVPAR and the addition of Cavanaughs on Fifth Avenue in Seattle, Washington. Total hotel and restaurant revenues increased $6.5 million, or 18.3%, from $35.2 million in 1996 to $41.7 million in 1997. ADR increased $6.14, or 9.1%, from $67.29 in 1996 to $73.43 in 1997. Available room nights increased 10.3% in 1997. REVPAR increased $3.67, or 8.7% from $42.04 in 1996 to $45.72 in 1997. Cavanaughs on Fifth Avenue opened in May 1996; therefore, 1997 was the first full fiscal year of operation for this 297-room property which contributed, in part, to this increase in revenues. Entertainment, management and services revenues increased $0.7 million, or 21.3%, from $3.2 million in 1996 to $3.8 million in 1997. Entertainment revenue increased due to greater demand for shows presented and distribution of tickets. Management and services revenue increased from the addition of new third-party management contracts. Rental income decreased $0.3 million, or 3.7%, from $6.8 million in 1996 to $6.5 million in 1997 primarily as a result of the Company's need to occupy additional space in the CHC Building, its corporate headquarters, which had previously been rented to third parties and the receipt of a one-time settlement for a lease termination which occurred in 1996. Direct operating expenses increased $2.4 million, or 11.4%, from $20.6 million in 1996 to $22.9 million in 1997, primarily due to the increase in the number of hotel guests served. This represents a decline in direct operating expenses as a percentage of total revenues from 45.6% in 1996 to 44.0% in 1997. The improvement in direct operating expense percentages is attributed to the increase in REVPAR while the Company was able to effectively control expenses and gain volume efficiencies. Total undistributed operating expenses increased $2.8 million, or 17.9%, from $15.7 million in 1996 to $18.5 million in 1997. Total undistributed operating expenses include selling, general and administrative expenses, which increased 26.7% from $6.4 million in 1996 to $8.2 million in 1997, and depreciation and amortization, which increased 24 13.3% from $4.2 million in 1996 to $4.8 million in 1997. Total undistributed operating expenses as a percentage of total revenues increased 0.8% from 34.7% in 1996 to 35.5% in 1997. The increase in undistributed operating expenses as a percentage of total revenues is primarily attributed to the addition of Cavanaughs on Fifth Avenue (which management believes had not attained stabilized occupancy) and the additional administrative expenses related to preparing the Company for future growth and the Offering. Operating income increased $1.7 million, or 19.4%, from $8.9 million in 1996 to $10.7 million in 1997. As a percentage of total revenues, operating income increased from 19.8% in 1996 to 20.5% in 1997. This increase is due primarily to an increase in REVPAR, the addition of Cavanaughs on Fifth Avenue and improvements in the hotel departmental margins. Interest expense increased $1.5 million, or 20.5%, from $7.3 million in 1996 to $8.8 million in 1997. This increase is primarily related to the incurrence of additional debt used for funding the acquisition and conversion of Cavanaughs on Fifth Avenue and other corporate purposes. Interest expense is initially anticipated to decline as a result of the application of the net proceeds of the Offering to repay certain indebtedness, but is expected to increase in the future due to the funding of hotel acquisitions with additional debt. Income tax provision increased 27.7%, from $0.7 million in 1996 to $ 0.9 million in 1997, due to the increase in income before taxes. The effective income tax rate for both years was 34%. Net income increased $0.4 million, or 27.6%, from $1.4 million in 1996 to $1.8 million in 1997. Comparison of year ended October 31, 1996 to year ended October 31, 1995 Total revenues increased $4.8 million, or 11.9%, from $40.4 million in 1995 to $45.2 million in 1996. The increase is attributed primarily to the addition of Cavanaughs on Fifth Avenue which opened in May 1996 and additional rental income from increased occupancy in the rental properties. Total hotel and restaurant revenues increased $4.0 million, or 12.7%, from $31.2 million in 1995 to $35.2 million in 1996. ADR increased 9.3% from $61.54 in 1995 to $67.29 in 1996. Available room nights increased 10.1% in 1996. The increase is primarily attributed to the addition of Cavanaughs on Fifth Avenue. Entertainment, management and services revenues increased 2.5% from $3.1 million in 1995 to $3.2 million in 1996. Rental income increased $0.8 million, or 12.7%, from $6.0 million in 1995 to $6.8 million in 1996. The increase is primarily attributed to increased occupancy and lease payments for the Company's office buildings. Direct operating expenses increased $2.1 million, or 11.2%, from $18.5 million in 1995 to $20.6 million in 1996. Direct operating expenses as a percentage of total revenues decreased from 45.9% in 1995 to 45.6% in 1996. This improvement is attributed primarily to the increase in REVPAR while controlling expenses. Total undistributed operating expenses increased $1.8 million, or 12.9%, from $13.9 million in 1995 to $15.7 million in 1996. Total undistributed operating expenses include selling, general and administrative expenses, which increased 18.9% from $5.4 million in 1995 to $6.4 million in 1996, and depreciation and amortization, which increased 23.0% from $3.4 million in 1995 to $4.2 million in 1996. Total undistributed operating expenses as a percentage of total revenues increased from 34.4% in 1995 to 34.7% in 1996. Increased expenses are attributed primarily to the addition of Cavanaughs on Fifth Avenue which management believes has not attained stabilized occupancy. Operating income increased $0.5 million, or 11.8%, from $8.0 million in 1995 to $8.9 million in 1996. This increase was primarily caused by an increase in hotel guests served and an increase in REVPAR coupled with the controlling operating expenses. 25 Interest expense increased $0.5 million, or 6.6%, from $6.9 million in 1995 to $7.3 million in 1996 primarily as a result of the additional indebtedness incurred by the Company in connection with the acquisition and conversion of Cavanaughs on Fifth Avenue. Income tax provision increased 34.7%, from $0.5 million in 1995 to $0.7 million in 1996 due to the increase in income before taxes. The effective income tax rate for both years was 34%. Net income increased $0.2 million, or 17.5%, from $1.2 million in 1995 to $1.4 million in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are cash on hand, cash generated by operations and borrowings under a $3.0 million working capital credit facility. Cash generated by operations in excess of operating expenses is used for capital expenditures and to reduce amounts outstanding under the working capital credit facility. Hotel acquisitions, development and expansion have been and will be financed through a combination of internally generated cash, borrowing under credit facilities, and the issuance of common stock or OP Units. The Company's short-term capital needs include food and beverage inventory, payroll and the repayment of interest expense on outstanding mortgage indebtedness. Historically, the Company has met these needs through internally generated cash. The Company's long-term capital needs include funds for property acquisitions, scheduled debt maturities and renovations and other non-recurring capital improvements. The Company anticipates meeting its future long-term capital needs through the borrowing of additional debt financing secured by the Hotels, by unsecured private or public debt offerings or by additional equity offerings or the issuances of OP Units, along with cash generated from internal operations. The Company intends to repay approximately $61.7 million of its outstanding indebtedness with the estimated net proceeds of the Offering. On a pro forma basis as of October 31, 1997, after giving effect to the Offering, the application of the net proceeds thereof and the acquisition of the five hotels acquired, or contracted for, since October 31, 1997, total outstanding indebtedness decreased from approximately $100.8 million to approximately $72.4 million. See "Use of Proceeds" and "Capitalization." At October 31, 1997, the Company had $6.4 million in cash and cash equivalents, a decrease of $0.8 million from $7.2 million on October 31, 1996. The Company has made extensive capital expenditures over the last three years, investing $24.1 million, $13.5 million and $6.2 million in owned and joint venture properties in 1995, 1996 and 1997, respectively. These expenditures included guest room, lounge and restaurant renovations, public area refurbishment, telephone and computer system upgrades, tenant improvements, property acquisitions, construction, and corporate expenditures and were funded from operating cash flow and debt. The Company establishes reserves for capital replacement in the amount of 4.0% of the prior year's actual gross income to maintain the Hotels at acceptable levels. Acquired hotel properties have a separate capital budget for purchase, construction, renovation, and branding costs. Capital expenditures planned for Hotels in 1998 are expected to be approximately $3.0 million. Management believes the consistent renovation and upgrading of the Hotels and other properties is imperative to its long-term reputation and customer satisfaction. To fund its acquisition program and meet its working capital needs, the Company has received a commitment from U.S. Bank to provide the Revolving Credit Facility. The commitment letter, which contains a number of conditions to the initial funding by the lender, provides that the amount available thereunder will be the lesser of $80.0 million or the gross proceeds (including the gross proceeds if the Underwriters' over-allotment option is exercised) of the Offering. During the 12 months following the Offering, the Company will have approximately $50.0 million available to be drawn under the Revolving Credit Facility, which amount may be increased to the full amount available thereunder with the lender's consent, at an interest rate of 185 basis points over LIBOR and declining to 165 basis points after six months if the Company maintains certain EBITDA to debt ratios. The Revolving Credit Facility has an initial term of five years and an annualized fee for the unutilized portion of the facility. The Company selects from four different interest rates when it draws funds: the lender's prime rate or one, three, or six month LIBOR plus the applicable margin of 165 to 210 basis points, depending on the ratio of EBITDA to total funded debt. The Revolving 26 Credit Facility has covenants that allow for the Company to draw funds based on the trailing 12 months performance on a pro forma basis for both acquired and owned properties. The Revolving Credit Facility allows the Company to choose which properties are part of the collateral base and, therefore, gives the Company the ability to utilize other long-term credit facilities that may be more favorable to the Company. Funds from the Revolving Credit Facility may be used for acquisitions, renovations, construction and general corporate purposes. The Company believes the structure and availability of funds under the Revolving Credit Facility will be sufficient to meet the Company's long-term growth plans. The Revolving Credit Facility will contain various representations, warranties, covenants and events of default deemed appropriate for financing of a similar size and nature. Covenants and provisions in the definitive agreements governing the Revolving Credit Facility will include, among other things, limitations on: (i) substantive changes in the Company's current business activities, (ii) liquidation, dissolution, mergers, consolidations, dispositions of material property or assets and acquisitions of property or assets of others, (iii) the creation or existence of liens on property or assets, (iv) the addition or existence of indebtedness, including guarantees and other contingent obligations, (v) loans and advances to others and investments in others, redemption of subordinated debt, (vi) amendment or modification of certain material documents or of the Articles in a manner adverse to the interests of the lenders under the Revolving Credit Facility, (vii) payment of dividends or distributions on the Company's capital stock, and (viii) maintenance of certain financial ratios. Each of the covenants described above will provide for certain ordinary course of business and other exceptions. If the Company breaches any of these covenants and does not obtain a waiver of that breach, the breach will constitute an event of default under the Revolving Credit Facility. As of October 31, 1997, the Company had debt outstanding of $100.8 million consisting of primarily variable and fixed rate debt secured by individual properties. The Company had a working capital credit facility of $1.0 million with zero drawn as of the end of fiscal year 1997. On November 1, 1997, the working capital credit facility was increased to $3.0 million. The Company believes that cash generated by operations will be sufficient to fund the Company's operating strategy for the foreseeable future, and that any remaining cash generated by operations, together with capital available under the Revolving Credit Facility (subject to the terms and covenants to be included therein) and the remaining proceeds from the Offering, will be adequate to fund the Company's growth strategy in the near term. Thereafter, the Company expects that future capital needs, including property acquisitions, will be met through a combination of net cash provided by operations, borrowings and additional issuances of Common Stock or OP Units. SEASONALITY The lodging industry is affected by normally recurring seasonal patterns. At most Hotels, demand is higher in the late spring through and early fall (May through October) than during the balance of the year. Demand also changes on different days of the week, with Sunday generally having the lowest occupancy. Accordingly, the Company's revenue, operating profit and cash flow are lower during the first and fourth calendar quarters and higher during the second and third calendar quarters. INFLATION The effect of inflation, as measured by fluctuations in the Consumer Price Index, has not had a material impact on the Company's revenues or net income during the periods under review. YEAR 2000 The Company does not believe that the costs of converting its computer systems to address the advent of the year 2000 will be material. 27 NEW ACCOUNTING PRONOUNCEMENTS In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," was issued. SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and simplifies the existing standards. This standard replaces the presentation of primary EPS with a presentation of basic EPS. It also requires the dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior-period EPS data presented. The adoption of SFAS No. 128 will not have a material effect on the presentation of the Company's EPS. In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. This statement requires that comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement does not require a specific format for the financial statement, but requires that an enterprise display net income as a component of comprehensive income in the financial statement. Comprehensive income is defined as the change in equity of a business enterprise arising from non-owner sources. The classifications of comprehensive income under current accounting standards include foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. This statement is effective for fiscal years beginning after December 15, 1997. Management does not believe that the implementation of SFAS No. 130 will have a material impact on the presentation of its combined financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments for an Enterprise and Related Information." This statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, and its major customers. The statement is effective for fiscal years beginning after December 15, 1997. Management of the Company does not believe that the implementation of SFAS No. 131 will have a material impact on the combined financial statements. 28 BUSINESS AND PROPERTIES GENERAL Cavanaughs Hospitality Corporation is a hotel operating company that owns, operates, acquires, develops, renovates and repositions full service hotels throughout the Northwest under its proprietary brand name, "Cavanaughs". The Company's hotel portfolio contains 11 full service Hotels, with 2,369 guest rooms and approximately 120,000 square feet of meeting space, located in Seattle, Spokane, Yakima and Kennewick, Washington; Idaho Falls and Post Falls, Idaho; and Kalispell, Montana. The Company plans to pursue additional growth opportunities by continuing to acquire and develop full service hotels in the Northwest. The Company has entered into purchase agreements to acquire two additional full service hotels, containing 343 guest rooms and approximately 14,500 square feet of meeting space, located in Kalispell, Montana and Portland, Oregon. With an average of more than 20 years of experience in the lodging industry, management believes the Company enjoys an excellent reputation in, and its Cavanaughs brand name is well recognized throughout, the Northwest. The Company also provides entertainment services, including event ticketing and theatrical presentations and other special events, property management services for third parties and owns and manages retail and office properties. The Company is seeking to become the dominant full service hotel company in the Northwest by providing customers with access to a Cavanaughs brand hotel in multiple locations throughout the region. As a result of consolidation among hotel chains, the Company believes there is an absence of a dominant Northwest based, regionally focused hotel company. The Company's growth strategy focuses on: (i) the acquisition and re-branding of full service hotels with the Cavanaughs name, (ii) the acquisition, conversion and redevelopment of non-hotel properties into Cavanaughs brand hotels, (iii) the construction of new Cavanaughs hotels and (iv) the expansion of existing Cavanaughs Hotels. The Company's operating strategy is designed to enhance its revenue and operating margins by increasing REVPAR, ADR, occupancy and operating efficiencies at the Hotels. This strategy includes: (i) building brand name recognition by maintaining its strategic focus on the Northwest; (ii) promoting a coordinated marketing program utilizing corporate level sales and marketing departments in conjunction with local hotel-based sales and marketing personnel; (iii) controlling operating expenses and achieving cost reductions through operating efficiencies and economies of scale; (iv) enhancing guest satisfaction and loyalty by providing high quality service; (v) utilizing the Company's yield management and proprietary management information systems to enable the general managers of each Hotel to optimize REVPAR, ADR, occupancy and net income; (vi) maintaining a consistent level of quality at the Hotels through its maintenance and capital expenditure programs; (vii) emphasizing the quality of the Company's food and beverage services to attract convention, group and special event business and to create local awareness of the Hotels; (viii) providing valuable guest benefit programs that promote customer loyalty, such as frequent flier mileage and repeat guest programs; and (ix) attracting and retaining qualified employees by providing on-going training and stock incentive programs at all levels of employment to enhance productivity and align the efforts of employees with the Company's objectives. For the fiscal year ended October 31, 1997, the Company's revenues were $52.0 million, operating income was $10.7 million, net income was $1.8 million, REVPAR was $45.72 and ADR was $73.43. On a pro forma basis, giving effect to the three Hotels acquired since October 31, 1997, the two hotels under contract to be acquired and the Offering, for the year ended October 31, 1997, the Company's revenues were $77.4 million, operating income was $14.6 million, net income was $5.6 million, REVPAR was $39.09 and ADR was $65.40. In addition to the Hotels, the Company operates two other divisions: (i) entertainment, management and services and (ii) rental operations. The entertainment, management and services division includes computerized event ticketing through G&B Select-a-Seat, which was founded in 1987 and distributed in excess of 2.0 million tickets in 1997, and the presentation of shows and special events through G&B Presents, which was also founded in 1987 and has presented over 79 Broadway theatrical presentations and special events in the last ten years. These services generate income from ticket sales and handling fees as well as additional room occupancy at the Hotels. The entertainment, management and services division is supported by the same Toll-Free Call Center used for hotel reservations. The Company's rental operations division includes ownership of three office properties and one retail property containing in excess of 590,000 square feet of leasable space, the majority of which are located near the Hotels, and third-party 29 management of more than 3.1 million square feet of retail and office properties and approximately 2,200 residential units throughout the Northwest. INDUSTRY OVERVIEW The domestic lodging industry completed its third year of record profitability, during which time it produced record income of $12.5 billion. Coopers & Lybrand L.L.P.'s Hospitality Directions estimates that the industry is expected to again achieve record profitability in 1997. Coopers & Lybrand Hospitality Directions indicates that average U.S. hotel occupancy reached 65.1% in 1996, its highest level in 13 years. U.S. hotel occupancy is expected to decline slightly in 1997 to 64.6% due to supply growth exceeding demand growth. The increase in room supply in the full service hotel segment has been lower than the limited service hotel segment due, in part, to the higher cost of developing a full service hotel. High occupancy during 1992 to 1997 has provided hotel operators with the ability to support increases in ADR without affecting occupancy percentages. Sustained ADR growth has contributed to total lodging industry revenue growth which was 8.6% in 1996 and is expected to be 8.5% in 1997. The following table reflects the percentage changes in REVPAR, ADR and occupancy in 1996 and 1997, compared to 1995 and 1996, respectively, for (i) the Hotels that were open for each of the periods presented and (ii) all U.S. hotels.
PERCENTAGE CHANGE VERSUS PRIOR PERIOD REVPAR(1) ADR OCCUPANCY(2) ----------------------- ----------------------- ----------------- 1996 1997 1996 1997 1996 1997 ---- ---- ---- ---- ---- ---- Cavanaughs Hotel.......... 8.3% 8.7% 9.3% 9.1% -1.5% -1.6% U.S. Hotels (3)........... 6.2% 5.5% 6.2% 6.1% 0.0% -0.7%
_____________________________________________________________ (1) Determined by dividing annual room revenue by annual available rooms. (2) The occupancy as a percentage of available rooms declined slightly, primarily because of the addition of new rooms associated with the opening of Cavanaughs on Fifth Avenue, which management believes has not reached stabilized occupancy. (3) Source: Coopers & Lybrand Hospitality Directions (November 1997). Lodging room demand has historically tracked the national economy. In 1997, the U.S. economy's ongoing expansion has been marked by low inflation and unemployment and, in the northwest states of Idaho, Oregon and Washington, employment and population growth has been above national averages. In addition, according to the Federal Reserve Bank of San Francisco, for the twelve months ended August 1997 the metropolitan areas of Seattle, Washington and Portland, Oregon were the fourth and tenth fastest growing metropolitan economies in the nation, respectively. The northwest region of the United States is expected to continue to achieve above average economic performance and population growth through the year 2000, according to the U.S. Bank 1997 Regional Economic Review and Forecast. GROWTH STRATEGY The Company is presently seeking growth opportunities in markets located throughout the Northwest. The Company will consider the following factors in evaluating acquisitions, conversions and redevelopments, construction of new hotels and expansion of existing hotels: (i) the location of the property, (ii) the construction quality, condition and design of the property, (iii) the current and projected REVPAR, ADR and occupancy of the property and the anticipated ability of the Company to increase REVPAR, ADR and occupancy through management of the property by the Company and (iv) the potential for economic growth in the communities in which the hotels are located. The Company expects that future acquisitions will be based on these factors or such other similar factors or criteria as are 30 established from time to time by the Board. The Company has successfully utilized each of these strategies and, since December 1996, has increased its room count from 1,546 to 2,712. Following the Offering, the Company expects to have improved access to equity and debt financing sources with which to implement its growth strategy. The Company has received a commitment from U.S. Bank which has agreed to provide, upon consummation of the Offering, the Revolving Credit Facility in an amount up to $80.0 million which will be used by the Company to finance property acquisitions, development and capital improvements and for general corporate purposes. As an alternative to debt financing, the Company may issue shares of Common Stock or OP Units as consideration in future acquisitions. The issuance of OP Units in exchange for hotels may allow the current owners of such hotels to achieve certain tax advantages when selling such hotels to the Company. Summarized below are the key elements of the Company's growth strategy: ACQUISITION. The Company is presently seeking to acquire full service hotels in locations where the Company currently operates properties, as well as in new markets where the Company believes the potential exists to acquire hotel properties suitable for conversion to a Cavanaughs brand hotel. Acquisitions are contemplated by the Company when the cost of acquiring an existing hotel property is less than replacement cost or where construction and development opportunities no longer exist in a target market. The Company generally targets for acquisition hotels with certain physical characteristics that guests associate with a Cavanaughs brand hotel, including full service hotels with interior hallways, conference and banquet facilities, restaurants, lounges, recreational amenities and on-site parking. The Company generally focuses on acquiring hotels containing 150 to 400 rooms. The Company re-brands an acquired hotel as soon as practicable after acquisition with the installation of "Cavanaughs" signage and amenities. In addition, as part of its repositioning process, a dedicated management team is made responsible for integrating the acquired hotel into the Company's reservations, information, accounting, budgeting and management systems and, if necessary, upgrading and renovating the hotel. The Company utilizes senior management's knowledge of the Northwest and long- standing relationships with the other hotel owners and operators to identify potential acquisitions. These relationships have enabled the Company to acquire certain of the Hotels before they became generally available for purchase on the open market. Since December 1996, the Company has acquired four Hotels (Cavanaughs Gateway Hotel, Cavanaughs Ridpath Hotel, Cavanaughs on the Falls and Cavanaughs Templin's Resort), containing 823 guest rooms and approximately 43,800 square feet of meeting space. The total purchase and option price of these Hotels was approximately $31.1 million (including a $6.3 million option purchase price payable with respect to Cavanaughs Gateway Hotel which the Company is not required to pay until 2003). This total purchase and option price is comprised of a combination of cash and assumed indebtedness and, in the case of Cavanaughs Ridpath Hotel, a combination of cash and OP Units. In addition, the Company has entered into purchase agreements to acquire two hotels (Cavanaughs Outlaw Hotel and Cavanaughs Hillsboro Hotel) containing 343 guest rooms and approximately 14,500 square feet of meeting space. The total purchase price for these hotels is approximately $15.5 million. CONVERSION. Based on management's experience in developing hotel, retail and office properties, the Company believes that it has the ability to convert non- hotel properties, such as office buildings, into full service hotels. In completing the conversion process, the Company uses an in-house design and development staff, combined with third-party architectural and construction expertise. The Company believes that this in-house capability allows certain conversion opportunities to be economically feasible for the Company and at a cost advantage in comparison to its competitors. The Company intends to target conversion opportunities in markets that do not have hotel properties suitable for acquisition or where acquisition and conversion of a non-hotel property offers significant cost saving advantages as compared to new construction. The Company recently completed the conversion of a non-hotel property into the Cavanaughs on Fifth Avenue, a full service hotel located in Seattle's central business and retail district. Prior to its conversion to a Cavanaughs brand hotel, the property was used by U.S. Bank of Washington as its regional headquarters. The Company acquired the property in June 1995 for approximately $18.3 million and in less than eleven months completed the design, zoning, permitting and construction required to convert the building into a 297-room, full service Cavanaughs brand hotel, containing two restaurants and 12,500 square feet of banquet and meeting space. The total conversion cost, including 31 acquisition costs, was approximately $36.8 million. The Hotel, which opened in May 1996, achieved average REVPAR of $73.55, ADR of $116.24 and occupancy of 64.9% during the Company's fiscal year ended October 31, 1997. The Company believes the Hotel has not yet reached stabilized operating performance. CONSTRUCTION. The Company intends to construct new hotels when it believes room demand and local ADR will support the cost of new construction, a well positioned building site is available and no viable acquisition or conversion opportunities exist. EXPANSION. As part of its growth strategy, the Company seeks to acquire hotel properties with sufficient excess land to allow for potential future expansion. The Company's current hotel portfolio includes seven Hotels which the Company believes can be expanded to include additional hotel rooms and meeting space. The Company's expansion criteria focuses on the demand for additional rooms in a given area, the costs related to such expansion and the potential return on investment to the Company. Through the use of its in-house development staff, in most cases, an expansion is completed within one year from the beginning of construction, with little or no disruption of existing hotel operations. Expansion of an existing Hotel allows the Company to obtain economies of scale in operating the Hotels and increase operating margins because it can leverage existing staff resources, common areas, restaurants and meeting facilities and guest amenities, such as pools and fitness facilities. OPERATING STRATEGY The Company's operating strategy focuses on increasing REVPAR, ADR and occupancy and improving operating efficiencies at the Hotels. Summarized below are the key elements of the Company's operating strategy: UTILIZATION OF PROPRIETARY CAVANAUGHS(TM) BRAND. The Company is focused on enhancing its Cavanaughs brand name, which is synonymous with quality and value throughout the Northwest, thereby earning the loyalty and repeat patronage of business and leisure travelers. By owning its own proprietary brand, the Company both retains control over the Hotels and avoids certain operating or marketing restrictions that a competitor might face being affiliated with a third-party brand or franchise. The Company believes that the Cavanaughs brand name provides it with a competitive advantage in its operating profitability over competitors that do not own a hotel brand and are required to pay third-party franchise fees which typically can range from 6% to 10% of revenue. As a result of owning its own Cavanaughs brand name, the Company has the flexibility to freely market as well as cross-sell hotel rooms with any of its other marketing efforts or promotions, such as ticketing events or promotional campaigns. These cross- marketing efforts also serve to strengthen the Cavanaughs brand name. The Company will use the Cavanaughs brand name on its newly acquired, converted and developed hotels in order to maximize the long-term value of each of its hotels. SALES AND MARKETING. The Company develops sales and marketing programs that target key segments of the hotel user market, including convention, corporate, government, tour and travel, team, education, promotion, leisure, transient and contract. Members of the Company's centrally located sales and marketing department are assigned to each market segment in which the Company operates and are responsible for communicating with hotel personnel in those markets regarding the specific hotel needs of such hotel's guests. In addition, each Hotel has (or shares with an adjacent Cavanaugh's Hotel) sales and banquet and catering personnel responsible for promoting that property as well as personnel responsible for the creation of promotional packages designed to attract individual guests. As a result of the corporate level and hotel level marketing efforts, the Company believes that it is able to more effectively meet customers' needs and enhance loyalty. The Company also expects that its corporate level marketing program will allow it to more easily direct those customers to other Cavanaughs brand Hotels located throughout the Northwest as their hospitality needs require. OPERATING EFFICIENCIES. As a result of owning and operating a portfolio of hotels, the Company is able to achieve operating efficiencies and economies of scale. By operating more than one hotel in a specific market, the Company believes that it can better manage its occupancy levels, match customer needs with a greater variety of price-points, locations and amenities and achieve economies of scale. For example, during periods when one of the Hotels is fully booked, customers can be accommodated at one of the Company's other Hotels, capturing what would otherwise be lost occupancy. Additionally, the Company is able to reduce costs through the allocation of fixed costs over a greater number of rooms. Regional management staff oversees the operations of all Hotels and certain departments, such as 32 accounting and sales, and operates in these regions with reduced independent staffs through shared accounting and sales personnel with the Company's corporate headquarters. The Company utilizes centralized control for the purchase of property, casualty and liability insurance policies, telephone and cable contracts as well as other goods and services. CONTROL OVER HOTEL OPERATIONS. The Company believes that it is able to effectively manage the relationship between occupancy and ADR of the Hotels through the delegation of authority to the general manager of each Hotel. The Company continuously invests in the development of its yield management and proprietary information reporting systems that enable general managers to analyze daily Hotel performance statistics and to use this information to adjust pricing, staffing and customer mix in an effort to maximize their Hotel's REVPAR. In addition, management believes that the use of centralized systems and regional support services allow general managers to control costs, allocate resources efficiently and maintain consistently high product quality and services. POLICY OF REINVESTMENT. It is the Company's policy to continuously reinvest capital in the Hotels in order to maintain their quality. The Company allocates 4.0% of each Hotel's prior year's gross revenues for reinvestment in the Hotels. During 1997, the Company reinvested approximately $5.0 million for renovation of rooms and related Hotel facilities. The Company's reinvestment program is designed to maintain attractive accommodations, common areas, update restaurants, lounges and meeting and banquet space and to modernize equipment. The Company believes that its reinvestment program helps to enhance the Company's competitive position and the value of the Hotels. EMPHASIS ON FOOD AND BEVERAGE SERVICES. The Company emphasizes its food and beverage operations (restaurant and lounge, room service, banquet facilities and catering) in an effort to strengthen its group and convention business as well as to establish a positive reputation among its local clientele. The restaurant and catering business serves to establish each Hotel's reputation and name recognition in their respective markets. In order to ensure consistency of food and beverage service throughout the Hotels, a new menu and customer marketing program, Northwest Signatures, has been introduced to all of the Hotels. GUEST BENEFIT PROGRAMS. The Company has established several incentive programs to encourage and reward repeat visits by guests at the Hotels. The incentive programs include: (i) Cavanaughs Constant Traveler and Cavanaughs Gold Club, a corporate rate and amenity program, (ii) Cavanaughs Cash, a frequent use program and (iii) participation in Alaska Airlines/Horizon Air Mileage Plan, a frequent flyer program. The Company uses the information gained through guest participation in its incentive programs to design direct mailing and other promotional programs to attract repeat use of the Hotels. MAINTAINING A UNIQUE MANAGEMENT CULTURE. The Company has developed a team of managers which has the expertise, authority and incentive to execute a plan for each Hotel that is designed to increase operating profitability. Members of the Company's senior management team have been with the Company on average for more than 17 years. The Company's management encourages employee loyalty and longevity through a number of employee programs that enhance productivity and align employees' interests with those of the shareholders. Significant programs include (i) employee stock option and stock purchase plans which are available to all hourly and salaried employees through payroll deduction and 401(k) programs, (ii) employee bonus plans that target, where possible, all management level employees to have a significant portion of their annual compensation from profits generated through their departments thereby encouraging significant business decision making among all levels of employees and (iii) continuing education programs that encourage expanded learning with Company sponsored tuition programs tied to length of service. In addition, the Company sponsors a not-for-profit day-care program at the Company's headquarters. SALES AND MARKETING The Company's hotel sales and marketing approach includes the following components: CENTRALIZED SALES MANAGEMENT. In order to serve customers' lodging needs, the Company's sales department is centrally organized according to expertise and relationships in each of the following market segments: corporate, convention, government, tour and travel, education, team, transient, contract, and promotion/leisure. The sales department works with each Hotel to ensure that sufficient hotel product is available to accommodate each group, guest or event in the particular Hotel which best serves the lodging needs of such group, guest or event. In addition, each 33 Hotel has (or shares with adjacent Cavanaughs Hotels) sales and banquet and catering personnel promoting that Hotel to ensure that such Hotel's local individual and corporate customers are served. The Company's sales and marketing department includes personnel located at its headquarters as well as sales and marketing personnel located at each of the Hotels. Sales and marketing personnel residing at the Company's headquarters are in charge of major national and regional accounts and promotional campaigns. The Company utilizes media in the Northwest including television, radio, newspaper, in-flight magazines, business publications, and billboards, to market the Hotels. ATTENTION TO CUSTOMER SERVICE. The Company places significant value on meeting the changing needs of its customers by employing state-of-the-art technology to track customer preferences and actively measuring guest satisfaction through surveys which enables it to reinvest in those services and amenities which are most appreciated. IN-HOUSE ADVERTISING SERVICES. The Company believes that its in-house advertising and promotional departments allows it to take advantage of hotel room sales opportunities by generating promotional campaigns more quickly than its competitors. Through its internal advertising agency, the Company can purchase media at lower all-inclusive costs than its competitors who must out- source these functions. RESERVATION SYSTEMS. The Company's Toll-Free Call Center is designed to provide integrated hotel, entertainment information and reservation services. The Toll-Free Call Center has the capacity to accommodate 48 simultaneous calls and provides access to standardized reservation systems utilized by travel agents worldwide to book hotel rooms. The Toll-Free Call Center is open 24 hours per day, seven days per week. The Toll-Free Call Center also maintains a database of information on over 200,000 repeat customers. Both hotel reservations and event ticketing requests can also be made through the Company's website address: www.cavanaughs.com. PROMOTIONAL PROGRAMS. The Company utilizes its own and affiliated incentive programs to attract additional customers. The Company's Cavanaughs Cash program enables participants to enjoy guest room savings by accumulating Cavanaughs Cash coupons. In addition, the Company participates in the Alaska Airlines/Horizon Air Mileage Plan Program. Alaska Airlines/Horizon Air is the dominant air service provider in the northwest United States, serving approximately 77 airports in the United States and 13 additional airports in Canada, Mexico and Russia. During 1996 Alaska Air/Horizon Air carried 11.8 million passengers. Guests of the Hotels who pay qualifying rates earn mileage credits for each stay, redeemable for air travel and other airline benefits. The Company and Alaska Airlines/Horizon Air have committed to jointly market property-specific programs that benefit the customers of both companies. 34 HOTEL PROPERTIES The Company's hotel portfolio currently contains 11 full service Hotels, with 2,369 guest rooms and approximately 120,000 square feet of meeting space, located in the Northwest. In addition, the Company has entered into purchase agreements to acquire two additional full service hotels. The following table sets forth certain information regarding the Company's hotel portfolio and hotels under contract.
YEAR ENDED OCTOBER 31, 1997 MEETING ------------------------------ YEAR BUILT/ YEAR GUEST SPACE AVERAGE LOCATION ACQUIRED RENOVATED ROOMS (SQ. FT.) REVPAR ADR OCCUPANCY ------------- --------- --------- ------- --------- -------- ------- ---------- Hotels Owned as of October 31, 1997: Cavanaughs on Fifth Avenue Seattle, WA 1996 1996 297 12,500 $73.55 $116.24 64.9% Cavanaughs Inn at the Park Spokane, WA 1983 1997 402 26,300 48.61 80.90 61.1 Cavanaughs River Inn Spokane, WA 1976 1997 245 3,700 40.17 53.01 74.2 Cavanaughs Fourth Avenue Spokane, WA 1991 1997 153 2,600 23.63 48.33 51.7 Cavanaughs at Yakima Center Yakima, WA 1991 1997 155 11,000 37.13 55.98 63.3 Cavanaughs Gateway Hotel Yakima, WA 1997 (1) 1997 172 8,000 34.16 58.96 57.9 Cavanaughs at Columbia Center Kennewick, WA 1978 1997 162 9,700 31.15 55.86 58.9 Cavanaughs at Kalispell Center Kalispell, MT 1986 1997 132 10,500 36.89 59.30 63.2 ------ ------- ------ ------- ---- Total/Weighted Average for Owned Hotels (2) 1,718 84,300 $45.72 $73.43 63.0%
Hotels Acquired since October 31, 1997: Cavanaughs Ridpath Hotel Spokane, WA 1998(3) 1996 342 16,000 $33.49 $58.43 57.3% Cavanaughs on the Falls Idaho Falls, ID 1998(4) 1994 142 8,800 34.49 57.38 60.1 Cavanaughs Templins Resort Post Falls, ID 1998(5) 1996 167 11,000 36.45 62.65 58.2
Hotels Currently Under Contract: Cavanaughs Outlaw Hotel Kalispell, MT 1998(6) 1995 220 11,000 $29.88 $68.88 43.4% Cavanaughs Hillsboro Hotel Portland, OR 1998(7) 1997 123 3,500 50.13 72.38 69.3 ------ ------- ------- ------- ---- Total/Weighted Average for Hotels Acquired or Under Contract Since October 31, 1997 994 134,600 $35.40 $62.99 56.2% Total/Weighted Average for All Hotels 2,712 218,900 $39.09 $65.40 59.8% - -----------------------------------------------
(1) Leased by the Company on October 15, 1997. See "Business and Properties -- Hotel Properties." (2) The total/weighted average for owned Hotels includes REVPAR, ADR and average occupancy of Cavanaughs Gateway Hotel for the period from October 15, 1997 through October 31, 1997. (3) Leased by the Company on January 1, 1998. See "Business and Properties -- Hotel Properties." (4) Acquired by the Company on January 7, 1998. (5) Expected to be acquired by the Company in February 1998. (6) The Company has entered into a purchase agreement to acquire this hotel, subject to the satisfaction of normal closing conditions, for a purchase price of $9.9 million within 60 days of the closing of the Offering. This hotel, which is currently known as the Outlaw Inn, will be re-branded as the "Cavanaughs Outlaw Hotel" upon acquisition. (7) The Company has entered into a purchase agreement to acquire this hotel, subject to the satisfaction of normal closing conditions, for a purchase price of $5.7 million. This hotel, currently known as the Hallmark Inn, will be re-branded as the "Cavanaughs Hillsboro Hotel" upon acquisition. Cavanaughs on Fifth Avenue - Seattle, Washington. Formerly the regional headquarters for U.S. Bank of Washington, the 20-story property was acquired by the Company in June 1995 and, in eleven months, converted into a 297-room, full service hotel which opened in May 1996. The Hotel is located in the central business district of Seattle, and is two blocks from the Washington State Convention Center. Amenities include two restaurants, a lounge, business center, fitness center and 12,500 square feet of meeting and banquet space which can be divided into six separate meeting rooms. The Hotel also includes 14,300 square feet of retail space and 25,000 square feet of office space. The retail and office space is 100% leased. 35 Cavanaughs Inn at the Park - Spokane, Washington. Developed by the Company in 1983 and expanded in 1986 and 1993, the property is a 402-room, full service hotel located along the banks of the Spokane River in Spokane, Washington, the cultural, entertainment and sports center for the region. The Hotel is adjacent to the 100 acre Riverfront Park, near the 80,000 square foot Spokane Convention Center and 2,600-seat Opera House and is two blocks from the central business district and one block from the 12,000-seat Spokane Arena. The Hotel is comprised of three guest room wings: the five story Main Wing containing 181 rooms, the seven story Executive Wing containing 85 rooms, and the 12-story Tower Wing containing 136 rooms. Amenities include two restaurants, two lounges, two outdoor pools, one indoor lap pool, fitness center, sauna, two whirlpools, and gift shop. The Hotel, which is the largest hotel conference facility in the region, offers approximately 26,300 square feet of meeting and banquet space which can be divided into separate meeting rooms. The property contains approximately 2.1 acres of excess land which could be reallocated for parking and enable the Company to develop an estimated 336 additional guest rooms on its primary site in the future, if market conditions warrant. Cavanaughs River Inn - Spokane, Washington. Developed by the Company in 1976, the property is a two-story, 245-room, full-service hotel located on the banks of the Spokane River along the 40 mile long Centennial Trail pedestrian walk. Amenities include two outdoor pools, tennis court, sauna and whirlpool, gift shop, and a 2,800 square foot ballroom divisible into two meeting rooms. The Hotel also has two additional meeting rooms totaling 900 square feet. The property contains approximately 0.5 acre of excess land upon which, if some of the Hotel's parking requirements were allocated to a parking lot controlled by Cavanaughs Inn at the Park, an estimated 168 additional guest rooms in a high- rise tower may be built in the future, if market conditions warrant. Cavanaughs Fourth Avenue - Spokane, Washington. Acquired by the Company in 1991 and re-branded as a Cavanaughs hotel, the property is a six story, 153-room full service hotel located in the center of Spokane's medical community, adjacent to four hospitals, numerous public and private clinics and rehabilitation centers. Amenities include a restaurant and lounge, an outdoor pool and 2,600 square feet of meeting and banquet space divisible into four meeting rooms. This Hotel is owned by a limited partnership of which the Company is a 50% owner and general partner and an unaffiliated person is the sole limited partner. Cavanaughs Ridpath Hotel - Spokane, Washington. Acquired by the Company in January 1998 and re-branded as a Cavanaughs hotel, the property is a 13-story, 342-room, full service hotel located in the Spokane central business district and is four blocks from the Spokane Convention Center and Opera House. Amenities include two restaurants, two lounges, an outdoor pool, fitness center and approximately 12,700 square feet of retail space which is leased to seven tenants. As of January 1998, the retail space was 80% leased. The Hotel offers approximately 16,000 square feet of meeting banquet space divisible into 14 meeting rooms. The Hotel is held by the Company pursuant to a lease which expires in November 1999, and provides the Company with a purchase option, and the lessor with a put option, exercisable during the term, to acquire the Hotel from the lessor for an amount ranging from $11.5 million to $12.5 million, depending on the date of exercise. Cavanaughs at Yakima Center - Yakima, Washington. Acquired by the Company in 1991 and re-branded as a Cavanaughs hotel, the property is a two-story, 155- room, full service hotel located in the center of Yakima's central business district and is attached to the Yakima Convention Center by a covered walkway. Yakima is located in the center of the state of Washington and has a diverse agricultural, industrial and manufacturing base. The Hotel is comprised of four buildings: the two-story Corporate Building, the two-story Garden Building, the two-story free standing Townhouse Building and the two-story, free standing Main Building. Amenities include a restaurant, lounge, two outdoor pools, and business center. The Hotel offers approximately 11,000 square feet of meeting and banquet space which can be divided into nine separate meeting rooms and is often used for convention center overflow. The property contains approximately 0.3 acres of excess land that could be used to facilitate the addition of an estimated 80 guest rooms, if market conditions warrant. Cavanaughs Gateway Hotel - Yakima, Washington. Acquired by the Company in October 1997 and re-branded as a Cavanaughs Gateway Hotel, the property is a three-story, 172-room full service hotel located adjacent to the Yakima Convention Center and across the street from the Company's Cavanaughs at Yakima Center Hotel. Amenities include a restaurant, lounge, outdoor pool and jacuzzi. The property offers approximately 8,000 square feet of meeting space which is divisible into ten meeting rooms and is often used for convention center overflow. The Hotel is held by 36 the Company pursuant to a lease which expires in October 2112, subject to the Company's right to extend the term of the lease for two additional five-year periods, and provides the Company with a purchase option, exercisable in 2003, to acquire the Hotel from the lessor for $6.3 million. Cavanaughs at Columbia Center - Kennewick, Washington. Developed by the Company in 1978, the property is a two-story, 162-room full service hotel located across the street from the five anchor, 90-store Columbia Center Mall and a 6,000 seat arena. Amenities include a restaurant, lounge, outdoor pool and gift shop. The Hotel offers 9,700 square feet of meeting and banquet space which is divisible into nine meeting rooms. The property contains approximately 4.0 acres of excess land upon which an estimated 144 additional guest rooms in a three-story structure, together with an estimated 50,000 square feet of retail facilities may be built in the future, if market conditions warrant. Cavanaughs on the Falls - Idaho Falls, Idaho. Acquired by the Company in January 1998 and re-branded as a Cavanaughs hotel, the property is an eight- story, 142-room full service hotel located in downtown Idaho Falls overlooking the falls on the Snake River. Amenities include a restaurant, lounge, an outdoor pool, sauna, spa and fitness center. The Hotel offers 8,800 square feet of meeting and banquet space which is divisible into eight meeting rooms. The property underwent major renovations in 1993 and 1994. The property includes a 13,300 square foot building which could be demolished and re-built into an estimated 30 additional guest rooms in the future, if market conditions warrant. Cavanaughs Templins Resort - Post Falls, Idaho. The property will be acquired by the Company in February 1998 and re-branded as a Cavanaughs hotel. The property is a three-story, 167-room full service hotel which was built in three phases between 1986 and 1996. The Hotel, which is located on the Spokane River, has a 76 slip marina offering boating access to Lake Coeur d'Alene, a popular vacation destination. Amenities include two restaurants, lounge, indoor pool, sauna, spa, fitness center, two tennis courts, and private beach and swim area. The Hotel offers 11,000 square feet of meeting space which is divisible into 14 meeting rooms. The property contains approximately 10.5 acres of excess land upon which an estimated 288 additional guest rooms in a series of low-rise buildings, together with an estimated 10,000 square foot executive conference center and 20,000 square foot retail facilities, may be built in the future, if market conditions warrant. Cavanaughs at Kalispell Center - Kalispell, Montana. Developed by the Company in 1986 in conjunction with the Company's development of the Kalispell Center Mall, the property is a three-story, 132-room full service hotel located near Glacier National Park, Flathead Lake and Big Mountain Ski Resort. Amenities include a restaurant, lounge, indoor pool, whirlpool, sauna and fitness center. The Hotel offers 10,500 square feet of meeting and banquet space which is divisible into nine meeting rooms. The Hotel is connected to the Company's Kalispell Center Mall. The property contains approximately 3.5 acres of excess land upon which an estimated 48 additional guest rooms and 100,000 square feet of additional retail space may be built in the future, if market conditions warrant. Cavanaughs Outlaw Hotel - Kalispell, Montana. The property, which the Company intends to acquire for a purchase price of $9.9 million within 60 days of the closing of the Offering, is a two-story, 220-room full service hotel and is the largest full service hotel in northwest Montana. Amenities include a restaurant, lounge, two indoor pools, four whirlpools, sauna, tennis and racquetball courts, and fitness center. The hotel offers approximately 11,000 square feet of meeting and banquet space divisible into 13 meeting rooms. Cavanaughs Hillsboro Hotel. The property, which the Company intends to acquire for a purchase price of $5.7 million, is a two-story, 123-room full service hotel located in the suburban Portland metropolitan area. The hotel is adjacent to the Portland/Hillsboro Airport, Washington County Fairplex and in the heart of the Silicon Forest, Oregon's premier high-tech business area. Amenities include a restaurant, lounge, outdoor pool, indoor spa and fitness center. The hotel offers 3,500 square feet of meeting and banquet space divisable into five meeting rooms. The property contains excess land upon which an estimated 70 additional guest rooms may be built, if market conditions warrant. ENTERTAINMENT SERVICES AND THIRD-PARTY PROPERTY MANAGEMENT The entertainment, management and services division of the Company is comprised of: (i) G&B Select-a-Seat, a full service theatrical and event ticketing agency, (ii) G&B Presents, a promoter of touring Broadway shows and other 37 special events, and (iii) G&B Real Estate Services, a third-party property management service. Reservations for entertainment events and hotel information and reservations are made through the Toll-Free Call Center. The combination of event ticketing, presentation of Broadway shows, hotel event packages and a centralized reservations systems enables the Company to offer packages for hotel guests, generating additional room night occupancy and income from ticket distribution service fees. G&B SELECT-A-SEAT. G&B Select-a-Seat, established in 1987, is a full service ticketing agency offering box office ticket distribution through 20 regional outlets and box offices in Washington, Idaho and Montana. G&B Select- a-Seat is the exclusive contracted ticket services vendor for certain facilities in these states, including the Spokane Arena, Spokane Opera House, Spokane Symphony, Washington State University's stadium and coliseum, Eastern Washington University and the University of Idaho. During its fiscal year ended October 31, 1997, the Company distributed in excess of 2.0 million tickets. G&B Select- a-Seat uses state of the art software which enables the agency to access the many entertainment events being presented throughout the Northwest. Phone agents are able to coordinate the sales of entertainment and event tickets with guests making hotel room reservations and vice versa. The Company is actively seeking additional ticket distribution opportunities in the Northwest. G&B PRESENTS. G&B Presents, established in 1987, is one of the largest regional presenters of events in the Washington area. In addition to special events, such as sporting events and musical acts, G&B Presents organizes the presentation of touring Broadway shows in Spokane as part of its "Best of Broadway" series. During 1997, the Company presented nine Broadway shows and special events. Past events have included shows such as Cats, South Pacific and Les Miserables. In its last ten years of operation the Company has attracted over 500,000 patrons to its 79 Broadway and special event shows. The Company cross-markets these productions by creating special event/Hotel packages. THE TOLL-FREE CALL CENTER. The Toll-Free Call Center is designed to provide centralized hotel and entertainment information and reservation services. Each agent is trained to cross-sell Hotel reservations, event tickets, and special event/Hotel packages. Guests that are traveling to see entertainment events are able to book their hotel room and confirm event tickets in one toll-free call. The Toll-Free Call Center is open 24 hours per day, seven days a week and has the capacity to accept as many as 48 simultaneous phone conversations and provides access to reservations systems used by travel agents world-wide to book hotel rooms. The Toll-Free Call Center also maintains a database which gives reservation agents information on current room and event availability, guest information, history and preferences. Event ticket requests and hotel reservations can be made by calling the Toll-Free Call Center at 1- 800-325-4000 and via the Company's website address at www.cavanaughs.com. G&B REAL ESTATE SERVICES. The Company is a leading property manager of office, retail and residential space in regions of eastern Washington, northern Idaho and western Montana, with over 3.1 million square feet of commercial space under management. The Company's property management staff includes leasing agents, property managers and building engineers providing full-service commercial property management. The Company's residential property management department manages approximately 2,200 residential units in 39 properties. The Company is experienced in the management of a full range of multi-family projects, including low income housing, retirement communities, market rate apartment properties and condominiums. RENTAL OPERATIONS The Company is the owner and manager of approximately 590,000 square feet of leasable office and retail space located in Spokane, Washington and Kalispell, Montana. The following is a description of each of the Company's office and retail properties: Crescent Court - Spokane, Washington. Acquired and substantially re- developed by the Company in 1994, the property is an eight-story, 234,000 square foot mixed-use commercial building comprised of approximately 59,000 square feet of leasable retail space, including a food court, 157,000 square feet of leasable office space and an 8,000 square foot lower level exhibition hall, located in Spokane's central business district. The property is located directly across the street from River Park Square, a $100 million redevelopment project which, when completed in 1999, is expected to include a 130,000 square foot Nordstrom's department store, a number of speciality retailers, a 20 screen 38 AMC multiplex cinema and 300,000 square feet of additional retail and restaurant space. As of December 1997, the retail portion of the property was 63.3% leased to 19 tenants and the office portion of the property was 77.4% leased to four tenants including the Bonneville Power Administration, the U.S. Postal Service regional headquarters, Sallie Mae and The Travelers Group which has an option to lease an additional floor in the building effective December 1999. The Company has determined to retain 22,000 square feet of retail space in the project for future development and leasing pending completion of the River Park Square project. Lincoln Building - Spokane, Washington. Acquired by the Company in 1984, the property is a 114,000 square foot mixed-use commercial building comprised of approximately 32,000 square feet of retail space, 82,000 square feet of office space, and two floors of underground parking which can accommodate 200 automobiles. The building is located in Spokane's central business district, one block west of the Company's Crescent Court property and one block south of River Park Square. As of December 1997, the retail portion of the property was 66.8% leased to six tenants, including Pacific Northwest Life and Farmers and Merchants Bank. The office tower was 88.4% leased to 25 tenants, including New York Life Insurance and Equitable of Iowa. The Company has determined to retain 26,000 square feet of retail space for future development and leasing pending completion of the River Park Square project. CHC Building - Spokane, Washington. Developed by the Company in 1986, the property is a six-story, 100,000 square foot office building having an attached three-story parking deck which can accommodate 250 automobiles. The building is located on the north bank of the Spokane River, adjacent to Cavanaughs Inn at the Park. As of December 1997, the property was 100% leased to 23 tenants including the Company, Morgan Stanley Dean Witter Discover, and Avista Energy. Kalispell Center Mall - Kalispell, Montana. Developed by the Company in 1986 in conjunction with the Company's development of the Cavanaughs at Kalispell Center hotel, the property is a single level enclosed regional mall shopping center containing 163,000 square feet of gross leasable area. As of December 1997, the property was 98% leased to 46 tenants including J.C. Penney and Herbergers. The property is connected to the Cavanaughs at Kalispell Center hotel. MANAGEMENT AND EMPLOYEES The Company employs approximately 1,900 persons. Employees at Cavanaughs Ridpath Hotel currently are represented by labor unions. Management believes its ongoing labor relations are good. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising in the normal course of business. The Company believes that the ultimate outcome of these lawsuits will not have a material adverse effect on the Company. TRADEMARKS "Cavanaugh's(R)" is a registered trademark of the Company in the United States. The Company has filed an application to register "Cavanaughs" as an additional trademark in the United States and Canada. 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information as of January 16, 1998 regarding the Company's directors and executive officers.
NAME AGE POSITION - ---- --- -------- Donald K. Barbieri 52 Chairman, President and Chief Executive Officer Arthur M. Coffey 42 Executive Vice President, Chief Financial Officer and Director Richard L. Barbieri 55 Senior Vice President, General Counsel and Director Thomas M. Barbieri 40 Senior Vice President - Acquisitions and Commercial Operations and Director David M. Bell 47 Senior Vice President - Project Design, Development and Construction Lori L. Farnell 42 Vice President - Sales and Marketing John M. Taffin 34 Vice President - Hotel Operations Peter F. Stanton 41 Proposed Director Ronald R. Taylor 50 Proposed Director Robert G. Templin 74 Proposed Director
Donald K. Barbieri has been President and Chief Executive Officer and a Director of the Company since 1978 and Chairman of the Board since 1996. Mr. Barbieri joined the Company in 1969 and is responsible for the Company's development activities in commercial, residential, hotels and entertainment areas. Mr. Barbieri served as president of the Spokane Chapter of the Building Owners and Managers Association from 1974 to 1975 and served as president of the Spokane Regional Convention and Visitors Bureau from 1977 to 1979. He also served on the Washington Tourism Development Council from 1983 to 1985 and the Washington Economic Development Board while chairing the State of Washington's Quality of Life Task Force from 1985 to 1989. Mr. Barbieri is the brother of Richard and Thomas Barbieri and the brother-in-law of David Bell. Arthur M. Coffey has been Chief Financial Officer and Executive Vice President of the Company since June 1997 and a Director of the Company since 1990. Mr. Coffey served as Chief Operating Officer of the Company from 1990 to June 1997. Mr. Coffey has been in the hotel business since 1971 and joined the Company in 1981. Mr. Coffey is currently a trustee of the Spokane Area Chamber of Commerce, served as a director of the Washington State Hotel Association from 1996 to 1997, served as director of the Spokane Regional Convention and Visitors Bureau from 1982 to 1985 and served as president of the Spokane Hotel Association from 1989 to 1990. Richard L. Barbieri has been a Senior Vice President of the Company since September 1997, full-time General Counsel of the Company since 1995 and a Director of the Company since 1978. From 1994 to 1997, Mr. Barbieri served as a Vice President of the Company. From 1978 to 1995, Mr. Barbieri served as outside counsel and Secretary of the Company, during which time he was engaged in the practice of law at Edwards and Barbieri, a Seattle law firm, and then at Riddell Williams Bullitt and Walkinsaw, a Seattle law firm, where he headed the real estate practice group. Mr. Barbieri has also served as chairman of various committees of the State and County Bar Association and as a 40 member of the governing board of the County Bar Association. He also served as vice chairman of the Citizens' Advisory Committee to the Major League Baseball Stadium Public Facilities District in Seattle in 1996 and 1997. Mr. Barbieri is the brother of Donald and Thomas Barbieri and the brother-in-law of David Bell. Thomas M. Barbieri has been Senior Vice President - Acquisitions and Commercial Operations of the Company since September 1997 and a Director of the Company since 1985. From 1985 to 1997, Mr. Barbieri served as a Vice President of the Company. Mr. Barbieri joined the Company in 1979 and from 1987 to the present has overseen the management, supervision, and development of the Company's real estate portfolio. From 1982 to 1987, Mr. Barbieri was Operations Manager of the Company's hospitality division. From 1979 to 1981, Mr. Barbieri was the General Manager of Cavanaughs River Inn. He served on Washington State Governor Lowery's Real Estate Advisory Council from 1993 to 1994, as a president of the Downtown Spokane Association from 1992 to 1994, as a director of the Spokane Convention and Visitors Bureau from 1983 to 1987, as a trustee of the Spokane Area Chamber of Commerce from 1987 to 1991 and as a director of the Spokane Economic Development Council from 1991 to 1996. Mr. Barbieri is the brother of Donald and Richard Barbieri and the brother-in-law of David Bell. David M. Bell has been Senior Vice President - Project Design, Development and Construction of the Company since September 1997 and a Director of the Company since 1985. From 1985 to 1997, Mr. Bell served as Vice President of the Company. He is in charge of new project development, property renovations and major building construction. Since joining the Company in 1984, Mr. Bell has been responsible for numerous projects, including the development of the CHC Building, the Cavanaughs at Kalispell Center hotel and the Kalispell Center Mall, two major room tower additions to Cavanaughs Inn at the Park and the conversion of the U.S. Bank of Washington office building in Seattle into Cavanaughs on Fifth Avenue. Mr. Bell is a registered Professional Engineer. Mr. Bell is the brother-in-law of Donald, Richard and Thomas Barbieri. Lori L. Farnell has been the Vice President - Sales and Marketing since October 1993. Ms. Farnell joined the Company in 1981 as Director of Sales for the hospitality division. Ms. Farnell is responsible for directing the sales and marketing activities of the Company and the in-house advertising and art department. Prior to joining the Company, Ms. Farnell worked as Director of Sales for the Spokane Davenport Hotel. She is a member of the Eastern Washington University Foundation Board, the Sacred Heart Hospital Ambassadors Board, a past President and Woman of the Year of Executive Women International and an active member of the Washington Society of Association Executives and the National Tour Association. John M. Taffin has been Vice President - Hotel Operations since September 1997. Mr. Taffin is responsible for the Company's overall hotel operations and directs the Company's yield management strategy. Mr. Taffin joined the Company's hospitality division in November 1995 as a regional manager. Mr. Taffin's prior lodging experience includes 13 years of service with Red Lion Hotels, during which time he was a general manager of various full service hotels throughout the Northwest. Prior to September 1997, Mr. Taffin was responsible for all aspects of operations for the Hotels located in Spokane. Mr. Taffin directs the Company's yield management strategy. Peter F. Stanton has agreed to become a Director of the Company upon consummation of the Offering. Mr. Stanton is the Chairman, Chief Executive Officer and President of Washington Trust Bank. Mr. Stanton has been with Washington Trust Bank since 1982 and has served as its President since 1990, Chief Executive Officer since 1993 and Chairman since 1997. Mr. Stanton is also Chief Executive Officer, President and a director of W.T.B. Financial Corporation (a bank holding company) and a director of Northern State Bank and Reardon and Rivard & Associates (a registered investment advisor). In addition to serving on numerous civic boards, Mr. Stanton was president of the Washington Bankers Association from 1995 to 1996 and serves as state chairman of the American Bankers Association for 1997 and 1998. Ronald R. Taylor has agreed to become a Director of the Company upon consummation of the Offering. From 1996 to the present, Mr. Taylor has worked as an independent business consultant. From 1987 to 1996, Mr. Taylor was chairman, president and chief financial officer of Pyxis Corporation (a health care services provider). He is currently a director of Watson Pharmaceuticals, Inc. (a pharmaceutical manufacturer), Allelix Biopharmaceuticals (a biotechnology company) and Cardio Dynamics (a medical device manufacturer). 41 Robert G. Templin has agreed to become a Director of the Company upon consummation of the Offering. Mr. Templin has had 50 years of continuous experience in ownership, acquisition and disposition, transaction counseling, development, construction and management work in the lodging industry in the Northwest. From 1962 to 1983, he was Chief Executive Officer of Western Frontiers, a hotel operator. Since 1986, Mr. Templin has served as governor for District II for Best Western, Inc. In 1986, he built Templin's Resort and Conference Center. He served as president of the Idaho Inn Keepers Association from 1975 to 1976 and president of the Coeur d'Alene Chamber of Commerce in 1963. Mr. Templin also served on the Government Affairs Committee of Holiday Inn, Inc. from 1981 to 1982. In addition to his responsibilities as a Director of the Company, Mr. Templin will be asked to represent the Company on the board of the Idaho Travel Council. COMMITTEES OF THE BOARD OF DIRECTORS Audit Committee. Promptly following the closing of the Offering, the Board will establish an audit committee consisting of Peter Stanton and Ronald Taylor (the "Audit Committee"). The Audit Committee will be responsible for making recommendations concerning the engagement of the Company's independent public accountants, reviewing with the independent public accountants the plans and results of the audit engagement, approving professional services provided by the independent public accountants, reviewing the independence of the independent public accountants, considering the range of audit and non-audit fees and reviewing the adequacy of the Company's internal accounting controls. Compensation Committee. Promptly following the closing of the Offering, the Board will establish a compensation committee consisting of Peter Stanton and Ronald Taylor (the "Compensation Committee"). The Compensation Committee will be responsible for determining compensation for the Company's executive officers and administering the Plans. OPERATIONS COMMITTEE The Board has established an operations committee (the "Operations Committee"). The Operations Committee is chaired by Donald Barbieri and consists of Art Coffey, Thomas Barbieri, John Taffin, Lori Farnell, David Barbieri, Stephen Barbieri, David Bell and Jack Lucas. The Operations Committee, which is not a committee of the Board, is responsible for implementing the policies established by the Board and shall be under the direction of the Board. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company expects that the Compensation Committee will consist of Peter Stanton and Ronald Taylor, neither of whom have ever served as an officer of the Company. COMPENSATION OF DIRECTORS The Company intends to pay an annual fee of $6,000 to its non-employee Directors which will be paid 50% in cash and 50% in shares of Common Stock. In addition, each non-employee Director will be paid $500 for attendance at each meeting of the Board and $250 for attendance at each meeting of a committee of the Board of which such Director is a member. Directors who are employees of the Company will not receive any fees for their service on the Board or any committee thereof. In addition, the Company will reimburse Directors for their out-of-pocket expenses incurred in connection with their service on the Board. Upon consummation of the Offering, each non-employee Director will be granted options to purchase 10,000 shares of Common Stock at the initial public offering price. These options will vest in 20% increments over the five-year period following the Offering subject to the accelerated vesting schedule described in "--Restricted Stock and Certain Stock Option Grants." Any non-employee Director who ceases to be a Director will forfeit the right to receive any options not previously vested. 42 EXECUTIVE COMPENSATION The following table sets forth all compensation paid by the Company with respect to the fiscal year ended October 31, 1997 to the Chief Executive Officer and the four most highly compensated executive officers whose total annual compensation from the Company exceeded $100,000. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) --------------------------- ---- ------- -------- ---------------- Donald K. Barbieri 1997 $88,776 $256,037 $7,129 President and Chief Executive Officer Arthur M. Coffey 1997 $76,680 $211,055 $8,799 Executive Vice President and Chief Financial Officer Richard L. Barbieri 1997 $79,572 $ 50,891 $6,544 Senior Vice President and General Counsel David M. Bell 1997 $67,530 $ 36,136 $7,667 Senior Vice President - Project Design, Development and Construction Thomas M. Barbieri 1997 $86,645 $ 46,926 $8,289 Senior Vice President - Acquisitions and Commercial Operations
- ---------------------------- (1) Includes contributions to the Company's 401(k) plan as well as premiums paid with respect to such executive officer's health, disability and life insurance policies. EMPLOYMENT AGREEMENTS The Company intends to enter into employment agreements with each of Donald Barbieri, Arthur Coffey, Richard Barbieri, David Bell and Thomas Barbieri which will provide for annual base salaries of $155,000 in the case of Donald Barbieri, $130,000 in the case of Mr. Coffey, and $96,000 in the case of Richard Barbieri, Mr. Bell and Thomas Barbieri, subject, in each case, to periodic increases. Each executive officer will be eligible to receive annual bonuses as determined by the Compensation Committee and will be entitled to participate in all existing or future benefit plans of the Company, on the same basis as other senior executive officers of the Company. The employment agreements with these senior executive officers (as used below, each an "Executive") will be substantially similar and provide as follows. Each Executive shall serve in the position described above through December 31, 1999, unless terminated earlier in accordance with the terms of such agreement. Thereafter, each agreement will automatically be renewed for additional one-year periods, unless terminated by either party upon 120 days' notice prior to any renewal. Each agreement may be terminated by the Company for Cause (as defined in such agreement) or by the Executive (i) for Good Reason (as defined in such agreement) or (ii) within six months of a Change of Control of the Company (as defined in such agreement). If the Executive terminates the agreement for Good Reason 43 (or the Company terminates the agreement without Cause) or, after the initial term ends, unilaterally determines to not renew such Executive's agreement, the Executive will receive a severance payment equal to two times such Executive's total compensation in the prior year, plus a continuation of all benefits for a two-year period, and all outstanding options of such Executive shall become fully vested. If the Executive terminates the agreement following a Change of Control, the severance payment will be equal to two times such Executive's total compensation for the prior year. The Executive is required to devote his full business time and attention to the business and affairs of the Company, except that he may devote such reasonable amount of time, as he determines, to (i) serving, with the approval of the Board, as a director, trustee or member of any board or committee of any organization, (ii) engaging in charitable and community activities, (iii) managing his personal investments and affairs, and (iv) acting as a director and officer of Inland Northwest Corporation, previously a wholly-owned subsidiary of the Company; provided, however, that such activities may not involve any material conflict of interest with the interests of the Company or interfere materially with the performance of his duties and responsibilities under such agreement. Each Executive is eligible to receive a bonus under Company's management bonus plan or such other plan adopted from time to time. The award and amount of such bonus shall be based upon the Compensation Committee's determination of such Executive's actual performance as measured against established goals. The Company has also agreed to reimburse the Executive for any federal, state or local excise taxes ("Excise Tax"), and any additional taxes to which he may be subject, on any payments to the Executive from the Company as a result of accelerated vesting of his options, up to a maximum reimbursement equal to two times the amount of such Excise Tax. 1998 STOCK INCENTIVE PLAN In January 1998 the Board adopted, and the shareholders of the Company approved, the 1998 Plan to attract and retain officers, key employees and consultants. Additional options may be granted subject to Board approval. An aggregate of 900,000 shares of Common Stock, subject to adjustment for stock splits, stock dividends and similar events, has been authorized for issuance upon exercise of options, stock appreciation rights ("SARs"), and other awards, including restricted or deferred stock awards under the 1998 Plan. Following the Offering, the Compensation Committee will administer the 1998 Plan and determine to whom options, SARs, restricted stock purchase rights and other awards are to be granted and the terms and conditions, including the number of shares and the period of exercisability, thereof. Upon consummation of the Offering, non-employee Directors will be granted options under the 1998 Plan to purchase 10,000 shares of Common Stock, subject to one year restriction on sale and vesting equal percentages over five years. The 1998 Plan authorizes the grant or issuance of various options and other awards. Nonqualified stock options ("NQSOs") may be granted for any term specified by the Compensation Committee and will provide for the right to purchase Common Stock at a specified price which, except with respect to NQSOs intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), may be less than fair market value on the date of grant (but not less than par value), and may become exercisable (at the discretion of the Compensation Committee) in one or more installments after the date of grant. Incentive stock options may be granted only to employees and if granted will be designed to comply with the provisions of the Code and will be subject to restrictions contained in the Code, including having an exercise price equal to at least 100% of fair market value of Common Stock on the grant date and ten year restriction on their term, but may be subsequently modified to disqualify them from treatment as an incentive stock option. The maximum fair market value (determined on the date of grant) of shares which may be issued pursuant to incentive stock options granted under the 1998 Plan to any individual in any calendar year may not exceed $100,000. SARs granted by the Compensation Committee in connection with stock options or other awards typically will provide for payments to the holder based upon increases in the price of the Common Stock over the exercise price of the related option or other awards, but alternatively may be based upon other criteria such as book value. Participants may receive dividend equivalents representing the value of the dividends per share paid by the Company, calculated with reference to the number of shares covered by the stock options, SARs or other awards held by the participant. Performance awards may be granted by the Compensation Committee on an individual or group basis and may include bonus or "phantom" stock awards that provide for payments based upon increases in the price of the Common Stock over a predetermined period. Restricted stock may be sold to participants at various prices (but not below par value) and made subject to such restrictions as may be determined by the Compensation Committee. Deferred stock awards may be granted to participants, typically without payment of 44 consideration, but subject to vesting conditions based on continued employment or on performance criteria established by the Compensation Committee. Whereas purchasers of restricted stock will have voting rights and will receive dividends prior to the time when the restrictions lapse, recipients of deferred stock generally will have no voting or dividend rights prior to the time when vesting conditions are satisfied. Payments for the shares purchased upon the exercise of options may be in cash or, if the terms of an option so provide, with shares of Common Stock owned by the optionee (or issuable upon exercise of the option) or with other lawful consideration, including services rendered. No option, SAR or other right to acquire Common Stock granted under the 1998 Plan may be assigned or transferred by the grantee, except by will or the laws of succession, although the shares underlying such rights may be transferred if all applicable restrictions have lapsed. During the lifetime of the holder of any option or right, such option or right may be exercised only by the holder. The Compensation Committee will have the right to accelerate, in whole or in part, from time to time, including upon a change in control of the Company, conditionally or unconditionally, the right to exercise any option or other award granted under the 1998 Plan. Amendments of the 1998 Plan to increase the number of shares as to which options, SARs, restricted stock and other awards may be granted (except for adjustments resulting from stock splits and similar events) will require the approval of the Company's shareholders. In all other respects, the 1998 Plan may be amended, modified, suspended or terminated by the Compensation Committee, unless such action would otherwise require shareholder approval as a matter of applicable law, regulation or rule. Amendments of the 1998 Plan will not, without the consent of the participant, affect such person's rights under an award previously granted, unless the award itself otherwise expressly so provides. The 1998 Plan will terminate ten years after the date the 1998 Plan was adopted by the Board and approved by the Company's shareholders. EMPLOYEE STOCK PURCHASE PLAN In January 1998, the Company adopted the Employee Stock Purchase Plan to assist employees of the Company in acquiring a stock ownership interest in the Company and to encourage them to remain in the employment of the Company. The Employee Stock Purchase Plan is intended to qualify under Section 423 of the Code. A maximum of 300,000 shares of Common Stock will be reserved for issuance under the Employee Stock Purchase Plan. The Employee Stock Purchase Plan permits eligible employees to purchase Common Stock at a discount through payroll deductions during specified six-month offering periods. No employee may purchase more than $25,000 worth of Common Stock in any calendar year. The price of shares purchased under the Employee Stock Purchase Plan will be equal to 85% of the fair market value of the Common Stock on the first or last day of the offering period, whichever is lower. After the Offering, the Employee Stock Purchase Plan will be administered by the Compensation Committee. COMPANY-WIDE STOCK OPTION PLAN In January 1998, the Company adopted the Company-Wide Plan to encourage ownership of Common Stock by all employees of the Company. A maximum of 300,000 shares of Common Stock will be reserved for issuance under the Company-Wide Plan. Pursuant to the Company-Wide Plan, the Compensation Committee may grant options to purchase Common Stock to eligible employees. An eligible employee includes any full-time or part-time employee who, as of the date the option is granted, is then an employee and had been an employee of the Company or of any subsidiary for at least 180 consecutive days during the Company's last fully- completed fiscal year, provided that no employee may be granted options under this plan that in the aggregate would result in such employee receiving more than 5% of the maximum number of shares available for issuance. At any time after any option becomes exercisable, the Compensation Committee has the right to elect, in its sole discretion, to cancel such option and to pay such optionee the excess of the fair market value of the shares of the Common Stock covered by such option over the option exercise price of such option. After the Offering, the Company-Wide will be administered by the Compensation Committee. 45 401(k) PLAN The Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") effective as of March 1, 1989 covering all employees who have been employed by the Company for at least 90 days and who are at least 21 years of age. Pursuant to the 401(k) Plan, participants may elect to reduce their current compensation by not less than 1.0% nor more than 15.0% of eligible compensation. The amount of each participant's contributions to the 401(k) Plan is partially matched by the Company based on years of service and amounts contributed, up to 6% of a participants earnings. The trustee under the 401(k) Plan invests the assets of the 401(k) Plan in designated investment options. In connection with the Offering, the Company intends to amend the 401(k) Plan to permit participants to designate the Company's Common Stock as an investment option; provided, however, no more than 15% of a participant's total investments in the 401(k) Plan may be allocated to the Common Stock. The 401(k) Plan is intended to qualify under Section 401 of the Code so that (i) contributions to the 401(k) Plan, and the income earned on such contributions, are not taxable to participants until withdrawn from the 401(k) Plan and (ii) contributions by the Company are deductible by the Company when made for income tax purposes. RESTRICTED STOCK AND CERTAIN STOCK OPTION GRANTS Prior to the consummation of the Offering, the Company will enter into an agreement to issue an aggregate of 55,000 restricted shares of Common Stock under the 1998 Plan to five members of senior management: Arthur Coffey (15,000 shares), John Taffin (10,000 shares), Lori Farnell (10,000 shares), David Peterson (10,000 shares) and Shannon Kapek (10,000 shares). Twenty percent of each recipient's stock grant will be issued on the date of grant and an additional twenty percent will be issued on each anniversary of such date of grant. In connection with the Offering, options to purchase up to 900,000 shares of Common Stock will be granted pursuant to the Plans, at an exercise price equal to the initial public offering price, including options to be granted to Donald Barbieri (90,000 shares), Arthur Coffey (55,000 shares), Richard Barbieri (45,000 shares), Thomas Barbieri (45,000 shares) and David Bell (45,000 shares). The options will have a term of ten years. Fifty percent of each recipient's options will vest on the fourth anniversary of the date of grant and the remaining 50% will vest on the fifth anniversary of the date of grant. This vesting schedule will change if, beginning one year after the option grant date, the stock price of the Common Stock reaches the following target levels (measured as a percentage increase over the exercise price) for 20 consecutive trading days: Percent of Share Price Increase: Option Shares Vested: -------------------- -------------------- 25% 25% 50% 50% 75% 75% 100% 100% Such options shall be exercisable, subject to vesting, for ten years from the date of grant and in all other respects shall be subject to the terms and conditions of the 1998 Plan. Vesting of such options is also conditioned upon the holder's employment with the Company on the scheduled vesting date. 46 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior to November 1, 1997, all of the assets of the Company were held by the Company and BIC directly, or indirectly through various limited partnerships (the "Limited Partnerships") and corporations wholly-owned (with one exception) by the Company and/or BIC, as the case may be, and all of the Hotels and other properties owned by the Company, BIC and the Limited Partnerships were managed by the Company, as the general partner of the Limited Partnerships, or through various management agreements with BIC or the Limited Partnerships. Effective November 3, 1997, BIC merged with and into the Company. The Merger was a stock- for-stock merger, pursuant to which the holders of the common stock of BIC and the holders of preferred and common stock of the Company received an aggregate of 7,084,251 shares of Common Stock of the Company pursuant to conversion ratios jointly determined by the boards of directors of the Company and BIC and unanimously approved by the shareholders of the Company and BIC. By effecting a merger of the holders of the general and limited partnership interests in the Limited Partnerships, the Merger resulted in the dissolution of, and a transfer to the Company by operation of law of all assets and property held by, the Limited Partnerships, with the exception of Cowley Street Limited Partnership. Also effective November 1, 1997, the Company (i) contributed certain assets not related to its core hospitality business to Inland Northwest Corporation, a wholly owned subsidiary of the Company ("INWC"), and (ii) distributed shares of capital stock of INWC and Huckleberry Bay Company, another wholly-owned subsidiary of the Company ("HBC"), on a pro rata basis, to the shareholders of the Company (the "Spin-Off"). As a result of the foregoing transactions, the following assets were distributed and are no longer part of the Company's operations: recreational real estate in Priest Lake, Idaho, a long-term residence inn operation, an interest in a milk processing and distribution business and a retail sales operation. The Company recorded management fees and other income of approximately $35,000, $31,000 and $27,000 during the years ended October 31, 1997, 1996 and 1995, respectively, for performing management and administrative functions for INWC and HBC. In addition, the Company received commissions from INWC and HBC of $87,000, $7,000 and $51,000 for real estate sales on behalf of INWC and HBC for the years ended October 31, 1997, 1996 and 1995, respectively. In connection with the Spin-Off, the Company intends to enter into an agreement with INWC, pursuant to which it will provide accounting and other administrative services to INWC at competitive rates. The Company acquired a hotel property (Cavanaughs Templins Resort) from Templin's Resort and Conference Center, Inc. in February 1998. Robert Templin, the President of Templin's Resort and Conference Center, Inc., has agreed to become a Director of the Company upon consummation of the Offering. The purchase price to be paid by the Company for this Hotel is $9.5 million consisting of cash, assumed indebtedness and a note to the seller. Mr. Templin and members of his immediate family own 100% of equity interest Templin's Resort and Conference Center, Inc. and will be entitled to receive all of the net proceeds of the purchase price paid for this Hotel. The purchase price was determined through arm's-length negotiations between the Company and Mr. Templin. In connection with the acquisition of certain real property, the Company incurred a $600,000 obligation payable to the Barbieri Family Foundation, Inc. ("BFF"), a corporation controlled by the estate of Louis Barbieri, who was the father of Donald, Richard and Thomas Barbieri. BFF is entitled to receive a guaranteed annual payment of approximately $67,000, which, pursuant to the terms of the obligation, increases by 3% annually. The Company has the right to repay its obligation at any time after January 1997, and BFF has the right to require redemption at any time after January 1999. Interest expense of $67,000, $66,000 and $64,000 was paid by the Company to BFF during the years ended October 31, 1997, 1996 and 1995, respectively. The Company will repay this obligation upon closing of the Offering. At October 31, 1997, the Company had a $1.3 million non-interest bearing note payable to HBC. Effective November 1, 1997, the Company began paying interest on such note. The note will be paid in full upon closing of the Offering. The Company intends to enter into employment agreements with each of Donald Barbieri, Arthur Coffey, Richard Barbieri, David Bell and Thomas Barbieri which will provide for annual base salaries of $155,000, $130,000, $96,000, $96,000 and $96,000, respectively. Each executive officer will be eligible to receive annual bonuses as 47 determined by the Compensation Committee and will be entitled to participate in all existing or future benefit plans of the Company, on the same basis as other senior executive officers of the Company. During the fiscal year ended October 31, 1997, the Company had loans totaling approximately $11.5 million with Washington Trust Bank, of which Peter Stanton, a Director nominee, is the Chief Executive Officer and President. With respect to future material transactions (or series of related transactions) between the Company and related parties, the Company has implemented a policy requiring any such transaction to be approved by a majority of the non-employee Directors, if any, upon such directors' determination that the terms of the transaction are no less favorable to the Company than those that could be obtained from unrelated third parties. 48 OWNERSHIP OF COMMON STOCK The following table sets forth certain information regarding the beneficial ownership of Common Stock as of January 16, 1998, and as adjusted to reflect the sale of 5,175,000 shares of Common Stock by the Company in the Offering and the issuance concurrent with the closing of Offering of 11,000 restricted shares of Common Stock, by (i) all persons known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director, (iii) each of the named executive officers and (iv) all directors and executive officers as a group. Unless otherwise indicated, the business address of each shareholder is 201 W. North River Drive, Suite 100, Spokane, Washington, 99201.
PERCENTAGE OF COMMON STOCK ---------------------------------- NAME AND ADDRESS NUMBER OF SHARES OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) BEFORE OFFERING AFTER OFFERING ------------------- ---------------------- ---------------- --------------- Donald K. Barbieri (2) 3,597,402 50.8% 29.3% DKB and HHB Unity Trust 958,379 13.5 7.8 Heather H. Barbieri (3) 958,379 13.5 7.8 Barbieri Family Trust 587,070 8.3 4.8 Thomas M. Barbieri 543,871 7.7 4.4 David M. Bell 543,871 7.7 4.4 Richard L. Barbieri (2) 1,488,537 21.0 4.3 Arthur M. Coffey (4) 3,000 -- * Mark E. Barbieri 423,275 6.0 3.5 Peter F. Stanton (5) -- -- -- Ronald R. Taylor (5) -- -- -- Robert G. Templin (5) -- -- -- All directors and executive officers as a (5 persons) 5,218,302 73.7% 42.6%
- ----------------------------- * Represents less than 1%. (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of shares of Common Stock as of a given date which such person has the right to acquire within 60 days after such date. For purposes of computing the percentage of outstanding shares held by each person or group of persons named above on a given date, any security which such person or persons has the right to acquire within 60 days after such date is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes 958,379 shares of Common Stock held by the DKB & HHB Unity Trust, an irrevocable trust, of which Mr. Barbieri is a co-trustee. Mr. Barbieri disclaims beneficial ownership of such shares. (3) These shares are held by the DKB & HHB Unity Trust, an irrevocable trust, of which Ms. Barbieri is a co-trustee. Ms. Barbieri disclaims beneficial ownership of such shares. (4) The Company has agreed to issue Mr. Coffey an aggregate of 15,000 restricted shares of Common Stock under the 1998 Plan over four years, 3,000 shares of which Mr. Coffey will receive upon closing of the Offering. (5) Messrs. Stanton, Taylor and Templin have agreed to become directors of the Company upon closing of the Offering. 49 PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP The following summary of the Agreement of Limited Partnership of the Operating Partnership (the "Partnership Agreement") is qualified in its entirety by reference to the Partnership Agreement, which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. See "Additional Information. " The Operating Partnership is organized as a Delaware limited partnership. The Company is the sole general partner of the Operating Partnership, and the Company, its wholly-owned subsidiary, North River Drive Company, and certain members of the Barbieri Family are currently the sole limited partners of the Operating Partnership. The Company intends to conduct substantially all of its business through the Operating Partnership. Generally, pursuant to the Partnership Agreement, the Company, as the sole general partner of the Operating Partnership, will have full, exclusive and complete responsibility and discretion in the management and control of the Operating Partnership, including the ability to cause the Operating Partnership to enter into certain major transactions including acquisitions, dispositions and refinancings and to cause changes in the Operating Partnership's line of business and distribution policies. The limited partners of the Operating Partnership will have no authority to transact business for, or participate in the management activities or decisions of, the Operating Partnership, except as provided in the Partnership Agreement and as required by applicable law. INDEMNIFICATION The Partnership Agreement provides for indemnification of the Company and officers and directors of the Company and the Operating Partnership (each, an "Indemnitee") from and against all losses, damages and expenses arising from any claims that relate to the Operating Partnership in which such Indemnitee may be involved, unless (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. This indemnification is in addition to any other rights to which an Indemnitee may be entitled. TRANSFERABILITY OF INTERESTS Except for a transaction described in the following two paragraphs, the Partnership Agreement provides that the Company may not voluntarily withdraw from the Operating Partnership, or transfer its general partner interest in the Operating Partnership, without the consent of the holders of a majority of the partner interests held by the limited partners (including the limited partnership interests held by the Company, which will represent approximately 98.8% of the total partner interests upon consummation of the Offering). Pursuant to the Partnership Agreement, the limited partners have agreed not to transfer, assign, sell, encumber or otherwise dispose of, without the consent of the general partner, their interest in the Operating Partnership, other than (a) transfers to (i) the general partner, (ii) immediate family members or (iii) charitable foundations or (b) pledges to unaffiliated lending institutions. The Company may not engage in any merger, consolidation or other combination with or into another person, sale of all or substantially all of its assets or any reclassification, recapitalization or change of the Common Stock (other than a change in par value and subdivisions or combinations of the Common Stock) (each a "Transaction") unless the Transaction has been approved by holders of at least a majority of the OP Units (including OP Units held by the Company, which will represent approximately 98.8% of all OP Units outstanding upon consummation of the Offering) and in connection with which all limited partners will receive for each OP Unit an amount of cash, securities or other property equal to the product of the number of shares of Common Stock into which each OP Unit is then exchangeable and the greatest amount of cash, securities or other property paid to a holder of one share of Common Stock in consideration of one share of Common Stock pursuant to such Transaction. The Company may also merge with another entity if immediately after such merger substantially all of the assets of the surviving entity, other than OP Units held by the Company, are contributed to the Operating Partnership 50 as a capital contribution in exchange for OP Units with a fair market value, as reasonably determined by the Company, equal to the value of the assets so contributed. ISSUANCE OF ADDITIONAL OP UNITS As sole general partner of the Operating Partnership, the Company has the ability to cause the Operating Partnership to issue additional OP Units, including units of limited partnership interests having rights superior to those attaching to outstanding OP Units; provided, however, that no such additional OP Units shall be issued to the general partner unless either (a) the additional OP Units are issued in connection with the grant, award, or issuance of shares of Common Stock, which shares have rights (except for voting rights) such that the economic interests attributable to such shares are substantially similar to the rights of the additional OP Units issued to the general partner, and (2) the general partner makes a capital contribution to the Operating Partnership in an amount equal to the proceeds, if any, raised in connection with the issuance of such shares of Common Stock, or (b) the additional OP Units are issued pro rata to all partners. ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK The Company may issue shares of Common Stock from time to time after the Offering; provided, however, that the Company may not issue any additional shares of Common Stock (other than shares issued pursuant to the redemption/exchange provisions of the Partnership Agreement described below), or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase Common Stock (collectively "New Securities"), other than to all holders of Common Stock, unless (i) the Company causes the Operating Partnership to issue to the Company OP Units or rights, options, warrants or convertible or exchangeable securities of the Operating Partnership having designations, preferences and other rights, all such that the economic interests are substantially the same as those of the grant, award or issuance of such New Securities, and (ii) the Company contributes the net proceeds from the grant, award or issuance of such New Securities and from the exercise of rights contained in such New Securities to the Operating Partnership. CAPITAL CONTRIBUTIONS The Partnership Agreement provides that if the Operating Partnership requires additional funds at any time or from time to time in excess of funds available to the Operating Partnership from borrowings or capital contributions, the Company may borrow such funds from a financial institution or other lender or through public or private debt offerings and lend such funds to the Operating Partnership on the same terms and conditions as are applicable to the Company's borrowing of such funds. As an alternative to borrowing funds required by the Operating Partnership, the Company may contribute the amount of such required funds as an additional capital contribution to the Operating Partnership. If the Company so contributes additional capital to the Operating Partnership, the Company's partnership interest in the Operating Partnership will be increased on a proportionate basis. Conversely, the partnership interests of the limited partners will be decreased on a proportionate basis in the event of additional capital contributions by the Company. AWARDS UNDER 1998 STOCK INCENTIVE PLAN If options granted in connection with the 1998 Plan are exercised at any time or from time to time, or restricted shares of Common Stock are issued under the 1998 Plan, the Partnership Agreement requires the Company to contribute to the Operating Partnership as an additional contribution the consideration received by the Company in connection with the issuance of such options or shares of Common Stock or the proceeds received by the Company upon issuance of the shares relating to such options. Upon such contribution the Company will be issued a number of OP Units in the Operating Partnership equal to the number of shares of Common Stock so issued. REDEMPTION/EXCHANGE RIGHTS Limited partners have the right (the "Redemption Right") to require the Operating Partnership to redeem part or all of their OP Units for cash, based upon the fair market value (as defined) of the number of shares of Common 51 Stock for each OP Unit is then exchangeable at the time of such redemption. The Company may elect to exchange such OP Units for shares of Common Stock (on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of certain rights, certain extraordinary distributions and similar events). With each such redemption or exchange, the Company's percentage ownership interest in the Operating Partnership will increase. This redemption/exchange right may be exercised by limited partners from time to time, in whole or in part, subject to the limitation that such right may not be exercised prior to the expiration of one year following the date on which such limited partner acquired his OP Units. TAX MATTERS Pursuant to the Partnership Agreement, the Company will be the tax matters partner of the Operating Partnership and, as such, will have authority to make tax elections under the Code on behalf of the Operating Partnership. The net income or net loss of the Operating Partnership will generally be allocated to the Company and the limited partners in accordance with their respective percentage interests in the Operating Partnership, subject to compliance with the provisions of Sections 704(b) and 704(c) of the Code and the Treasury Regulations promulgated thereunder. OPERATIONS The Partnership Agreement provides that the net income of the Operating Partnership, as well as net sales and refinancing proceeds, will be distributed from time to time as determined by the Company pro rata in accordance with the partners' respective percentage interests. Pursuant to the Partnership Agreement, the Operating Partnership will assume and pay when due, or reimburse the Company for payment of, all expenses it incurs relating to the ownership and operation of, or for the benefit of, the Operating Partnership and all costs and expenses relating to the operations of the Company. OUTSIDE ACTIVITIES OF THE GENERAL PARTNER; LIMITATIONS ON INDEBTEDNESS; BORROWINGS The Company, as general partner, may not enter into or conduct any business other than in connection with the ownership, acquisition and disposition of OP Units, the management of the business of the Operating Partnership and such activities as are incidental or related thereto. The Company may not incur any debts other than (i) debt of the Operating Partnership for which it may be liable in its capacity as general partner of the Operating Partnership, and (ii) indebtedness for borrowed money the proceeds of which are loaned to the Operating Partnership on the same terms and conditions as the borrowing by the general partner. CONTRACTS WITH AFFILIATES The Operating Partnership may lend or contribute funds or other assets to its subsidiaries or other entities in which it has an equity investment, and such persons may borrow funds from the Operating Partnership, on terms and conditions established in the discretion of the general partner. The Operating Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with the Partnership Agreement and applicable law as the general partner, in its discretion, believes are advisable. Except as expressly permitted by the Partnership Agreement, neither the general partner nor any of its affiliates may sell, transfer or convey any property to, or purchase any property from, the Operating Partnership, except pursuant to transactions that are determined by the general partner in good faith to be fair and reasonable and no less favorable to the Operating Partnership than would be obtained from an unaffiliated third party. TERM The term of the Operating Partnership commenced on October 21, 1997, the date the certificate of limited partnership was filed in the office of the Secretary of State of Delaware and will continue until October 31, 2097, unless the Operating Partnership is dissolved (sooner) pursuant to the provisions of the Partnership Agreement or as otherwise provided by law. 52 DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of the Articles and By-Laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. GENERAL Under the Articles, the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). Following the consummation of the Offering, 12,270,251 shares of Common Stock will be issued and outstanding and no shares of Preferred Stock will be issued and outstanding. COMMON STOCK Except as otherwise provided by law, each holder of Common Stock is entitled to one vote for each share owned of record on all matters voted upon by holders of Common Stock, and a majority vote is required for all action to be taken by such shareholders. Each share of Common Stock has an equal and ratable right to receive dividends when, as and if declared by the Board out of funds legally available therefor and subject to the dividend obligations of the Company to the holders of any Preferred Stock then outstanding. See "Dividend Policy." In the event of a liquidation, dissolution or winding-up of the Company, the holders of Common Stock will be entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company and the liquidation preference of any holders of outstanding Preferred Stock. The Common Stock has neither preemptive or cumulative voting rights nor redemption, sinking fund or conversion provisions. PREFERRED STOCK The Board is authorized to issue, without shareholder approval, up to 5,000,000 shares of Preferred Stock in one or more series and to determine at the time of creating such series the designations, and the powers, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereon including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. The Board may issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of the Company. As of the date of this Prospectus, the Board has not authorized any series of Preferred Stock and there are no agreements for the issuance of any shares of Preferred Stock. CERTAIN PROVISIONS OF ARTICLES AFFECTING SHAREHOLDERS The Articles and By-Laws provide for shareholder action by written consent and reserve to the directors the exclusive right to change the number of directors or to fill vacancies on the Board. The Articles also provides for the Board to be divided into three classes of directors serving staggered three year terms. As a result, approximately one-third of the Board will be elected each year. The purpose and intended effect of the above described provisions in the Articles and By-Laws are to enhance the continuity and stability of the Company's management by making it more difficult for shareholders to remove or change the incumbent members of the Board. Such provisions, coupled with the ownership by existing shareholders of approximately 60% of the Common Stock following the Offering, could also render the Company more difficult to be acquired pursuant to an unfriendly acquisition by an outsider by making it more difficult for such person to obtain control of the Company and replace current management without the approval of the Board. The Company has included in the Articles and By-Laws provisions to (i) eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the Washington Business Corporations Act, as amended from time to time (the "Washington Act"), and (ii) indemnify its directors and officers to the fullest extent permitted by the Washington Act, including circumstances in which indemnification is otherwise discretionary. The Company believes that these provisions are necessary to attract and 53 retain qualified persons as directors and officers. The Company's employment agreements with certain executive officers and directors contain additional indemnification provisions. WASHINGTON ANTI-TAKEOVER STATUTE Washington law contains certain provisions that may have the effect of delaying, deterring or preventing a takeover or change in control of the Company. Chapter 23B.19 of the Washington Act prohibits the Company, with certain exceptions, from engaging in certain significant business transactions with an "acquiring person" (defined as a person who acquires 10% or more of the Company's voting securities without the prior approval of the Board) for a period of five years after such acquisition. The prohibited transactions include, among others, a merger with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person, or otherwise allowing the acquiring person to receive any disproportionate benefit as a shareholder. After the five-year period, the Company may engage in otherwise proscribed transactions, so long as the transaction complies with certain fair price provisions of the statute or is approved by a majority of disinterested shareholders within each voting group entitled to vote separately. The Company may not exempt itself from coverage of this statute. These statutory provisions may have the effect of delaying, deterring or preventing a change in control of the Company. TRANSFER AGENT AND REGISTRAR The Company has appointed American Stock Transfer & Trust Company as the Company's transfer agent and registrar for the Common Stock. 54 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering (assuming no exercise of the Underwriters' over-allotment option), the Company will have 12,270,251 shares of Common Stock outstanding on the date of the Offering. Of these shares, all of the shares of Common Stock sold in this Offering will be freely tradeable by persons other than "affiliates" of the Company without restriction or limitation under the Securities Act. The remaining 7,084,251 shares are "restricted securities" within the meaning of Rule 144 adopted under the Securities Act (the "Restricted Shares") and may not be sold in the absence of registration under the Securities Act unless a exemption from registration is available, including the exemption contained in Rule 144. The Company and its executive officers and directors have agreed that, subject to certain limited exceptions, for a period of one year from the date of this Prospectus they will not, without the prior written consent of CIBC Oppenheimer Corp., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into, or exercisable for, Common Stock. Donald Barbieri, who will own 21.6% of the outstanding Common Stock after the Offering, has agreed, subject to the same exceptions contained in the foregoing lock-up agreements, not to sell, offer to sell, contract to sell, pledge or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock or other capital stock, or any securities convertible into or exchangeable or exercisable for, or any rights to purchase or acquire, shares of Common Stock or other capital stock, for a period of three years commencing on the date of this Prospectus, without the prior written consent of CIBC Oppenheimer Corp.; provided, however, Mr. Barbieri may sell or otherwise transfer ownership of up to one-third of his shares of Common Stock on each anniversary of the date of this Prospectus without the consent of CIBC Oppenheimer Corp. See "Underwriting." In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of Restricted Shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the acquiror or subsequent holder thereof is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then-outstanding shares of the Company or the average weekly trading volume of the Common Stock on all exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice, requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of Restricted Shares from the Company or from any "affiliate" of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares in the public market under Rule 144 without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. Prior to the Offering, there has been no public market for the Common Stock and the effect, if any, that future sales of Restricted Shares, the availability of such Restricted Shares for sale, the issuance of shares of Common Stock upon the exercise of options or otherwise or the perception that such sales could occur will have on the market price prevailing from time to time cannot be predicted. Nevertheless, sales of substantial amounts of Restricted Shares in the public market could have an adverse effect on the market price for the Common Stock. A total of 1,500,000 shares of Common Stock have been reserved for issuance under the Plans. The Company intends to grant options to purchase an aggregate of 900,000 shares of Common Stock at an exercise price equal to the initial public offering price in connection with the closing of this Offering. The Company intends to file a Registration Statement on Form S-8 under the Securities Act registering the 1,500,000 shares of Common Stock reserved for issuance under its the Plans promptly after completion of the Offering. As a result, shares of Common Stock issued upon exercise of stock options granted under the Plans will be freely tradeable by persons other than "affiliates" of the Company without restriction or limitation under the Securities Act. 55 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement between the Company and the underwriters named below (the "Underwriters"), for whom CIBC Oppenheimer Corp. and NationsBanc Montgomery Securities LLC are acting as representatives (the "Representatives"), each of the Underwriters has severally agreed to purchase from the Company, and the Company has agreed to sell to the Underwriters, the number of shares of Common Stock set forth below opposite their respective names: NUMBER OF SHARES TO BE UNDERWRITER PURCHASED ----------- ------------- CIBC Oppenheimer Corp............................ NationsBanc Montgomery Securities LLC............ Total...................................... 5,175,000 ========= The Underwriting Agreement provides that the obligations of the several Underwriters are subject to approval of certain legal matters by counsel and to various other conditions. The Underwriters are committed to purchase and pay for all of the above shares of Common Stock if any are purchased. The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $_____ per share of Common Stock. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $_____ per share of Common Stock on sales to certain other brokers or dealers. After the Offering, the public offering price, concession and re- allowance to dealers may be changed by the Underwriters. Prior to the Offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price for the shares of Common Stock included in the Offering was determined through negotiations between the Company and the Representatives. The factors considered in determining the initial public offering price included the history of, and the prospects for, the Company's business and the industry in which it competes, an assessment of the Company's management, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the general condition of the securities markets at the time of the Offering and the recent market prices of securities of publicly traded companies which are comparable to the Company. The Company, its executive officers and directors and certain shareholders of the Company have agreed not to sell, offer to sell, contract to sell, pledge or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock or other capital stock, or any securities convertible into or exchangeable or exercisable for, or any rights to purchase or acquire, shares or Common Stock or other capital stock for a period of one year commencing on the date of this Prospectus, without the prior written consent of CIBC Oppenheimer Corp., other than the sale of the shares of Common Stock in the Offering and the issuance or transfer of: (i) options to purchase shares of Common Stock (and shares of Common Stock issuable upon the exercise of such options) issued pursuant to the Plans; (ii) shares of Common Stock in connection with estate planning; (iii) 55,000 restricted shares of Common Stock to be awarded to certain employees of the Company; and, (iv) securities of the Company or the Operating Partnership issued in connection with the acquisition by the Company of real property or interests in entities holding real property, provided that the recipient or transferee of such securities agrees in writing to be subject to the lock-up contained in this paragraph (without giving effect to clauses (i), (ii) and (iii)) for a period ending on the date that is one year after the date hereof. Donald Barbieri, who will own 21.6% of the Common Stock outstanding after the Offering, has agreed, subject to the same exceptions contained in the foregoing lock-up agreements, not to sell, offer to sell, contract to sell, pledge or otherwise dispose of or transfer, directly or indirectly, any shares of Common Stock or other capital stock, or any securities convertible into or exchangeable or exercisable for, or any rights to purchase or acquire, shares of Common Stock or other capital stock, 56 for a period of three years commencing on the date of this Prospectus, without the prior written consent of CIBC Oppenheimer Corp.; provided, however, Mr. Barbieri may sell or otherwise transfer ownership of up to one-third of his shares of Common Stock on each anniversary of the date of this Prospectus without the consent of CIBC Oppenheimer Corp. The Underwriters have been granted a 30-day over-allotment option to purchase from the Company up to an aggregate of 776,250 additional shares of Common Stock, exercisable at the public offering price less the underwriting discount and commissions set forth on the cover page of this Prospectus. If the Underwriters exercise such over-allotment option, then each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares of Common Stock to be purchased by it as shown on the above table bears to the total number of shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters to bid for and purchase shares of Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize or otherwise affect the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus), the Underwriters may reduce that short position by purchasing Common Stock in the open market. The Underwriters also may elect to reduce any short position by exercising all or part of the over-allotment option described herein. In addition, CIBC Oppenheimer Corp., on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or selling group member participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Representatives have informed the Company that the Underwriters do not intend to confirm, without customer authorization, sales to their customer accounts as to which they have discretionary trading power. The Company has agreed to indemnify the several Underwriters against certain liabilities, including, without limitation, liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. EXPERTS The combined balance sheets as of October 31, 1997 and 1996 and the combined statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended October 31, 1997, included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 57 LEGAL MATTERS Certain legal matters will be passed upon for the Company by Kaye, Scholer, Fierman, Hays & Handler, LLP, Los Angeles, California and for the Underwriters by Rogers & Wells, New York, New York. The validity of the Common Stock offered hereby and certain other legal matters will be passed upon for the Company by Dennis McLaughlin & Associates P.S., Spokane, Washington. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, 450 Fifth Street N.W., Washington D.C. 20549, a Registration Statement on Form S-1 under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Common Stock offered pursuant to this Prospectus. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and such exhibits, copies of which may be examined without charge at, or obtained upon payment of prescribed fees from the Public Reference Section of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Securities and Exchange Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 or by way of the Securities and Exchange Commission's website address, http://www.sec.gov. In addition, the Common Stock will be listed on the NYSE and similar information concerning the Company can be inspected and copied at the offices of the NYSE, 20 Broad Street, New York, New York 10005. Statements contained in this Prospectus as to the contents of any contract or other document which is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document. The Company will be required to file reports and other information with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. The Company has changed its fiscal year end from October 31 to December 31, which change shall take effect with the fiscal year beginning on January 1, 1998. In addition to applicable legal or NYSE requirements, if any, holders of the Common Stock will receive annual reports containing audited financial statements with a report thereon by the Company's independent certified public accountants, and quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. Following consummation of the Offering, holders of the Common Stock will receive such reports on a calendar year basis. 58 INDEX TO FINANCIAL STATEMENTS Historical Combined Financial Statements of Cavanaughs Hospitality Corporation, Barbieri Investment Company and Lincoln Building Limited Partnership: - -------------------------------------------------------------------- . Report of Independent Accountants...................................... F-2 . Combined Balance Sheets at October 31, 1996 and 1997................... F-3 . Combined Statements of Income for the years ended October 31, 1995, 1996 and 1997.......................................................... F-4 . Combined Statements of Changes in Stockholders' Equity for the years ended October 31, 1995, 1996 and 1997.................................. F-5 . Combined Statements of Cash Flows for the years ended October 31, 1995, 1996 and 1997.......................................................... F-6 . Notes to Combined Financial Statements................................. F-7 Pro Forma Combined Financial Statements: - ------------------------------------------- . Condensed Pro Forma Combined Financial Information..................... F-23 . Condensed Pro Forma Combined Balance Sheet at October 31, 1997......... F-24 . Condensed Pro Forma Combined Statement of Income for the year ended October 31, 1997................................................. F-25 . Notes to Condensed Pro Forma Combined Financial Statements............. F-26
F-1 REPORT OF INDEPENDENT ACCOUNTANTS Boards of Directors, Stockholders and Partners Cavanaughs Hospitality Corporation Barbieri Investment Company Lincoln Building Limited Partnership We have audited the accompanying combined balance sheets of Cavanaughs Hospitality Corporation, Barbieri Investment Company and Lincoln Building Limited Partnership, excluding certain of their subsidiaries or divisions as described in Note 1 to the combined financial statements (collectively referred to as "Cavanaughs Hospitality Corporation" or the "Company"), as of October 31, 1996 and 1997, and the related combined statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Company as of October 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Spokane, Washington December 10, 1997, except for Notes 7, 14 and 15, as to which the date is January 15, 1998 F-2 CAVANAUGHS HOSPITALITY CORPORATION BARBIERI INVESTMENT COMPANY LINCOLN BUILDING LIMITED PARTNERSHIP COMBINED BALANCE SHEETS October 31, 1996 and 1997 (in thousands, except share data)
1996 1997 ASSETS Current assets: Cash and cash equivalents $ 7,200 $ 6,440 Accounts receivable 1,755 2,864 Inventories 374 376 Prepaid expenses and deposits 395 1,128 -------- -------- Total current assets 9,724 10,808 Property and equipment, net 108,234 109,954 Minority interest in partnerships 149 286 Other assets, net 2,164 3,400 -------- -------- Total assets $120,271 $124,448 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Payable to affiliate $ -- $ 1,333 Accounts payable 1,780 2,263 Accrued payroll and related benefits 830 843 Accrued interest payable 711 741 Other accrued expenses 2,764 3,618 Long-term debt, due within one year 10,086 4,285 Capital lease obligations, due within one year 423 499 -------- -------- Total current liabilities 16,594 13,582 Long-term debt, due after one year 86,450 93,771 Capital lease obligations, due after one year 2,349 2,255 Deferred income taxes 4,469 5,417 -------- -------- Total liabilities 109,862 115,025 -------- -------- Commitments and contingencies (Notes 4, 10, 11 and 14) Stockholders' equity: Cavanaughs Hospitality Corporation: Preferred stock - 1,424 shares authorized, $450 par value; 1,100 shares issued and outstanding, liquidation value $495,000 495 495 Common stock - 2,848 shares authorized, $10 par value; 1,858 and 1,766 shares issued and outstanding 19 18 Discount on stock (318) (318) Barbieri Investment Company: Common stock - 1,000 shares authorized, no par value; 929 shares issued and outstanding 686 686 Additional paid-in capital 3,787 3,125 Retained earnings 5,740 5,417 -------- -------- Total stockholders' equity 10,409 9,423 -------- -------- Total liabilities and stockholders' equity $120,271 $124,448 ======== ========
The accompanying notes are an integral part of the combined financial statements. F-3 CAVANAUGHS HOSPITALITY CORPORATION BARBIERI INVESTMENT COMPANY LINCOLN BUILDING LIMITED PARTNERSHIP COMBINED STATEMENTS OF INCOME for the years ended October 31, 1995, 1996 and 1997 (in thousands, except per share data)
1995 1996 1997 Revenues: Hotels and restaurants: Rooms $17,587 $20,972 $25,147 Food and beverage 12,397 12,141 13,926 Other 1,260 2,092 2,589 ------- ------- ------- Total hotels and restaurants 31,244 35,205 41,662 Entertainment, management and services 3,092 3,168 3,842 Rental operations 6,027 6,790 6,539 ------- ------- ------- Total revenues 40,363 45,163 52,043 ------- ------- ------- Operating expenses: Direct: Hotels and restaurants: Rooms 4,931 5,719 6,820 Food and beverage 10,034 10,181 11,483 Other 716 1,008 1,066 ------- ------- ------- Total hotels and restaurants 15,681 16,908 19,369 Entertainment, management and services 1,802 2,204 2,052 Rental operations 1,026 1,464 1,506 ------- ------- ------- Total direct expenses 18,509 20,576 22,927 ------- ------- ------- Undistributed operating expenses: Selling, general and administrative 5,420 6,445 8,165 Property operating costs 5,022 4,997 5,518 Depreciation and amortization 3,428 4,215 4,775 ------- ------- ------- Total undistributed operating expenses 13,870 15,657 18,458 ------- ------- ------- Total expenses 32,379 36,233 41,385 ------- ------- ------- Operating income 7,984 8,930 10,658 Other income (expense): Interest expense, net of amounts capitalized (6,866) (7,319) (8,817) Interest income 439 296 416 Other income -- 150 348 Minority interest in partnerships 192 91 137 ------- ------- ------- Income before income taxes 1,749 2,148 2,742 Income tax provision 542 730 932 ------- ------- ------- Net income $ 1,207 $ 1,418 $ 1,810 ======= ======= ======= Pro forma net income per share $0.26 ======= Number of shares used in the pro forma computation 7,084 =======
The accompanying notes are an integral part of the combined financial statements. F-4 CAVANAUGHS HOSPITALITY CORPORATION BARBIERI INVESTMENT COMPANY LINCOLN BUILDING LIMITED PARTNERSHIP COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY for the years ended October 31, 1995, 1996 and 1997 (in thousands, except share and per share data)
CAVANAUGHS HOSPITALITY CORPORATION --------------------------------------------------------- PREFERRED STOCK COMMON STOCK --------------------- --------------- DISCOUNT SHARES AMOUNT SHARES AMOUNT ON STOCK ----------- -------- ---------- ------ -------- Balances, October 31, 1994 1,100 $ 495 1,877 $ 19 $ (318) Net income Contributions from stock- holders Dividends on Cavanaughs Hospitality Corporation common stock ($85.00 per share) Dividends on preferred stock ($31.50 per share) Dividends on Barbieri Investment Company common stock ($85.00 per share) Redemption of stock (19) ------ -------- ---------- ------ -------- Balances, October 31, 1995 1,100 495 1,858 19 (318) Net income Contributions from (distributions to) stockholders and partners Dividends on Cavanaughs Hospitality Corporation common stock ($85.00 per share) Dividends on preferred stock ($31.50 per share) Dividends on Barbieri Investment Company common stock ($85.00 per share) ------ -------- ---------- ------ -------- Balances, October 31, 1996 1,100 495 1,858 19 (318) Net income Distributions to stockholders and partners Dividends on Cavanaughs Hospitality Corporation common stock ($102.00 per share) Dividends on preferred stock ($31.50 per share) Dividends on Barbieri Investment Company common stock ($102.00 per share) Redemption of stock (92) (1) ------ -------- ---------- ------ -------- Balances, October 31, 1997 1,100 $495 1,766 $ 18 $ (318) ====== ======== ========== ===== ========
BARBIERI INVESTMENT COMPANY ---------------- COMMON STOCK ADDITIONAL ---------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ------ ------ ---------- -------- Balances, October 31, 1994 929 $ 686 $3,190 $1,411 Net income 1,207 Contributions from stock- holders 600 2,496 Dividends on Cavanaughs Hospitality Corporation common stock ($85.00 per share) (158) Dividends on preferred stock ($31.50 per share) (35) Dividends on Barbieri Investment Company common stock ($85.00 per share) (79) Redemption of stock (129) ------ ------- ------ ------ Balances, October 31, 1995 929 686 3,661 4,842 Net income 1,418 Contributions from (distributions to) stockholders and partners 126 (248) Dividends on Cavanaughs Hospitality Corporation common stock ($85.00 per share) (158) Dividends on preferred stock ($31.50 per share) (35) Dividends on Barbieri Investment Company common stock ($85.00 per share) (79) ------ ------- ------ ------ Balances, October 31, 1996 929 686 3,787 5,740 Net income 1,810 Distributions to stockholders and partners (1,815) Dividends on Cavanaughs Hospitality Corporation common stock ($102.00 per share) (188) Dividends on preferred stock ($31.50 per share) (35) Dividends on Barbieri Investment Company common stock ($102.00 per share) (95) Redemption of stock (662) ------ ------- ------ ------ Balances, October 31, 1997 929 $ 686 $3,125 $5,417 ====== ======= ====== ======
The accompanying notes are an integral part of the combined financial statements. F-5 CAVANAUGHS HOSPITALITY CORPORATION BARBIERI INVESTMENT COMPANY LINCOLN BUILDING LIMITED PARTNERSHIP COMBINED STATEMENTS OF CASH FLOWS for the years ended October 31, 1995, 1996 and 1997 (in thousands)
1995 1996 1997 Operating activities: Net income $ 1,207 $ 1,418 $ 1,810 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,428 4,215 4,775 Gain on disposition of property and equipment -- -- (322) Deferred income tax provision (benefit) (151) 89 948 Minority interest in partnerships (192) (91) (137) Change in: Accounts receivable (4) (372) (1,109) Inventories 25 (50) (2) Prepaid expenses and deposits 305 (64) (733) Accounts payable (153) (1,576) 483 Accrued payroll and related benefits 38 189 13 Accrued interest payable 99 21 30 Other accrued expenses (1,016) 1,421 854 -------- -------- ------- Net cash provided by operating activities 3,586 5,200 6,610 -------- -------- ------- Investing activities: Additions to property and equipment (24,124) (13,457) (6,192) Proceeds from disposition of property and equipment 128 185 1,159 Payment for purchase option agreement -- -- (500) Other, net (432) 88 (735) -------- -------- ------- Net cash used in investing activities (24,428) (13,184) (6,268) -------- -------- ------- Financing activities: Capital contributions from stockholders and partners 3,096 -- -- Distributions to stockholders and partners -- (122) (1,815) Dividends to stockholders (272) (272) (318) Proceeds from long-term debt 21,853 34,735 10,559 Repayment of long-term debt (4,389) (24,844) (9,539) Purchase and retirement of common stock (129) -- (663) Principal payments on capital lease obligations (981) (239) (659) Advances from affiliate -- -- 1,333 -------- -------- ------- Net cash provided by (used in) financing activities 19,178 9,258 (1,102) -------- -------- ------- Change in cash and cash equivalents: Net increase (decrease) in cash and cash equivalents (1,664) 1,274 (760) Cash and cash equivalents at beginning of year 7,590 5,926 7,200 -------- -------- ------- Cash and cash equivalents at end of year $ 5,926 $ 7,200 $ 6,440 ======== ======== ======= Supplemental disclosure of cash flow information: Cash paid during year for: Interest (net of amount capitalized) $ 6,176 $ 7,298 $ 8,787 Income taxes 300 130 1,646 Noncash investing and financing activities: Acquisition of capital leases $ 1,112 $ 1,714 $ 641 Issuance of note payable for purchase option -- -- 500
The accompanying notes are an integral part of the combined financial statements. F-6 CAVANAUGHS HOSPITALITY CORPORATION BARBIERI INVESTMENT COMPANY LINCOLN BUILDING LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION: At October 31, 1997, the Company controlled and operated (through ownership or lease with purchase option agreements) eight hotel properties in Seattle, Spokane, Yakima and Kennewick, Washington and Kalispell, Montana under its Cavanaughs brand. Additionally, the Company provides computerized ticketing for entertainment events and arranges Broadway and other entertainment event productions. The Company also leases retail and office space in buildings owned by the Company and manages residential and commercial properties in Washington, Idaho and Montana. The Company's operations are classified into three divisions: (1) hotels and restaurants, (2) entertainment, management and services, and (3) rental operations. The combined financial statements include the accounts (except as described below) of the following entities which are under common control through Barbieri family ownership. . Cavanaughs Hospitality Corporation (CHC-Washington), a Washington corporation (formerly known as Goodale & Barbieri Companies until October 1997) . Barbieri Investment Company (BIC) . Lincoln Building Limited Partnership (Lincoln Building) CHC-Washington and/or BIC have the following wholly owned subsidiary or partnership investments which are included in the combined financial statements. . Cowley Street Limited Partnership (Cowley) . Inn on Fifth Avenue Associates, L. P. (Inn on Fifth) . West 201 North River Drive Limited Partnership (North River Drive Partnership) . Kalispell Center Limited Partnership (KCLP) . North River Drive Company CHC-Washington is the sole general partner of all of the above partnerships. CHC-Washington and/or BIC hold all of the limited partnership units in all of the partnerships except for Cowley (which has a 50% limited partner). The Lincoln Building Limited Partnership is a partnership which was formed to operate a commercial office building. The partnership is comprised of the Barbieri Family Foundation (BFF) and four members of the Barbieri family. All partners are general partners of the partnership. Unless otherwise defined, "the Company" refers to all of the above companies and partnerships collectively. All significant intercompany accounts and transactions have been eliminated in the combined financial statements. F-7 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 1. ORGANIZATION, CONTINUED: In October 1997, Cavanaughs Hospitality Limited Partnership (CHLP), a Delaware partnership, was formed. CHLP was inactive at October 31, 1997. In November 1997, the Company distributed certain of its operations (consisting of subsidiaries, partnership investments or divisions of the Company) to the existing stockholders as they were dissimilar to the predominant business of the Company. These operations consisted primarily of real estate development, a wholesale dairy processor and a long-term residence inn operation. These operations have historically been managed and financed autonomously, will be operated autonomously in the future and, after the distributions to the stockholders, will not have material financial commitments, guarantees or contingent liabilities associated with the Company. Accordingly, these operations have been excluded from the combined financial statements for all periods presented. The effects of excluding the subsidiaries, investments or divisions are recorded as a contribution from or distribution to stockholders and partners. In November 1997, BIC was merged into CHC-Washington, and the Company contributed all of its assets to CHLP in exchange for the general partnership interest (which holds a 1% interest in CHLP) and limited partnership interests. Operating units (OP Units) of CHLP will be issued to the partners for their interest in the Lincoln Building. OP Units may also be used for future acquisitions (see Note 14). OP Units will be convertible to common stock of CHC-Washington on a one-for-one basis. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments with remaining maturities at time of purchase of three months or less. The Company places its cash with high credit quality institutions. At times, cash balances may be in excess of federal insurance limits. The Company maintains several trust accounts for owners of real properties which it manages. These cash accounts are not owned by the Company and therefore, are not included in the combined financial statements. At October 31, 1997, these accounts totaled approximately $2.6 million. INVENTORIES Inventories consist primarily of food and beverage products held for sale at the restaurants operated by the Company. Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value. F-8 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the lesser of the estimated useful lives of the related assets or the lease term as follows: Buildings 25-40 years Equipment 5-20 years Furniture and fixtures 15 years Landscaping and land improvements 15 years Major additions and betterments are capitalized. Costs of maintenance and repairs which do not improve or extend the lives of the respective assets are expensed currently. When items are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized in operations. Management of the Company periodically reviews the net carrying value of all properties to determine whether there has been a permanent impairment of value and assesses the need for any write-downs in carrying value. INTEREST CAPITALIZATION The Company capitalizes interest costs during the construction period for qualifying assets. During the years ended October 31, 1995, 1996 and 1997, the Company capitalized approximately $459,000, $1,412,000 and $6,000 of interest costs, respectively. OTHER ASSETS Other assets primarily include deferred loan fees, deferred stock offering costs, purchase option payments and prepaid rental income. Deferred loan fees are amortized using the interest method over the term of the related loan agreement. Costs incurred in connection with the Company's planned common stock offering (the Offering -- see Note 15) are deferred and will be offset against the proceeds of the offering, if successful. If the offering is unsuccessful, the costs will be charged to operations. At October 31, 1997, the Company has deferred purchase option payments made pursuant to a purchase agreement for a hotel property which is currently being leased and operated by the Company (see Note 10). If the option is exercised, the option payments will offset a portion of the purchase price. If the option is not exercised, the option payments will be charged to operations. F-9 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: INCOME TAXES CHC-Washington and BIC file separate federal and state income tax returns. The Lincoln Building and the other partnerships which are owned by CHC- Washington and/or BIC are not tax paying entities. However, the income tax attributes of these partnerships flow through to the respective partners of the partnerships. LEASE INCOME The Company records rental income from operating leases which contain fixed escalation clauses on the straight-line method. The difference between income earned and lease payments received from the tenants is included in other assets on the combined balance sheets. Rental income from retail lessees which is contingent upon the lessees' revenues is recorded as income in the period earned. PRO FORMA EARNINGS PER SHARE Due to the combination of the companies and partnerships, historical earnings per share information is not relevant or meaningful. Therefore, pro forma earnings per share for the year ended October 31, 1997 has been presented based upon the number of common shares of CHC-Washington which are outstanding after the merger of the companies and partnerships (see Note 15). NEW ACCOUNTING PRONOUNCEMENTS In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," was issued. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and simplifies the existing standards. This standard replaces the presentation of primary EPS with a presentation of basic EPS. It also requires the dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods and requires restatement of all prior-period EPS data presented. The adoption of SFAS No. 128 will not have a material effect on the presentation of the Company's EPS. F-10 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued. This Statement requires that comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement does not require a specific format for the financial statement, but requires that an enterprise display net income as a component of comprehensive income in the financial statement. Comprehensive income is defined as the change in equity of a business enterprise arising from non-owner sources. The classifications of comprehensive income under current accounting standards include foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities. This Statement is effective for fiscal years beginning after December 15, 1997. Management does not believe that the implementation of SFAS No. 130 will have a material impact on the presentation of its combined financial statements. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments for an Enterprise and Related Information". This Statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity- wide disclosures about the products and services an entity provides, and its major customers. The Statement is effective for fiscal years beginning after December 15, 1997. Management of the Company does not believe that the implementation of SFAS No. 131 will have a material impact on the combined financial statements. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. F-11 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 3. PROPERTY AND EQUIPMENT: Property and equipment at October 31, 1996 and 1997 is summarized as follows (in thousands):
1996 1997 Buildings and equipment $105,039 $108,507 Furniture and fixtures 11,150 14,163 Equipment acquired under capital leases 4,421 4,543 Landscaping and land improvements 863 863 -------- -------- 121,473 128,076 Less accumulated depreciation and amortization (30,049) (34,325) -------- -------- 91,424 93,751 Land 16,810 16,203 -------- -------- $108,234 $109,954 ======== ========
4. LONG-TERM DEBT: Long-term debt consists of mortgage notes payable and notes and contracts payable, collateralized by real property, equipment and the assignment of certain rental income. Long-term debt as of October 31, 1997 is as follows (amounts outstanding in thousands):
Note payable in monthly installments of $146,494 including interest at a variable rate (9.0% at October 31, 1997), collateralized by real property $ 16,816 Note payable in monthly installments of $117,487 including interest at a variable rate (9.0% at October 31, 1997), collateralized by real property 13,884 Note payable in monthly installments of $79,828 including interest at 7.25%, collateralized by real property 9,785 Note payable in monthly installments of $85,156 including interest at a variable rate (8.125% at October 31, 1997), collateralized by real property 9,083 Note payable in monthly installments of $64,637 including interest at a variable rate (7.88% at October 31, 1997), collateralized by assignment of certain rental income 7,773
F-12 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 4. LONG-TERM DEBT, CONTINUED: Industrial revenue bonds payable in monthly installments of $73,668 including interest at a variable rate (7.65% at October 31, 1997), collateralized by real property $ 7,555 Note payable in monthly installments of $63,378 including interest at a variable rate (10.375% at October 31, 1997), collateralized by real property 7,128 Note payable in monthly installments of $46,369 including interest at 8.875%, collateralized by real property 5,046 Note payable in monthly installments of $56,875 including interest at a variable rate (9.0% at October 31, 1997), collateralized by real property 4,794 Urban Development Action Grant loan payable in monthly installments of $27,807 including interest at 9.0%, collateralized by real property /(A)/ 2,603 Note payable in monthly installments of $25,777 including interest at 9.25%, collateralized by real property 2,412 Note payable in monthly installments of $37,604 including interest at an index rate plus 2.375% (8.66% at October 31, 1997), collateralized by real property 2,292 Note payable in monthly installments of $17,608 including interest at a variable rate (8.5% at October 31, 1997), collateralized by real property 2,151 Note payable in monthly installments of $18,418 including interest at an index rate plus 1.5%, subject to a minimum of 9.5% and a maximum of 12.0% (9.75% at October 31, 1997), collateralized by real property 1,696 Note payable in monthly installments of $22,702 including interest at a variable rate (9.5% at October 31, 1997), collateralized by real property 1,190 Note payable in monthly installments of $41,674 including interest at a variable rate plus 0.5% (9.0% at October 31, 1997), collateralized by real property 1,091 Note payable in monthly installments of $8,497 including interest at a variable rate (9.5% at October 31, 1997), collateralized by certain equipment and furniture and fixtures 760 Amount payable at $67,000 interest only annually /(B)/ 600 Note payable of interest only at 8.0% until maturity in October 2002, collateralized by letter of credit 500 Note payable in monthly installments of $9,000 including interest at an index rate (8.5% at October 31, 1997), collateralized by real property 462
F-13 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 4. LONG-TERM DEBT, CONTINUED: Note payable in monthly installments of $5,113 including interest at prime plus 1.0% (9.0% at October 31, 1997), collateralized by real property $ 238 Note payable of interest only at 7.3% until maturity in December 1997, collateralized by real property 100 Note payable in annual principal payments of $37,000 plus interest at a variable rate (9.0% at October 31, 1997), collateralized by real property 74 Other 23 ------- 98,056 Less current portion (4,285) ------- Total long-term debt $93,771 =======
/(A)/ This loan agreement requires the City of Kalispell, Montana (the City) to receive 15% of cumulative annual net cash flow (as defined in the agreement) from the property until the loan is paid in full. The cumulative net cash flow of the property resulted in participation by the City of approximately $20,000, $45,000 and $22,000 for the years ended October 31, 1995, 1996 and 1997, respectively. The Company repaid this note in full in December 1997. /(B)/ The Company has a $600,000 obligation payable to BFF. BFF is entitled to a guaranteed annual payment of approximately $67,000, which is increased by 3% annually. The Company has the right to pay off its obligation at any time after January 1997, and BFF has the right to require redemption at any time after January 1999. Contractual maturities for long-term debt outstanding at October 31, 1997, are summarized by year as follows (in thousands):
YEARS ENDING OCTOBER 31, ------------- 1998 $ 4,285 1999 3,326 2000 3,208 2001 3,348 2002 4,119 Thereafter 79,770 ------- $98,056 =======
F-14 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 5. CAPITAL LEASE OBLIGATIONS: The Company leases certain equipment under capital leases. The imputed interest rates on the leases range from 7.6% to 8.6%. Cost and accumulated amortization of this equipment as of October 31, 1996 are approximately $4,421,000 and $1,831,000, respectively. Cost and accumulated amortization of equipment under capital lease obligations as of October 31, 1997 are approximately $4,543,000 and $2,074,000, respectively. Future minimum lease payments are as follows (in thousands):
YEARS ENDING OCTOBER 31, ------------ 1998 $ 711 1999 697 2000 685 2001 531 2002 408 Thereafter 336 ------ Total minimum lease payments 3,368 Less amount representing interest (614) ------ Total obligations under capital lease 2,754 Less current maturities (499) ------ $2,255 ======
6. LINES OF CREDIT: At October 31, 1997, the Company had a $1.0 million line-of-credit agreement with U.S. Bank of Washington. The outstanding balance on the unsecured credit line bears interest at the bank's prime rate plus 0.25%. At October 31, 1997, there were no amounts outstanding on the line of credit. In November 1997, this agreement was increased to $3.0 million and expires in March 1998. The agreement requires that the Company maintain a defined current ratio and minimum levels of cash flow. Additionally, the Company has a non-revolving line-of-credit agreement. Any outstanding amounts bear interest at the bank's index rate plus 2.75%. At October 31, 1997, $9,083,000 is outstanding under this agreement (see Note 4) and $670,000 was available to be drawn. In December 1997, the Company obtained a commitment for a revolving secured credit facility with a bank for up to $80.0 million. The credit facility is contingent upon the successful completion of the Offering. The agreement requires that the Company maintain certain financial ratios and minimum levels of cash flows. Any outstanding borrowings will bear interest based on prime rate or LIBOR. The credit facility matures five years after closing. F-15 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 7. STOCKHOLDERS' EQUITY: Prior to the mergers described in Note 1, the preferred stock of CHC- Washington was the only voting stock of CHC-Washington. The preferred stockholders were entitled to 7% annual, noncumulative dividends if and when declared by the Board of Directors. In the event of liquidation or dissolution of CHC-Washington, the preferred stockholders had a liquidation preference equal to $450 plus any unpaid dividends per share. At October 31, 1997, all declared dividends have been paid to the preferred stockholders. In connection with the merger and changes in the capital structure of CHC-Washington (see Note 15), the outstanding preferred stock of CHC-Washington was retired and cancelled. In January 1998, the Board of Directors adopted, subject to shareholder approval, three Company stock benefit plans. A total of 1,500,000 shares of common stock were reserved for issuance or grant under the plans of which 900,000 shares are planned to be granted to certain employees at the initial public offering price concurrent with the closing of the Offering. 8. INCOME TAXES: Major components of the Company's income tax provision (benefit) for the years ended October 31, 1995, 1996 and 1997 are as follows (in thousands):
1995 1996 1997 Current $ 693 $ 641 $ (16) Deferred (151) 89 948 ----- ----- ----- $ 542 $ 730 $ 932 ===== ===== =====
The income tax provisions shown in the statements of income for the years ended October 31, 1995, 1996 and 1997 differ from the amounts calculated using the federal statutory rate applied to income before income taxes as follows (amounts in thousands):
1995 1996 1997 --------------- -------------- --------------- AMOUNT % AMOUNT % AMOUNT % ------- ----- ------ ----- ------- ----- Provision at federal statutory rate $ 595 34.0% $ 730 34.0% $932 34.0% Effect of tax credits (64) (4.0) -- -- (20) (0.1) Other 11 1.0 -- -- 20 0.1 ----- ---- ----- ---- ---- ---- $ 542 31.0% $ 730 34.0% $932 34.0% ===== ==== ===== ==== ==== ====
F-16 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 8. INCOME TAXES, CONTINUED: Components of the net deferred tax assets and liabilities as of October 31, 1996 and 1997 were as follows (in thousands):
1996 1997 -------------------- -------------------- ASSETS LIABILITIES ASSETS LIABILITIES ------ ----------- ------ ----------- Depreciation on property and equipment $ -- $5,331 $ -- $5,295 Rental income -- 192 -- 248 Tax credits 577 -- 367 -- Other 477 -- -- 241 ------ ------ ------ ------ $1,054 $5,523 $ 367 $5,784 ====== ====== ====== ======
At October 31, 1997, the Company has approximately $352,000 of alternative minimum tax credits available to offset future regular taxes payable to the extent they exceed alternative minimum taxes. 9. OPERATING LEASE INCOME: KCLP leases shopping mall space to various tenants over terms ranging from one to ten years. The leases generally provide for fixed minimum monthly rent as well as tenants' payments for their pro rata share of taxes and insurance, common area maintenance and expenses associated with the shopping mall. In addition, the Company leases commercial office space over terms ranging from one to eighteen years. At October 31, 1996, cost and accumulated depreciation of retail and commercial properties which are subject to operating leases was $31,008,000 and $7,191,000, respectively. The cost and accumulated depreciation of these properties at October 31, 1997 was approximately $31,875,000 and $8,281,000, respectively. Future minimum lease income under existing noncancellable leases are as follows (in thousands):
YEARS ENDING OCTOBER 31, ------------- 1998 $ 6,840 1999 6,687 2000 6,237 2001 5,466 2002 4,444 Thereafter 16,009 ------- $45,683 =======
Rental income for the years ended October 31, 1995, 1996 and 1997 was approximately $6,027,000, $6,790,000 and $6,539,000, respectively, which included contingent rents of approximately $309,000, $342,000 and $217,000, respectively. F-17 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 10. OPERATING LEASE COMMITMENTS: The Company leases building space under an operating lease agreement which requires monthly payments of $4,500 through March 2009. Commencing in 1999, the monthly payments can be increased for inflation. In October 1997, the Company began operating a hotel in Yakima, Washington under an operating lease and purchase option agreement. The lease agreement is for a period of 15 years with two five-year renewal options. The Company pays all operating costs of the hotel plus monthly lease payments of $35,000 through September 2003. Commencing October 2003, the monthly lease requirement will be $52,083 and monthly payments shall increase by $5,208 each year thereafter. The Company agreed to a $1.0 million option payment which allows the purchase of this hotel at a fixed price. One-half of this option payment was paid in cash and the remaining $500,000 is payable in October 2002. The option is exercisable by the Company between March and September 2003 for a total purchase price of $6,250,000. If the Company exercises its purchase option, the option payments made by the Company will be applied against the total purchase price. Assuming the Company exercises its purchase option for the hotel in March 2003, total payments due under these leases are as follows (in thousands):
YEARS ENDING OCTOBER 31, ------------ 1998 $ 474 1999 474 2000 474 2001 474 2002 474 Thereafter 630 ------ $3,000 ======
11. COMMITMENTS AND CONTINGENCIES: The Company has guaranteed certain debt of entities affiliated through common ownership, which are excluded from the combined financial statements (see Note 1). At October 31, 1997, total debt outstanding which was guaranteed by the Company was approximately $5,748,000. With the consummation of the merger described in Note 1, the Company's guarantee of these affiliated companies' debt was eliminated. F-18 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 11. COMMITMENTS AND CONTINGENCIES, CONTINUED: In 1994, the Company was sued by the contractor who constructed one of the Company's hotel properties asserting lack of payment of cost overruns. The Company filed a counter claim for the recovery of various damages. The Company obtained summary judgment for most of the claims. As of October 31, 1997, the amount of claims against the Company which have not been dismissed or are subject to appeal is $233,000, plus interest. The Company's counter claims which have not been dismissed are $419,000. Management believes that the ultimate resolution of this matter will not have a material effect on the Company's results of operations, financial condition or cash flows. 12. RELATED-PARTY TRANSACTIONS: In addition to related-party transactions described in Notes 4 and 11, the Company had the following transactions with related parties during the years ended October 31, 1995, 1996 and 1997: . Interest expense of approximately $64,000, $66,000 and $67,000 was incurred related to the payable to BFF (see Note 4) for the years ended October 31, 1995, 1996 and 1997, respectively. . The Company recorded management fee and other income of approximately $27,000, $31,000 and $35,000 during the years ended October 31, 1995, 1996 and 1997, respectively, for performing management and administrative functions for entities which are owned by the stockholders of the Company, but are excluded from the combined financial statements. . The Company received commissions from entities which are owned by the stockholders of the Company, but are excluded from the combined financial statements of $51,000, $7,000 and $87,000 for real estate sales for the years ended October 31, 1995, 1996 and 1997, respectively. . At October 31, 1997, the Company has a $1.3 million non-interest bearing payable to an affiliated entity due to common control. The amount is expected to be paid during fiscal 1998. F-19 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 13. EMPLOYEE BENEFIT PLAN: The Goodale and Barbieri Retirement Savings Plan, to which both the Company and employees contribute, was established in March 1989. The defined contribution plan was created for the benefit of substantially all employees of the Company. The Company makes contributions of up to 3% of an employee's compensation based on a vesting schedule and eligibility requirements set forth in the plan document. Company contributions to the plan for the years ended October 31, 1995, 1996 and 1997 were approximately $78,000, $93,000 and $97,000, respectively. 14. SUBSEQUENT EVENTS: In October 1997, the Company entered into a lease (which was effective in January 1998) with purchase option for an operating hotel in Spokane, Washington. The Company is obligated to pay debt service and all costs of operating the hotel through the lease termination date of November 1, 1999. The purchase price is $11.5 million. Approximately $2.0 million of the purchase price shall be paid by the transfer of OP Units to the owner. In November 1997, CHLP entered into separate purchase agreements to acquire certain assets of operating hotels in Post Falls, Idaho and in Idaho Falls, Idaho for a total purchase price of $13.3 million. The Idaho Falls acquisition was closed in January 1998 and the Post Falls acquisition is expected to close in February 1998. In December 1997, the Company entered into an agreement for the acquisition of an operating hotel in Kalispell, Montana. The acquisition is contingent upon the Company's successful completion of the Offering. The purchase price is approximately $9.9 million. In January, 1998, the Company entered into an agreement to acquire an operating hotel in Portland, Oregon for a total purchase price of $5.7 million. The transaction is expected to close in March, 1998. 15. CAPITALIZATION OF THE COMPANY AND PROPOSED INITIAL PUBLIC OFFERING: After the mergers described in Note 1 were completed, the Articles of Incorporation of CHC-Washington were amended to authorize 50.0 million common shares and 5.0 million preferred shares. The preferred stock rights, preferences and privileges will be determined by the Board of Directors. The existing stockholders of CHC-Washington and BIC received a total of 7,084,251 newly issued shares in exchange for all of their outstanding shares. CHC-Washington intends to enter into an underwriting agreement with CIBC Oppenheimer Corp. for the sale of 5.2 million shares of the Company's common stock. F-20 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 16. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data and to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Potential income tax ramifications related to the realization of unrealized gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration. The carrying amounts for cash and cash equivalents, accounts receivable and current liabilities are a reasonable estimate of their fair values. The fair values of long-term debt and capital lease obligations are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for debt or capital lease obligations with similar remaining maturities. The estimated fair values of financial instruments are as follows (in thousands):
OCTOBER 31, --------------------------------------- 1996 1997 ------------------ ------------------ CARRYING FAIR CARRYING FAIR AMOUNTS VALUE AMOUNTS VALUE -------- ------- -------- ------- Financial assets: Cash and cash equivalents $ 7,200 $ 7,200 $ 6,440 $ 6,440 Accounts receivable 1,755 1,755 2,864 2,864 Financial liabilities: Current liabilities, excluding debt 6,085 6,085 8,798 8,798 Long-term debt 96,536 97,764 98,056 99,615 Capital lease obligations 2,772 2,772 2,754 2,754
F-21 NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 17. BUSINESS SEGMENTS (IN THOUSANDS):
1995 1996 1997 Revenues: Hotels and restaurants $ 31,244 $ 35,205 $ 41,662 Entertainment, management and services 3,092 3,168 3,842 Rental operations 6,027 6,790 6,539 -------- -------- -------- $ 40,363 $ 45,163 $ 52,043 ======== ======== ======== Operating income: Hotels and restaurants $ 15,563 $ 18,297 $ 22,293 Entertainment, management and services 1,290 964 1,790 Rental operations 5,001 5,326 5,033 Undistributed operating expenses (13,870) (15,657) (18,458) -------- -------- -------- $ 7,984 $ 8,930 $ 10,658 ======== ======== ======== Capital expenditures: Hotels and restaurants $ 20,439 $ 11,705 $ 4,960 Rental operations 3,536 1,631 980 General corporate, including entertainment, management and services 149 121 252 -------- -------- -------- $ 24,124 $ 13,457 $ 6,192 ======== ======== ======== Depreciation and amortization: Hotels and restaurants $ 2,274 $ 2,840 $ 3,457 Rental operations 1,005 1,210 1,179 General corporate, including entertainment, management and services 149 165 139 -------- -------- -------- $ 3,428 $ 4,215 $ 4,775 ======== ======== ======== Identifiable assets: Hotels and restaurants $ 76,711 $ 89,733 $ 90,878 Rental operations 24,749 24,845 24,932 General corporate, including entertainment, management and services 5,577 5,693 8,638 -------- -------- -------- $107,037 $120,271 $124,448 ======== ======== ========
Revenues and identifiable assets of each segment are those that are directly identified with those operations. Capital expenditures and identifiable assets for the entertainment, management and services segment are not separated from corporate. General corporate assets consist primarily of cash and cash equivalents, receivables and property and equipment. Operating income for each segment represents revenues less direct operating expenses of each segment. Undistributed operating expenses are not identified by segment. F-22 CONDENSED PRO FORMA COMBINED FINANCIAL INFORMATION The following condensed pro forma combined balance sheet and condensed pro forma combined statement of income, collectively, the "Pro Forma Financial Statements" were prepared by Cavanaughs Hospitality Corporation to illustrate the estimated effects of (i) the merger of the companies and partnerships which occurred in November 1997, (ii) acquiring minority interests through the issuance of OP Units and (iii) business combinations to be accounted for as purchases under generally accepted accounting principles. The acquisitions include the property and equipment of the following hotel properties: . Templin's Resort (Templin's) . Outlaw Inn (Outlaw) . Inn on the Falls . The Ridpath Hotel (Ridpath) . Hallmark Inn (Hallmark) Additionally, in October 1997, Cavanaughs Hospitality Corporation entered into a lease with purchase option agreement for the Gateway Hotel (Gateway). Therefore, the historical results of operations of Gateway are included in the condensed pro forma combined financial information. Templin's, Outlaw, Inn on the Falls, Ridpath, Gateway and Hallmark are collectively referred to as the "Acquired Hotels." Accordingly, the financial information of Cavanaughs Hospitality Corporation, Barbieri Investment Company and Lincoln Building Limited Partnership (collectively, "CHC" or "the Company") and the Acquired Hotels has been combined as if the acquisitions occurred on November 1, 1996 for purposes of the condensed pro forma combined statement of income, and as of October 31, 1997, for purposes of the condensed pro forma combined balance sheet. There are no differences between CHC's and the Acquired Hotel's accounting policies, which are expected to have a material impact on the pro forma combined financial statements. The Pro Forma Financial Statements do not purport to represent what the combined financial position or results of operations would have been if the acquisitions had occurred at the beginning of the period or to project the combined financial position or results of operations for any future date or period. The Pro Forma Financial Statements should be read in conjunction with the historical combined financial statements, including the notes thereto, of CHC, which are included in this document. The Pro Forma Financial Statements are presented utilizing the purchase method of accounting whereby the excess of the total purchase price over the fair value of the assets acquired of the Acquired Hotels is recorded as property and equipment. The combined pro forma results of operations presented herein are not necessarily indicative of the future results of operations. F-23 CONDENSED PRO FORMA COMBINED BALANCE SHEETS AT OCTOBER 31, 1997 (in thousands, except for share data)
ACQUIRED CHC HOTELS PRO FORMA PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ---------- ---------- -------------- --------- ASSETS Current assets: Cash and cash equivalents $ 6,440 $ -- (6,440)/(a)/ $ -- Accounts receivable 2,864 -- -- 2,864 Inventories 376 -- -- 376 Prepaid expenses and deposits 1,128 -- -- 1,128 -------- ---------- ------------- -------- Total current assets 10,808 -- (6,440) 4,368 Property and equipment, net 109,954 20,478 22,642/(b)/ 153,074 Minority interest 286 -- (286)/(c)/ -- Other assets, net 3,400 -- -- 3,400 -------- ---------- ------------- -------- Total assets $124,448 $ 20,478 $ 15,916 $160,842 ======== ========== ============= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Payable to affiliates $ 1,333 $ -- $ -- $ 1,333 Accounts payable 2,263 -- -- 2,263 Accrued payroll and related benefits 843 -- -- 843 Accrued interest payable 741 -- -- 741 Other accrued expenses 3,618 -- -- 3,618 Long-term debt, due within one year 4,285 -- -- 4,285 Capital lease obligations, due within one year 499 -- -- 499 -------- ---------- ------------- -------- Total current liabilities 13,582 -- -- 13,582 Long-term debt, due after one year 93,771 -- 31,880/(d)/ 125,651 Capital lease obligations, due after one year 2,255 -- -- 2,255 Deferred income taxes 5,417 -- -- 5,417 Minority interest -- -- 4,514/(c)(e)/ 4,514 -------- ---------- ------------- -------- Total liabilities 115,025 -- 36,394 151,419 -------- ---------- ------------- -------- Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 authorized; no shares issued and outstanding -- -- -- -- Common stock, $.01 par value, 50,000,000 authorized; 7,084,251 shares issued and outstanding 71 -- -- 71 Additional paid-in capital 3,935 -- -- 3,935 Retained earnings 5,417 20,478 (20,478) 5,417 -------- ---------- ------------- -------- Total stockholders' equity 9,423 20,478 (20,478) 9,423 -------- ---------- ------------- -------- Total liabilities and stockholders' equity $124,448 $ 20,478 $ 15,916 $160,842 ======== ========== ============= ========
See notes to condensed pro forma combined balance sheet and statement of income. F-24 CONDENSED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED OCTOBER 31, 1997 (in thousands, except per share data)
ACQUIRED CHC HOTELS PRO FORMA PRO FORMA HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ----------- ----------- ------------ ---------- Revenues: Hotels and restaurants: Rooms $25,147 $14,662 $ -- $ 39,809 Food and beverage 13,926 9,621 -- 23,547 Other 2,589 1,056 -- 3,645 ------- ------- ----------- -------- Total hotels and restaurants 41,662 25,339 -- 67,001 Entertainment, management and services 3,842 -- -- 3,842 Rental operations 6,539 -- -- 6,539 ------- ------- ----------- -------- Total revenues 52,043 25,339 -- 77,382 ------- ------- ----------- -------- Operating expenses: Direct: Hotels and restaurants: Rooms 6,820 4,600 -- 11,420 Food and beverage 11,483 7,829 -- 19,312 Other 1,066 343 -- 1,409 ------- ------- ----------- -------- Total hotels and restaurants 19,369 12,772 32,141 Entertainment, management and services 2,052 -- -- 2,052 Rental operations 1,506 -- -- 1,506 ------- ------- ----------- -------- Total direct expenses 22,927 12,772 35,699 ------- ------- -------- Undistributed operating expenses: Selling, general and administrative 8,165 4,653 (743)/(f)/ 12,075 Property operating costs 5,518 3,353 312/(g)/ 9,183 Depreciation and amortization 4,775 1,825 (753)/(h)/ 5,847 ------- ------- ----------- -------- Total undistributed operating expenses 18,458 9,831 (1,184) 27,105 ------- ------- ----------- -------- Total expenses 41,385 22,603 (1,184) 62,804 ------- ------- ----------- -------- Operating income 10,658 2,736 1,184 14,578 Other income (expense): Interest expense, net of amounts capitalized (8,817) (2,555) 244/(i)/ (11,128) Interest income 416 -- -- 416 Other income 348 -- -- 348 Minority interest in partnerships 137 -- (194)/(j)/ (57) ------- ------- ----------- -------- Income before income taxes 2,742 181 1,234 4,157 Income tax provision 932 61 459/(k)/ 1,452 ------- ------- ----------- -------- Net income $ 1,810 $ 120 $ 775 $ 2,705 ======= ======= =========== ======== Pro forma net income per share $ 0.26 $ 0.38 ======= ======== Number of shares used in the pro forma computation 7,084 7,084 ======= ========
See notes to condensed pro forma combined balance sheet and statement of income. F-25 NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME 1. BUSINESSES ACQUIRED: Subsequent to October 31, 1997, the Company has entered into agreements to purchase the real and personal property and equipment of the following hotel properties: Templin's Resort Outlaw Inn Inn on the Falls The Ridpath Hotel Hallmark Inn Additionally, the Company has entered into a lease with purchase option agreement with the owner of the Gateway Hotel. The purchase option cannot be exercised by the Company until 2003 and therefore, the acquisition of the property and equipment of the Gateway Hotel has not been assumed in the pro forma balance sheet. However, the pro forma statement of income reflects the lease expense associated with the Gateway Hotel along with its historical operations. The acquisitions will be accounted for utilizing the purchase method of accounting. The purchase price for all of the acquired hotels will be paid in cash except for the Ridpath. The purchase price for the Ridpath assumes that the purchase option is exercised prior to March 1998 and that $2.0 million of the purchase price is satisfied by the issuance of OP Units (see Note 14 to the historical financial statements of the Company). The total purchase price and the amount in excess of the historical book value of the property and equipment is as follows (in thousands):
TOTAL EXCESS PURCHASE PURCHASE PRICE PRICE -------- -------- Templin's Resort $ 9,500 $ 5,376 Outlaw Inn 9,870 5,547 Inn on the Falls 3,800 259 The Ridpath Hotel 11,500 4,587 Hallmark Inn 5,650 4,073 ------- ------- $40,320 $19,842 ======= =======
The purchase price has been allocated to the acquired land, building, furniture and fixtures as follows (in thousands):
DEPRECIABLE AMOUNT LIFE ----------- -------- Land $13,791 Building 23,894 35 years Furniture and fixtures 2,635 10 years ------- $40,320 =======
Assuming the acquisitions were made on November 1, 1996, historical depreciation expense for the acquired hotels would have been reduced by $753,000 for the year ended October 31, 1997. F-26 NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME, CONTINUED 2. PRO FORMA ADJUSTMENTS: The following pro forma adjustments were made to the condensed pro forma combined balance sheet and statement of income to reflect the acquisitions of the Acquired Hotels and the issuance of OP Units for the acquisition of minority interests in the Lincoln Building. (a) Represents the cash used for the purchase of the Acquired Hotels. (b) Represents the purchase price in excess of the historical value of the property and equipment of the Acquired Hotels and the acquired minority interest associated with the Lincoln Building. (c) Represents the minority interest related to the Lincoln Building. (d) Represents the amount of the purchase price of the Acquired Hotels which will be financed by the Company's revolving line-of-credit agreement. (e) Assumes the purchase price of the Ridpath will be $9.5 million cash plus OP Units equivalent to $2.0 million of the purchase price. (f) Represents elimination of franchise fees which were based on gross room revenues. (g) Represents elimination of $108,000 of facility lease payments at one hotel which is offset by $420,000 of additional facility lease payment requirements at Gateway. (h) Represents the net reduction in depreciation and amortization expense from the historical amounts for the Acquired Hotels based on the purchase price and new depreciable lives. (i) Represents the net reduction in interest expense from the historical amounts for the Acquired Hotels based on the amount of the purchase price to be financed under the Company's revolving line-of-credit agreement. (j) Represents the minority interest share of the pro forma net income associated with OP units for the year ended October 31, 1997. (k) Represents estimated income taxes related to the Acquired Hotels historical income before income taxes and the tax effects of pro forma adjustments. F-27 NOTES TO CONDENSED PRO FORMA COMBINED BALANCE SHEET AND STATEMENT OF INCOME, CONTINUED 3. INTEREST EXPENSE: Assuming the acquisitions were made as of November 1, 1996, the Company would have incurred debt to finance part of the purchase price of the Acquired Hotels. Pro forma interest expense associated with the Company's acquisitions has been calculated assuming borrowings were made in amounts as presented in the pro forma condensed combined balance sheet and at interest rates that would be charged under the Company's revolving line- of-credit agreement. Pro forma interest expense which would have been incurred by the Company for the year ended October 31, 1997 of $2.3 million is $244,000 less than the historical interest expense incurred by the Acquired Hotels. 4. INSURANCE COSTS: The Company has obtained insurance premium quotations for the Acquired Hotels which indicate that insurance expense will be approximately $180,000 less than the historical insurance expense which was incurred by the Acquired Hotels. This reduction in expense has not been reflected in the pro forma financial statements. F-28 No dealer, salesperson or other person has been authorized to give any information or to make any representation other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy the shares of Common Stock by anyone in any jurisdiction in which such an offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any offer or sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................ 3 Risk Factors.............................. 11 The Company............................... 17 Use of Proceeds........................... 17 Dividend Policy........................... 17 Capitalization............................ 18 Dilution.................................. 19 Selected Combined Financial And Other Data.................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 23 Business and Properties................... 29 Management................................ 40 Certain Relationships and Related Transactions............................ 47 Ownership of Common Stock................. 49 Partnership Agreement of the Operating Partnership............................. 50 Description of Capital Stock.............. 53 Shares Eligible for Future Sale........... 55 Underwriting.............................. 56 Experts................................... 57 Legal Matters............................. 58 Additional Information.................... 58 Index to Financial Statements............. F-1
Until ________, 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. 5,175,000 SHARES CAVANAUGHS HOSPITALITY CORPORATION [LOGO] COMMON STOCK PROSPECTUS CIBC OPPENHEIMER NATIONSBANC MONTGOMERY SECURITIES LLC _____________, 1998 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses, other than underwriting discounts and commissions, paid or payable in connection with the issuance and distribution of the Common Stock being registered hereby (all amounts are estimated except the Securities and Exchange Commission Registration Fee, the NASD Filing Fee and the NYSE Listing Fee): SEC Registration Fee................ $ 24,600 NASD Filing Fee..................... 8,800 NYSE Listing Fee.................... 84,600 Printing and Engraving Expenses..... 50,000 Legal Fees and Expenses............. 350,000 Accounting Fees and Expenses........ 380,000 Transfer Agent and Registrar Fees... 2,000 -------- Total.......................... $900,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Amended and Restated By-Laws ("By-Laws") and Amended and Restated Articles of Incorporation (the "Articles") provide that the Company shall, to the full extent permitted by the Washington Business Corporation Act (the "WBCA"), as amended from time to time, indemnify all directors and officers of the Company. In addition, the Company's Articles contain a provision eliminating the personal liability of directors to the Company or its stockholders for monetary damage arising out of a breach of fiduciary duty. Chapter 23B.08.510 and .570 of the WBCA authorizes a corporation to indemnify its directors, officers, employees, or agents in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including provisions permitting advances for reasonable expenses incurred) arising under the 1933 Act. Pursuant to Chapter 23B.08.580 of the WBCA, the Board of Directors (the "Board") may authorize, by a vote of a majority of a quorum of the Board, the Company to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under Chapter 23B.08.510 or 23B.08.520 of the WBCA. The Board intends to authorize the Company to purchase and maintain appropriate policies of insurance on behalf of the Company's directors and officers against liabilities asserted against any such person arising out of his or her status as such. The Board may authorize the Company to enter into a contract with any person who is or was a director, officer, partner, trustee, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of another partnership, joint venture, trust, employee benefit plan or other enterprise providing for indemnification rights equivalent to or, if the Board so determines, greater than those provided for in the By-Laws. The Board intends to authorize the Company to enter into contracts providing for indemnification with any person who is or was a director or officer of the Company. Section 6 of the Underwriting Agreement (filed as an Exhibit hereto) provides that the Underwriters will indemnify and hold harmless the Company and each director, officer or controlling person of the Company from and against any liability caused by any statement or omission in the Registration Statement or Prospectus based on certain information furnished to the Company by the Underwriters for use in the preparation thereof. II-1 Each of the employment agreements described in "Management -- Employment Agreements" contains provisions entitling the executive to indemnification for losses incurred in the course of service to the Company or its subsidiaries, under certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Effective November 1, 1997, Barbieri Investment Company ("BIC"), a company that was owned by the same group of shareholders which owned the Company prior to such date, merged into the Company. In connection with this merger, the Company issued an aggregate of 7,084,251 shares of Common Stock to the shareholders of the Company and BIC. This issuance of Common Stock is exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act") pursuant to Regulation D promulgated thereunder. Each shareholder who received Common Stock in this merger is an "accredited investor" as defined in such regulation. Effective November 1, 1997, the Company issued an aggregate of 150,817 OP Units to the Barbieri Family Foundation, Inc. ("BBF"), Donald Barbieri, Richard Barbieri and Thomas Barbieri in exchange for such persons' partnership interest in the Lincoln Building Limited Partnership. This issuance of OP Units is exempt from the registration requirements of the Securities Act pursuant to Regulation D promulgated thereunder. Each of BBF, Donald Barbieri, Richard Barbieri and Thomas Barbieri are "accredited investors" as defined in such regulation. On January 15, 1998, the Board adopted the 1998 Plan which provides for, subject to the closing of the Offering, the issuance of an aggregate of 55,000 shares of Common Stock to Arthur Coffey (15,000 shares), John Taffin (10,000 shares), Lori Farnell (10,000 shares), David Peterson (10,000 shares) and Shannon Kapek (10,000 shares) over five years. Of these 55,000 shares, 11,000 will be issued upon closing of the Offering and an additional 11,000 shares will be issued on each anniversary thereof until such anniversary date in 2002. ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. a. Exhibits --------
EXHIBIT NO. DESCRIPTION - ---------- ----------- 1.1* -- Form of Underwriting Agreement 3.1 -- Amended and Restated Articles of Incorporation of the Company 3.2 -- Amended and Restated By-Laws of the Company 4.1 -- Specimen Common Stock Certificate 5.1* -- Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP, regarding the legality of issuance of the Common Stock being registered 5.2* -- Opinion of Dennis McLaughlin & Associates P.S. regarding the legality of the issuance of the Common Stock being registered. 10.1* -- Employment Agreement between the Company and Donald Barbieri 10.2* -- Employment Agreement between the Company and Arthur Coffey 10.3* -- Employment Agreement between the Company and Richard Barbieri 10.4* -- Employment Agreement between the Company and David Bell 10.5* -- Employment Agreement between the Company and Thomas Barbieri 10.6* -- Form of Revolving Credit Facility Agreement 10.7 -- Form of Amended and Restated Agreement of Limited Partnership of Cavanaughs Hospitality Limited Partnership 10.8 -- Employee Stock Purchase Plan of Cavanaughs Hospitality Corporation 10.9 -- 1998 Stock Incentive Plan of Cavanaughs Hospitality Corporation 10.10 -- Company-Wide Stock Option Plan 10.11* -- Form of Stock Option Award Agreement 10.12 -- Form of Restricted Stock Award Agreement 10.13* -- Gateway Property Lease Agreement
II-2 10.14* -- Ridpath Property Lease Agreement 21* -- List of Subsidiaries of the Company 23.1 -- Consent of Coopers & Lybrand L.L.P. 23.2* -- Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit 5.1) 23.2(A)* -- Consent of Dennis McLaughlin & Associates P.S. (included in Exhibit 5.2) 23.3 -- Consent of Peter F. Stanton 23.4 -- Consent of Ronald R. Taylor 23.5 -- Consent of Robert G. Templin 24.1 -- Power of Attorney (see signature pages) 27.1 -- Financial Data Schedule
- -------------- * To be filed by amendment. II-3 b. Financial Statement Schedules ----------------------------- All schedules for which provisions is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or the information is contained in the Financial Statements and therefore have been omitted. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes as follows: a. To provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser; b. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue; c. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. d. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Spokane and State of Washington, on the 20th day of January, 1998. CAVANAUGHS HOSPITALITY CORPORATION By /s/ Donald K. Barbieri ------------------------------------------- Donald K. Barbieri President and Chief Executive Officer II-5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that, the undersigned directors and officers of Cavanaughs Hospitality Corporation, a Washington corporation, hereby constitute and appoint Donald K. Barbieri and Richard L. Barbieri, each with full power of substitution and resubstitution, their true and lawful attorneys and agents to sign the names of the undersigned directors and officers in the capacities indicated below to the registration statement to which this Power of Attorney is filed as an exhibit, and all amendments (including post-effective amendments) and supplements thereto, and all instruments or documents filed as a part thereof or in connection therewith, and to file the same, with all exhibits thereto, and all other instruments or documents in connection therewith, with the Securities and Exchange Commission; and each of the undersigned hereby ratifies and confirms all that said attorneys, agents, or any of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------- ------------------------------- ---------------- /s/ Donald K. Barbieri President, Chief Executive January 20, 1998 - ------------------------------- Officer and Chairman of the Donald K. Barbieri Board /s/ Arthur M. Coffey Executive Vice President, January 20, 1998 - ------------------------------- Chief Arthur M. Coffey Financial Officer and Director /s/ Richard L. Barbieri Senior Vice President, General January 20, 1998 - ------------------------------- Counsel and Director Richard L. Barbieri /s/ Thomas M. Barbieri Senior Vice President and January 20, 1998 - ------------------------------- Director Thomas M. Barbieri
II-6 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1* -- Form of Underwriting Agreement 3.1 -- Amended and Restated Articles of Incorporation of the Company 3.2 -- Amended and Restated By-Laws of the Company 4.1 -- Specimen Common Stock Certificate 5.1* -- Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP, regarding the legality of issuance of the Common Stock being registered 5.2* -- Opinion of Dennis McLaughlin & Associates P.S. regarding the legality of the issuance of the Common Stock being registered. 10.1* -- Employment Agreement between the Company and Donald Barbieri 10.2* -- Employment Agreement between the Company and Arthur Coffey 10.3* -- Employment Agreement between the Company and Richard Barbieri 10.4* -- Employment Agreement between the Company and David Bell 10.5* -- Employment Agreement between the Company and Thomas Barbieri 10.6* -- Form of Revolving Credit Facility Agreement 10.7 -- Form of Amended and Restated Agreement of Limited Partnership of Cavanaughs Hospitality Limited Partnership 10.8 -- Employee Stock Purchase Plan of Cavanaughs Hospitality Corporation 10.9 -- 1998 Stock Incentive Plan of Cavanaughs Hospitality Corporation 10.10 -- Company-Wide Stock Option Plan 10.11* -- Form of Stock Option Award Agreement 10.12 -- Form of Restricted Stock Award Agreement 10.13* -- Gateway Property Lease Agreement 10.14* -- Ridpath Property Lease Agreement 21* -- List of Subsidiaries of the Company 23.1 -- Consent of Coopers & Lybrand L.L.P. 23.2* -- Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in Exhibit 5.1) 23.2(A)* -- Consent of Dennis McLaughlin & Associates P.S. (included in Exhibit 5.2) 23.3 -- Consent of Peter F. Stanton 23.4 -- Consent of Ronald R. Taylor 23.5 -- Consent of Robert G. Templin 24.1 -- Power of Attorney (see signature pages) 27.1 -- Financial Data Schedule
- --------------------- * TO BE FILED BY AMENDMENT. II-7 EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPRATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CAVANAUGHS HOSPITALITY CORPORATION FIRST: The name of the corporation is Cavanaughs Hospitality ----- Corporation (hereinafter called the "Corporation"). SECOND: The address of the Corporation's registered office in ------ Washington is 201 W. North River Drive Suite 100, Spokane, WA 99201. Richard Barbieri is the corporation's registered agent at that address. THIRD: The nature of the business and purposes to be conducted by ----- the Corporation are to engage in, carry on and conduct any lawful act or activity for which corporations may be organized under the Washington Business Corporation Act, RCW Chapter 23B (hereafter "Act"). FOURTH: ------ 4.1 Authorized Shares. The amount of the capital stock that the ----------------- Corporation shall have authority to issue is fifty-five million (55,000,000) shares, consisting of fifty million (50,000,000) shares of Common Stock, par value $.01 per share (the "Common Stock") and five million (5,000,000) shares of Preferred Stock, par value of $.01 per share (the "Preferred Stock"). All cross references in each subdivision of this ARTICLE FOURTH refer to other paragraphs in such subdivision unless otherwise indicated. 4.2 Common Stock. ------------ 1. The Board of Directors may, in its discretion, out of funds legally available for the payment of dividends and at such times and in such manner as determined by the Board of Directors, declare and pay dividends in the amount determined by the Board of Directors on the Common Stock. 2. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, after there shall have been paid to or set aside for the holders of shares of Preferred Stock the full preferential amounts to which they are entitled, the holders of outstanding shares of Common Stock shall be entitled to receive pro rata, according to the number of shares held by each, the remaining assets of the Corporation available for distribution. 3. Except as otherwise provided by law and except as may be determined by the Board of Directors with respect to the Preferred Stock pursuant to Section 4.3 of this ARTICLE FOURTH, only the holders of shares of Common Stock shall be entitled to vote for the election of Directors of the Corporation and for all other corporate purposes. Upon any such vote the holders of shares of Common Stock shall, except as otherwise provided by law, be entitled to one vote for each share of Common Stock held by them respectively. 4. Shareholders of the Corporation shall not have cumulative voting rights. 4.3 Preferred Stock. The Preferred Stock may be issued from time to --------------- time in one or more series in any manner permitted by law and the provisions of the Articles of Incorporation of the Corporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. Unless otherwise provided in the resolution establishing a series of Preferred Stock, prior to the issue of any shares of a series so established or to be established, the Board of Directors may, by resolution, amend the relative rights and preferences of the shares of such series, and, after the issue of shares of a series whose number has been designated by the Board of Directors, the resolution establishing the series may be amended by the Board of Directors to increase (but not above the total authorized shares of the class) or to decrease (but not below the number of shares of such series then outstanding) the number of shares of that series. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock shall be governed by the following provisions: 1. The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors except if such resolution or resolutions conflict with the provisions of the Articles of Incorporation of the Corporation or the Act. Said resolution or resolutions may provide for (but not limiting the generality thereof) the following: a) The number of shares to constitute each such series, and the designation of each such series. b) The dividend rate of each such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes or on any other series of any class or classes of stock, and whether such dividends shall be cumulative or noncumulative. c) Whether the shares of each such series shall be subject to 2 redemption by the Corporation and if made subject to such redemption, the times, prices and other terms and conditions of such redemption. d) The terms and amount of any sinking fund provided for the purchase or redemption of the shares of each such series. e) Whether or not the shares of each such series shall be convertible into or exchangeable for shares of any other class or classes or any other series of any other class or classes of stock of the Corporation, and, if provision be made for conversion or exchange, the times, prices, rates of exchange, adjustments, and other terms and conditions of such conversion or exchange. f) The extent, if any, to which the holders of the shares of each such series shall be entitled to vote with respect to the election of Directors or otherwise. g) The restrictions, if any, on the issue or reissue of any additional Preferred Stock. h) The rights of the holders of the shares of each such series upon the dissolution of, or upon the distribution of the assets of, the Corporation. 2. Except as otherwise required by law and except for such voting powers with respect to the election of Directors or other matters as may be stated in the resolutions of the Board of Directors creating any series of Preferred Stock, the holders of any such series shall have no voting powers whatsoever. Any amendment of the Articles of Incorporation of the Corporation which shall increase or decrease the number of authorized shares of any class or classes of stock may be adopted by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote. FIFTH: The names of the original incorporators of the Corporation ----- are Louis L. Barbieri and Donald K. Barbieri. The address of the original incorporators is 201 W. North River Drive Suite 100, Spokane, WA 99201. SIXTH: The Corporation shall indemnify to the fullest extent ----- permitted by the Act as amended from time to time, including amendments which expand the allowable scope of indemnification, each person who is or was a director or officer of the Corporation both as to an action in his official capacity and as to action in another capacity while holding such office and such indemnification shall inure to the benefit of the heirs, executors and administrators of such a person. The indemnification provided for herein shall not be deemed exclusive of any 3 other rights to which those indemnified may be entitled under any by-law, agreement, vote of shareholders or disinterested directors or otherwise. SEVENTH: No director shall be personally liable to the Corporation or ------- its shareholders for monetary damages for breach of fiduciary duty as a director for any act or omission occurring subsequent to the date when this provision becomes effective, except that a director may be liable (i) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (ii) under Section 23B.08.310 of the Act (liability for unlawful distributions) or (iii) for any transaction with respect to which it was finally adjudged that such director personally received a benefit to which such director was not legally entitled. If the Act is amended to authorize corporate action further eliminating or limiting personal liability of directors, then the liability of a director of a corporation shall be eliminated or limited to the fullest extent permitted by the Act as so amended. Any repeal or modification of the foregoing provisions by shareholders shall not adversely affect any right or protection which existed at the time of such repeal or modification. EIGHTH: The Board of Directors may from time to time make, alter or ------ repeal the by-laws of the Corporation; provided, however, that any by-laws made, -------- ------- amended or repealed by the Board of Directors may be amended or repealed, and any by-laws may be made, by the shareholders of the Corporation. NINTH: The duration of the Corporation is to be perpetual. ----- TENTH: No holder of any shares of capital stock shall be entitled as ----- of right to subscribe for, purchase, or otherwise acquire any shares of any capital stock of the Corporation which the Corporation proposes to issue or any rights or options which the Corporation proposes to grant for the purchase of shares of any class of the Corporation or for the purchase of any shares, bonds, securities or obligations of the Corporation which are convertible into or exchangeable for, or which carry any rights to subscribe for, purchase, or otherwise acquire shares of any class of capital stock of the Corporation; and any and all of such shares, bonds, securities or obligations of the Corporation, whether now or hereafter authorized or created, may be issued, or may be reissued or transferred if the same have been reacquired and have treasury status, and any and all of such rights and options may be granted by the Board of Directors to such persons, firms, corporations and associations, and for such lawful consideration, and on such terms, as the Board of Directors in its discretion may determine, without first offering the same, or any thereof, to any said holder. ELEVENTH: The headings of the various section and subsections hereof -------- are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. TWELFTH: The number of Directors of the Corporation which shall -------- constitute the entire Board of Directors shall be such as from time to time shall be determined by a majority of the then authorized number of Directors, but in no case shall the number be less than 3 nor 4 more than 13. The Directors shall be classified with respect to the time for which they severally hold office into classes, as nearly equal in number as possible (but with not less than one Director in each class), as determined by the Board of Directors, one class to be elected for a term expiring at the first annual meeting of shareholders to be held after its election, another class to be elected for a term expiring at the second annual meeting of shareholders to be held after its election, and another class to be elected for a term expiring at the third annual meeting of shareholders to be held after its election, with the members of each class to hold office until their successors have been elected and qualified. At each annual meeting of shareholders, the successors of the members of the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. Except as otherwise provided in these Articles of Incorporation, newly created directorships resulting from any increases in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining Directors then in office, even if such majority is less than a quorum of the Board of Directors, and the person appointed thereto shall serve until the next annual meeting of shareholders, at which annual meeting the term of the position filled by vote of the Directors shall expire and the newly created position or vacancy shall be filled by election of the shareholders for a term corresponding to that of the vacancy being filled or of the newly created position. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. THIRTEENTH: Except as may otherwise be specifically provided in ---------- these Articles of Incorporation, no provision of these Articles of Incorporation is intended by the Corporation to be construed as limiting, prohibiting, denying, or abrogating any of the general or specific powers or rights conferred under the Act upon the Corporation, upon its shareholders, bondholders, and security holders, and upon its Directors, officers, and other corporate personnel, including, in particular, the power of the Corporation to furnish indemnification to Directors and officers in the capacities defined and prescribed by the Act and prescribed rights of said persons to indemnification as the same are conferred by the Act. FOURTEENTH: From time to time any of the provisions of these ---------- Articles of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Washington at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the shareholders of the Corporation by these Articles of Incorporation are granted subject to the provisions of this ARTICLE FOURTEENTH. These Articles of Incorporation are effective November 1, 1997 /s/ Richard L. Barbieri --- ------------------- Richard L. Barbieri Secretary 5 EX-3.2 3 AMENDED AND RESTATED BY-LAWS Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF CAVANAUGHS HOSPITALITY CORPORATION ARTICLE 1. OFFICES ------- Section 1.1 Principal Executive Office. The principal executive office -------------------------- (the "Principal Office") of the Corporation shall be located at 201 W. North River Drive, Suite 100, Spokane, Washington 99201 or such other locations as the Board of Directors shall determine. Section 1.2 Other Offices. The Corporation may also have offices at such ------------- other places both within and without the State of Washington as the Board of Directors may determine or as the business of the Corporation may require. ARTICLE 2. MEETING OF SHAREHOLDERS ----------------------- Section 2.1 Annual Meetings. The annual meeting of shareholders of the --------------- Corporation for the election of directors and the transaction of such other business as may be brought before the meeting in accordance with the Articles of Incorporation and these By-Laws shall be held on the date and at the time fixed from time to time by the Board of Directors within thirteen (13) months after the date of the preceding annual meeting. The annual meeting of shareholders of the Corporation shall not be called or held otherwise than as provided in the Articles of Incorporation or in these By-Laws. Section 2.2 Special Meetings. Special meetings of shareholders of the ---------------- Corporation may be called only at the direction of (i) the Board of Directors by a resolution adopted by the affirmative vote of a majority of the Board of Directors, or (ii) the holders of not less than a majority in aggregate of the then issued and outstanding shares of stock of the Corporation entitled to vote thereat ("Voting Shares"), upon written request delivered to the Secretary of the Corporation. Special meetings of shareholders of the Corporation shall not be called or held otherwise than as provided in the Articles of Incorporation or in these By-Laws. Section 2.3 Place of Meeting. Meetings of the shareholders of the ---------------- Corporation shall be held at such place, either within or without the State of Washington as the Board of Directors may determine. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2.4 Notice. Except as otherwise provided by Washington Business ------ Corporation Act, RCW Chapter 23B (hereafter "Act"), or unless lapse of time shall be waived, written notice of the time, date and place of any shareholders meeting, and, in the case or a special meeting, the purpose or purposes for which the meeting is called, shall be given to each shareholder at least ten (10) nor more than sixty (60) days before the date of such a meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the shareholder at his address as it appears on the records of the Corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Section 2.5 Quorum. At any meeting of shareholders, the holders of ------ record, present in person or by proxy, of a majority of the Corporation's issued and outstanding shares of stock entitled to vote at such meeting shall constitute a quorum for the transaction of business, except as otherwise provided by law. In the absence of a quorum, any officer entitled to preside at or to act as secretary of the meeting shall have power to adjourn the meeting from time to time until a quorum is present. Once a quorum is present, Shareholders may continue to transact business at the meeting notwithstanding the withdrawal of enough Shareholders to leave less than a quorum. Section 2.6 Voting. When a quorum is present at any meeting, action on a ------ matter is approved if the votes cast favoring the action exceed the votes cast opposing the action (taking into account those voting in person or by proxy at the meeting and entitled to vote on the subject matter unless the question is one upon which by express provision of law or of the Articles of Incorporation or of these By-Laws a different vote is require, and such approved action shall be the act of the shareholders. Section 2.7 Adjourned Meeting. Any meeting of shareholders may be ----------------- adjourned from time to time by the vote of a majority of the shares represented in person or by proxy whether or not a quorum is present. When a shareholders' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting ; however, if a record date for the adjourned meeting is or must be fixed in accordance with the Act, notice of the adjourned meeting must be given to persons who are Shareholders as of the new record date. Section 2.8 Proxies. Every person entitled to vote for Directors or any ------- other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy executed by, or delivered to the Corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is 2 received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the applicable provisions of the Washington Business Corporation Act (RCW Chapter 28B), referred to hereafter as the Act. Section 2.9 Shareholder Action by Consent. Without a meeting any action ----------------------------- required or permitted to be taken at any meeting of shareholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voting. Prompt notice of the taking of any such action shall be given to those shareholders who did not consent in writing. Any such consent in writing shall be filed with the minutes of proceedings of the shareholders. If the Act requires that notice of a proposed action be given to non-voting Shareholders and the action is to be taken by unanimous consent of the voting Shareholders, the Corporation must give its non- voting Shareholders written notice of the proposed action at least 10 days before the action is taken. The notice must contain or be accompanied by the same material that would have been required to be sent to the non-voting Shareholders in a notice of meeting at which the proposed action would have been submitted to such Shareholders for action. Section 2.10 Waiver of Notice. A shareholder may waive any notice ---------------- required to be given by these By-Laws, or the Articles of Incorporation of this Corporation, or any of the corporate laws of the State of Washington, before or after the meeting that is the subject of such notice. A valid waiver is created by any of the following three methods: (a) in writing, signed by the shareholder entitled to the notice and delivered to the Corporation for inclusion in its corporate records; (b) attendance at the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; or (c) failure to object at the time of presentation of a matter not within the purpose or purposes described in the meeting notice. ARTICLE 3. DIRECTORS --------- Section 3.1 Powers. The Board of Directors shall be responsible for the ------ entire management of the business of this Corporation. In addition, to the powers and authorities by these By-Laws and the Articles of Incorporation expressly conferred upon it, the Board of Directors may exercise all such corporate powers and do all such lawful acts and things as are not otherwise prohibited by the Act or by the Articles of Incorporation or by these By-Laws. The Board of Directors may delegate the management of the day-to-day operations of the business of the Corporation to a management company or other person, provided that the business and affairs of the Corporation shall be managed and all corporate power shall be exercised under the ultimate direction of the Board of Directors. 3 Section 3.2 Number; Board of Directors Divided in Classes. The number of --------------------------------------------- Directors of the Corporation which shall constitute the entire Board of Directors shall be such as from time to time shall be determined by a majority of the then authorized number of Directors, but in no case shall the number be less than 3 nor more than 13. The Directors shall be classified with respect to the time for which they severally hold office into classes, as nearly equal in number as possible (but with not less than 1 Director in each class), as determined by the Board of Directors, one class to be elected for a term expiring at the first annual meeting of shareholders to be held after its election, another class to be elected for a term expiring at the second annual of shareholders to be held after its election, another class to be elected for a term expiring at the second annual meeting of shareholders to be held after its election and another class to be elected for a term expiring at the third annual meeting of shareholders to be held after its election, with the members of each class to hold office until their successors have been elected and qualified. At each annual meeting of shareholders, the successors of the members of the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. Except as otherwise provided in these By- Laws, newly created directorships resulting from any increases in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining Directors then in office, even if such majority is less than a quorum of the Board of Directors. The term of office of any Director so elected by the shareholders to succeed a Director elected by the other Directors (or to fill a vacancy on the Board of Directors which had not been filled by the vote of such other Directors) shall expire at the annual meeting of shareholders at which annual meeting the term of the position filled by vote if the Directors shall expire and the newly created position or vacancy shall be filled by election of the shareholders for a term corresponding to that of the vacancy being filled or of the newly created position. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. Section 3.3 Nominations and Qualifications of Directors. Nominations for ------------------------------------------- the election of Directors may be made by the Board of Directors or a committee appointed by the Board of Directors or any shareholder entitled to vote generally in the election of Directors. However, any shareholder entitled to vote generally in the election of Directors may nominate one or more persons for election as Directors at a meeting only if written notice of such shareholder's intent to make such nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 60 calendar days in advance of the date in the current fiscal year of the Corporation corresponding to the date the corporation released its proxy statement to shareholders in connection with the annual meeting for the immediately preceding year, or (ii) with respect to an election to be held at a special meeting of shareholders for the election of Directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: 4 (1) The name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (2) A representation that the shareholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (3) A description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (4) Such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the then current proxy rules of the Securities and Exchange Commission, if the nominee were to be nominated by the Board of Directors; and (5) The consent of each nominee to serve as a Director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. The Directors shall be at least twenty-one years of age. Directors need not be shareholders or residents of the State of Washington. At each meeting of shareholders for the election of Directors at which a quorum is present, the persons receiving a plurality of the votes cast shall be elected Directors. Section 3.4 Meetings. -------- (1) Regular meetings of the Board of Directors shall be held at such times and places as may from time to time be fixed by the Board of Directors or as may be specified in a notice of meeting. Special meetings of the Board of Directors may be held at any time upon the call of the Chairman of the Board, the President, the Vice President or two or more directors. Oral or written notice of each special meeting of the Board of Directors, stating the time and place of the meeting, shall (i) be given to each Director not less than two days before such meeting or (ii) be delivered to the director personally by facsimile or by telephoning not less than one (1) day before the meeting. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of the shareholders. Notice need not be given of regular meetings of the Board of Directors. (2) Members of the Board of Directors or any committee designated by the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear each other. Such participation constitutes presence in person at such meeting. 5 (3) Whenever notice is required to be given to any Director pursuant to Act, the Corporation's Articles of Incorporation or these By-Laws, a written waiver thereof, signed by such Directors, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a Director at a meeting shall constitute a waiver of notice of such meeting except when the Director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.5 Quorum. A majority of the total number of Directors shall ------ constitute a quorum for the transaction of business. If a quorum is not present at any meeting of the Board of Directors, the Directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until such a quorum is present. Except as otherwise provided by the Act, the Articles of Incorporation of the Corporation, these By-Laws or any contract or agreement to which the Corporation is a party, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Any meeting of the Board of Directors may be adjourned and continued at a later time, including a meeting at which a quorum is not present. Notwithstanding Section 4 of this Article, notice of the adjourned meeting or of the business to be transacted therein, other than by announcement at the meeting of which the adjournment is taken, shall not be necessary. At any adjourned meeting at which a quorum is present, any business may be transacted which could have been transacted at the meeting as originally called. Section 3.6 Committees of Directors. The Board of Directors may, by ----------------------- resolution adopted by a majority of the full Board of Directors, designate from among its members an Executive Committee and one or more other committees, each of which, to the extent provided in such resolution, shall have and may exercise all the authority of the Board of Directors, except no such committee shall have the authority to (a) authorize or approve a distribution except according to a general formula or method prescribed by the Board of Directors; (b) approve or propose to shareholders action which the corporate law requires to be approved by shareholders; (c) fill vacancies on the Board of Directors or on any of its committees; (d) amend Articles of Incorporation; (e) adopt, amend, or repeal By- Laws; (f) approve a plan of merger not requiring shareholder approval; or (g) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations on a class or series of shares, except that the Board of Directors may authorize a committee, or a senior executive officer of the corporation, to do so within limits specifically prescribed by the Board of Directors. At such time as the stock of the Corporation may be publicly traded upon any exchange, there shall be an Audit Committee of one or more independent Directors and a Compensation Committee of one or more independent Directors. Section 3.7 Action Without Meeting. Any action required or permitted to ---------------------- be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting 6 if all members of the Board of Directors or any committee, as the case may be, consent in writing to such action and the writing or writings are filed with the minutes or proceedings of the Board of Directors or committee, as the case may be. Section 3.8 Fees and Compensation. Directors and members of committees --------------------- may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. No such payment shall preclude any Director from serving this Corporation in any other capacity and receiving compensation therefore. Section 3.9 Vacancies. Any vacancy in the Board of Directors caused by --------- death, resignation, retirement, disqualification or removal or any other cause (including an increase in the number of directors) may be filled by resolution adopted by the affirmative vote of a majority of the directors then in office, whether or not such majority constitutes less than a quorum, or by a sole remaining director. Any new director elected to fill a vacancy on the Board of Directors will serve for the remainder of the full term of the director for which the vacancy occurred. No decrease in the size of the Board of Directors shall have the effect of shortening the term of any incumbent director. Section 3.10 Resignation of Directors. Any director may resign at any ------------------------ time. Such resignation shall be made in writing and shall take effect at the time specified therein, and if no time be specified, shall take effect at the time of its receipt by the Chairman, the Chief Executive Officer or the Secretary of the Corporation. The acceptance of a resignation shall not be necessary to make it effective. No resignation shall discharge any accrued obligation or duty of a director. Section 3.11 Removal of Directors. A duly elected director of the -------------------- Corporation may be removed from such position, with or without cause, only by the affirmative vote of the holders of a majority of Voting Shares entitled to vote in the election of such director as provided in the Articles of Incorporation. Section 3.12 Chairman. The Board of Directors may select one of its -------- members to be Chairman. The Chairman shall have such powers and perform such duties which are commonly associated with the office of Chairman, including, presiding at meetings of the Board of Directors and at shareholder meetings. The Chairman shall also have such powers and perform such duties as are set forth in these By-Laws and as may from time to time be assigned to him by the Board of Directors. Section 3.13 Vice Chairman of the Board. The Vice-Chairman of the Board, -------------------------- if there be any, shall be a member of the Board of Directors and shall have such powers and perform such duties as may from time to time be assigned to him or her by the Board of Directors. 7 Section 3.14 Interested Directors and Officers. --------------------------------- (1) Contracts and Transactions. No contract or transaction -------------------------- between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are also directors or officers, or have a financial interest, shall be void or voidable solely for such reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (2) Disclosure to Board. The material facts as to his interest ------------------- and as to the contract or transaction are disclosed or known to the Board of Directors and the Board of Directors in good faith authorizes the contract or transaction by a vote sufficient for such purpose without counting the vote of the interested director or directors, even though the disinterested directors be less than a quorum; or (a) Disclosure and Shareholders. The material facts as to his --------------------------- interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by a vote of the shareholders; or (b) Fairness. The contract or transaction is fair as to the -------- Corporation as of the time it is authorized, approved, or ratified, by the Board of Directors or the shareholders. (3) Quorum. Interested directors may be counted in determining ------ the presence of a quorum at a meeting of the Board of Directors which authorizes a contract or transaction in the preceding section. Section 3.15 Presumption of Assent. A director of this Corporation who is --------------------- present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless: (a) the director objects at the beginning of the meeting, or promptly upon the director's arrival, to the holding of the meeting or transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director shall file written dissent or abstention with the presiding officer of the meeting before such adjournment or to the Corporation within a reasonable time after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 8 ARTICLE 4. OFFICERS -------- Section 4.1 Officers. The officers of the Corporation shall consist -------- of a President, a Secretary, a Chief Financial Officer (Treasurer) and such other additional officers with such titles as the Board of Directors shall determine, all of whom shall be chosen by and shall serve at the pleasure of the Board of Directors. Any number of offices may be held by the same person. Such officers shall have the usual powers and shall perform all the usual duties incident to their respective offices. All officers shall be subject to the supervision and direction of the Board of Directors. The authority, duties or responsibilities of any officer of the Corporation may be suspended by the President with or without cause. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. No officer need be a Shareholder of this Corporation. Section 4.2 Other Officers. The Board of Directors, at its -------------- discretion, may appoint, or empower the President to appoint, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, or such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as the Board of Directors or the President may from time to time determine. Section 4.3 Removal. Any officer may be removed, either with or ------- without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors (subject, in each case, to the rights, if any, of an officer under an employment contract). Section 4.4 Resignation. Any officer may resign at any time by ----------- giving written notice to the Board of Directors, the President, or to the Secretary of the Corporation without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.5 Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointments to such office. Section 4.6 Salaries. The salaries, if any, of the officers shall be -------- fixed from time to time by the Board of Directors or the committee of the Board designated for that purpose. No officers shall be prevented from receiving such salary by reason of the fact that said officer is also a Director of this Corporation. 9 ARTICLE 5. INDEMNIFICATION --------------- Section 5.1 Indemnification Rights. To the fullest extent permitted ---------------------- by the Act, as the same may be amended and supplemented, the Corporation shall indemnify each current or former Director or officer of the Corporation from and against any and all expenses, liabilities or other matters referred to in or covered by the Act, including, without limitation, by reason of his current or former position with the Corporation or by reason of the fact that he is or was serving, at the request of the Corporation, as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Section 5.2 Nonexclusivity. The indemnification provided for herein -------------- shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of shareholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Except as may otherwise be specifically provided in these By-Laws, no provision of these By-Laws is intended by the Corporation to be construed as limiting, prohibiting, denying or abrogating any of the general or specific powers or rights conferred under the Act upon the Corporation, upon its shareholders, bondholders and security holders, and upon its Directors, officers, employees or agents, including in particular the power of the Corporation to furnish indemnification to Directors, officers, employees and agents in the capacities defined and prescribed by the Act and prescribed rights of said persons to indemnification as the same are conferred by the Act. Section 5.3 Advancement of Expenses. The rights granted herein shall ----------------------- include the right to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of such expenses shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Director, officer, employee or agent, to repay all amounts so advanced if it shall ultimately be determined that such Director, officer, employee or agent is not entitled to indemnification. ARTICLE 6. SHARES AND SHAREHOLDERS ----------------------- Section 6.1 Share Certificates. ------------------ (1) The Corporation may issue a certificate or certificates representing shares of its stock. No shares of this Corporation shall be issued unless authorized by the Board or a committee of the Board. Such authorization shall include the maximum number of shares to be issued, the consideration to be received, and a statement that the Board considers the consideration to be adequate. Certificates for shares of the Corporation shall be in such form as 10 is consistent with the provisions of the Act and shall state: 1) The name of the Corporation and that the Corporation is organized under the laws of the State of Washington; 2)The name of the person to whom issued; and 3) The number and class of shares and the designation of the series, if any, which such certificate represents. Any or all of the signatures on the certificate may be a facsimile. The Board of Directors may appoint one or more transfer agents and registrars for its stock of any class or classes and may require stock certificates to be countersigned and registered by one or more of the transfer agents and registrars. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent of registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. The Corporation shall be entitled to issue shares of its capital stock without certificates representing such shares if the Board of Directors of the Corporation shall so resolve. (2) There shall be set forth on the face or back of a certificate which the Corporation may issue to represent a class or series of stock one of the following: (1) a statement of the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights, or (2) a summary of the statement described in subsection 1.B.(1) above. If a security of the corporation is subject to a restriction on the transfer or registration thereof, such restriction shall be noted, in writing, conspicuously upon the certificate representing the security. (3) The Corporation may, but shall not be required to, issue certificates representing a fraction of a share and, in this event, the holder thereof shall have all the rights appurtenant to ownership of that interest in the Corporation. If the Corporation elects not to issue certificates representing a fraction of a share to the persons entitled thereto, it shall, at its election, either: (4) Arrange for disposition of the fractional interest by those entitled thereto. (5) Pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined. (6) Issue scrip or warrants in registered or bearer which entitles the holder to receive a full share upon surrender of such scrip or warrants aggregating one or more full shares, which scrip or warrants may, if the Board of Directors elects, either become (i) void if not so surrendered on or before a specified date, or (ii) subject to such other conditions or limitations as may be designated by the Board of Directors. Section 6.2 Transfer of Certificates. Where a certificate for shares ------------------------ is presented to the Corporation or its transfer clerk or transfer agent with a request to register a transfer of shares, the Corporation is under a duty to register the transfer, cancel the certificate presented, and issue a new certificate if: (a) the certificate is endorsed or the instructions were originated by the 11 appropriate person or persons; (b) reasonable assurance is given that those endorsements or instructions are genuine and effective; (c) the Corporation has no duty to inquire into adverse claims or has discharged any such duty; (d) any applicable law relating to the collection of taxes has been complied with; and (e) reasonable assurance is given that the transfer is in fact rightful or is to a bona fide purchaser. Section 6.3 Lost Certificates. Where a certificate is alleged to ----------------- have been lost, destroyed or wrongfully taken, the Corporation shall issue a new certificate in place of the original if the owner: (a) so requests, in writing, before the Corporation has notice that the certificate has been acquired by a bona fide purchaser; and (b) if so requested by the Board of Directors, gives the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, destruction or wrongful taking of such certificate or the issuance of such new certificate. Except as provided above, no new certificate for shares shall be issued in lieu of an old certificate unless the Corporation is ordered to do so by a court judgment in an action brought in a court of appropriate jurisdiction. Section 6.4 Registration of Shares. The Corporation shall recognize ---------------------- the person or persons registered in its stock ledger as the exclusive owner and holder of the shares registered in his name and as the "shareholder" for all purposes herein with the exclusive rights inter alia to vote the shares, to ----- ---- receive dividends declared with respect to the shares, to transfer the shares to others, and to exercise any other rights of shareholders. The Corporation shall have no obligation to recognize any equitable or other claim or interest in any shares on the part of any person or persons other than the registered owner, as set forth in the stock ledger, whether or not the Corporation shall have any notice thereof, except as may otherwise be provided by the laws of the State of Washington. "Shares" for the purposes hereof, shall mean shares of the Corporation's stock authorized by its Articles of Incorporation and registered in the stock ledger as issued and outstanding, including any one or more classes of stock so authorized and whether or not such share is deemed to have voting or other privileges. It is the duty of every shareholder to notify this corporation of the shareholder's post office address. Section 6.5 Record Date. For the purpose of determining shareholders ----------- entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a record date for any such determination of shareholders, such date in any case to be not more than seventy (70) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of 12 shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date for the adjourned meeting. Section 6.6 Voting Record. The officer or agent having charge of the ------------- stock transfer books for shares of this Corporation shall make at least ten (10) days before each meeting of shareholders a complete record of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof. ARTICLE 7. GENERAL PROVISIONS ------------------ Section 7.1 Notices. Whenever any statute, the Articles of ------- Incorporation or these By-Laws requires notice to be given to any Director or shareholder, such notice may be given in writing by mail, addressed to such Director or shareholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Such notices shall be deemed to have been given when it is deposited in the United States mail. Notice to Directors may also be given by facsimile or telephone. Section 7.2 Dividends and Reserves. The Board of Directors, from ---------------------- time to time, may determine whether any, and, if any, what part, of its net assets in excess of its capital available therefor pursuant to applicable law and the Articles of Incorporation shall be declared by it as dividends on the stock of the Corporation. The Board of Directors, in its discretion, in lieu of declaring any such dividend, may use and apply any of such net profits or net assets as a reserve for working capital, to meet contingencies, for the purpose of maintaining or increasing the property or business of the Corporation or for any other lawful purpose which it may think conducive to the best interests of the Corporation. Section 7.3 Seal. The corporate seal of the Corporation shall be in ---- the form of a circle and shall bear the name of the Corporation and the year and state of its incorporation. Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be ----------- fixed by the Board of Directors. Section 7.5 Record Date; Books and Records. ------------------------------ (1) The Board of Directors may fix, in advance, a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, 13 to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. (2) The Corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, Board of Directors and committees of the Board of Directors and shall keep at its principal executive office or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each. Such minutes shall be kept in written form. Such other books and records shall be kept either in written form or in any other form capable of being converted into written form. Section 7.6 Check, Drafts, Etc. All checks, drafts or other orders ------------------- for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 7.7 Authority to Execute Contracts. The Board of Directors ------------------------------ may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, subject to the applicable laws of the State of Washington. Such authority may be general or confined to specific instances and, unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 7.8 Representation of Shares of Other Corporations. The ---------------------------------------------- President or any Vice President and the Secretary or any Assistant Secretary of this Corporation are authorized to vote, represent and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this Corporation. The authority herein granted to said officers to vote or represent on behalf of this Corporation any and all shares held by this Corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 7.9 Construction and Definitions. Unless the context ---------------------------- otherwise requires, the general provisions, rules of construction and definitions contained in the Act shall govern the construction of these By-Laws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. Section 7.10 Books and Records. The Corporation shall keep as ----------------- permanent records minutes of all meetings of its shareholders and Board of Directors, a record of all actions taken by the shareholders or Board of Directors without a meeting, and a record of all actions taken by a committee of the Board of Directors exercising the authority of the Board of Directors on 14 behalf of the Corporation; shall maintain appropriate accounting records; and the Corporation or its agent shall maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each; and shall keep a copy of the following records at its principal office: (1) The Articles or Restated Articles of Incorporation and all amendments to them currently in effect; (2) The By-Laws or Restated By-Laws and all amendments to them currently in effect; (3) The minutes of all shareholders' meetings, and records of all actions taken by shareholders without a meeting, for the past three (3) years; (4) Its financial statements for the past three (3) years, including balance sheets showing in reasonable detail the financial condition of the Corporation as of the close of each fiscal year, and an income statement showing the results of its operations during each fiscal year prepared on the basis of generally accepted accounting principles or, if not, prepared on a basis explained therein; (5) All written communications to shareholders generally within the past three (3) years; (6) A list of the names and business addresses of its current directors and officers; and (7) Its most recent annual report delivered to the Corporations Division of the State of Washington. Section 7.11 Financial Statements. Not later than four (4) months -------------------- after the close of its fiscal year, and in any event prior to the annual meeting of shareholders, the corporation shall prepare a balance sheet and income statement as of the close of the fiscal year. Upon written request, the Corporation shall mail to any shareholder a copy of the most recent balance sheet and income statement. If the annual financial statements are reported upon by a public accountant, the accountant's report must accompany them. If not, the statements must be accompanied by the statement required by Washington law, which is signed by the President or a person responsible for the Corporation's accounting records. 15 ARTICLE 8. AMENDMENTS ---------- Subject to any limitations imposed by law or the Articles of Incorporation these By-Laws may be altered, amended, supplemented or repealed, or new By-Laws may be adopted, (a) at any annual or special meeting of the shareholders by affirmative vote of all shareholders or (b) at any regular or special meeting of the Board of Directors by affirmative vote of a majority of the Board of Directors. In either case, notice of the proposed amendment must be given in the Notice of the meeting. The undersigned, being the Secretary of Cavanaughs Hospitality Corporation, hereby certifies that the foregoing By-Laws were adopted as the restated By-Laws of said corporation by its Board of Directors effective January 1, 1998. /s/ Richard Barbieri --------------------------- Richard Barbieri, Secretary 16 EX-4.1 4 SPECIMEN COMMON STOCK CERTIFICATE EXHIBIT 4.1 Common Stock Common Stock Incorporated Under the Laws of See Reverse for Statements the State of Washington Relating to Rights Preferences, Privileges and Restrictions, If Any This Certifies that is the Record Holder of Fully paid and nonassessable shares of the Common Stock, par value $.01 per share, of CAVANAUGHS HOSPITALITY CORPORATION transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signature of its duly authorized officers. Dated:__________________________ Cavanaughs Hospitality Corporation WASHINGTON Richard L. Barbieri Donald K. Barbieri Secretary President and Chief Executive Officer Countersigned and Registered: American Stock Transfer & Trust Company Trust Agent and Registrant By: --------------------------- Authorized Signature The Corporation is authorized to issue two classes of stock, Common Stock and Preferred Stock. The Board of Directors of the Corporation has the authority to fix the number of shares and the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any unissued series of Preferred Stock. A statement of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares and upon the holders thereof as established by the Articles of Incorporation of the Corporation and by any certificate of determination, and the number of shares constituting each class or series and the designations thereof, may be obtained by any shareholder of the Corporation upon written request and without charge from the Secretary of the Corporation at its corporate headquarters. The following abbreviation, when used in the incorporation on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entries JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT _________________________________ Custodian Minor under Uniform Gifts to Minors Act _________________________________ (State) UNIF TRF MIN ACT _________________________________ Custodian until age _____ Custodian under Uniform Transfers to Minors Act _________________________________ State Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _____________ hereby sell, assign and transfer unto 2 PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________________ - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------- Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated:__________ X ________________________________________ X ________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. ____________ Guaranteed ____________________________________ SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS), STOCKHOLDERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO A.S.C. RULE 17ad15. 3 EX-10.7 5 FORM OF AMENDED AND RESTATED AGREEMENT EXHIBIT 10.7 FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CAVANAUGHS HOSPITALITY LIMITED PARTNERSHIP THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as of___________, 1998, is entered into by and among Cavanaughs Hospitality Corporation, a Washington corporation ("CHC" or "General Partner"), as the General Partner and the Persons whose names are set forth on Exhibit D attached hereto, as the Limited Partners, together with any Persons who become Partners in the Partnership as provided herein. WHEREAS, the Partners desire to amend and restate the Original Partnership Agreement in its entirety; WHEREAS, the General Partner proposes to cause the Partnership to acquire direct and indirect interests in real estate and other assets, to cause the Partnership to enter into certain mortgage financing transactions and, in the event of any public offering of CHC Stock, to contribute the remaining net proceeds from the public offering to the Partnership in accordance with this Agreement; and WHEREAS, the Partnership will issue Partnership Interests to the General Partner and other persons in accordance with this Agreement; NOW, THEREFORE, that for good and adequate consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINED TERMS The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement. "Act" means the Delaware Revised Uniform Limited Partnership Act, as --- it may be amended from time to time, and any successor to such statute. "Additional Limited Partner" means a Person admitted to the -------------------------- Partnership as a Limited Partner pursuant to Section 4.1 hereof and who is shown as such on the books and records of the Partnership. "Adjusted Capital Account" means the Capital Account maintained for ------------------------ each Partner as of the end of each Partnership Year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement, or is treated as being obligated to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c), or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1), 1.704-2(i)(5), and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704- 1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjusted Capital Account Deficit" means, with respect to any Partner, -------------------------------- the deficit balance, if any, in such Partner' s Adjusted Capital Account as of the end of the relevant Partnership Year. "Adjusted Property" means any property the Carrying Value of which has ----------------- been adjusted pursuant to Exhibit A hereof. --------- "Affiliate" means, with respect to any Person, (i) any Person directly --------- or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person, (iii) any Person of which such Person owns or controls ten percent (10%) or more of the voting interests, or (iv) any officer, director, general partner or trustee of such Person or of any Person referred to in clauses (i), (ii), and (iii) above. For the purposes of this definition, "control" when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Amended and Restated Agreement of Limited --------- Partnership, as it may be amended, supplemented or restated from time to time. "Assignee" means a Person to whom one or more Partnership Units have -------- been transferred in a manner permitted under this Agreement, but who has not become a Substituted Limited Partner, and who has the rights set forth in Section 11.5. "Book-Tax Disparities" means, with respect to any item of Contributed -------------------- Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's Capital Account balance as maintained pursuant to Exhibit A and the hypothetical balance of such Partner's Capital Account --------- computed as if it had been maintained strictly in accordance with federal income tax accounting principles. "Business Day" means any day except a Saturday, Sunday or other day on ------------ which commercial banks in New York, New York are authorized or required by law to close. 2 "Capital Account" means the Capital Account maintained for a Partner --------------- pursuant to Exhibit A hereof. --------- "Capital Contribution" means, with respect to any partner, any cash, -------------------- cash equivalents or the 704(c) Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Section 4.1 or 4.2 hereof (reduced by any indebtedness either assumed by the Partnership or to which such property is subject at the time of the contribution as determined under Section 752 of the Code and the Regulations thereunder). The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed by a Partner as the maker of the note shall not be considered a capital contribution until the Partnership makes a taxable disposition of the note or until (and to the extent) principal payments are made on the note, all in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(d)(2). "Carrying Value" means (i) with respect to a Contributed Property or -------------- Adjusted Property, the 704(c) Value of such property, reduced (but not below zero) by all Depreciation with respect to such Property charged to the Partners' Capital Accounts following the contribution of or adjustment with respect to such Property, and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit A hereof, and to reflect changes, --------- additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. "Cash Amount" means an amount of cash per Partnership Unit equal to ----------- the Value on the Valuation Date of the CHC Shares Amount. "Certificate" means the Certificate of Limited Partnership relating to ----------- the Partnership filed in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act. "CHC" means Cavanaughs Hospitality Corporation, a Washington --- Corporation. "CHC Shares Amount" means a whole number of CHC Shares equal to the ----------------- product of the number of Partnership Units offered for redemption by a Redeeming Partner, multiplied by the Conversion Factor (rounded down to the nearest whole number in the event such product is not a whole number); provided that in the ------------- event the General Partner at any time issues to all holders of CHC Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders to subscribe for or purchase CHC Shares, or any other securities or property (collectively, the "rights"), which rights have not expired pursuant to their terms, then the CHC Shares Amount thereafter shall also include such rights that a holder of that number of CHC Shares would be entitled to receive. 3 "CHC Share" means a share of common stock, par value $.01 per share, --------- of the General Partner. "Code" means the Internal Revenue Code of 1986, as amended and in ---- effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "Consent" means the consent or approval of a proposed action by a ------- Partner given in accordance with Section 14.2 hereof. "Contributed Property" means each property or other asset contributed -------------------- to the Partnership, in such form as may be permitted by the Act, but excluding cash contributed or deemed contributed to the Partnership. Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 1.D of Exhibit A --------- hereof, such property shall no longer constitute a Contributed Property for purposes of Exhibit A hereof, but shall be deemed an Adjusted Property for such --------- purposes. "Conversion Factor" means 1.0, provided that in the event that the ----------------- ------------- General Partner (i) declares or pays a dividend on its outstanding CHC Shares in CHC Shares or makes a distribution to all holders of its outstanding CHC Shares in CHC Shares; (ii) subdivides its outstanding CHC Shares; or (iii) combines its outstanding CHC Shares into a smaller number of CHC Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of CHC Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of CHC Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, subdivision or combination. Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. "Debt" means, as to any Person, as of any date of determination, (i) ---- all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services; (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person; (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person's interest in such property, even though such Person has not assumed or become liable for the payment thereof; and (iv) lease obligations of such Person which, in accordance with generally accepted accounting principles, should be capitalized. 4 "Depreciation" means, for each Partnership year, an amount equal to ------------ the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, -------- ------- that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner. "Distribution Amount" means, with respect to any period for which ------------------- there is a Distribution Event, an amount equal to the amount that the Partnership would have paid in federal (but not state) income taxes, calculated at the highest marginal individual federal income tax rate set forth in Section 1 of the Code for the taxable year in which the distribution is made, on the Net Income for the taxable year through the calendar quarter to which the distribution relates, minus all General Partner Distribution Amounts and all Limited Partner Distribution Amounts previously distributed during the taxable year. "Distribution Event" means any calendar quarter in which the General ------------------ Partner determines that the Partnership has generated Net Income for such quarter, after taking into consideration the Net Income and Net Losses for all previous calendar quarters for the taxable year. "Effective Date" means November 1, 1997. -------------- "General Partner" means Cavanaughs Hospitality Corporation, a --------------- Washington corporation, or its predecessors or successors as general partner of the Partnership. "General Partner Distribution Amount" means the Distribution Amount, ----------------------------------- multiplied by a fraction, the numerator of which is the Net Income allocable to the General Partner for the taxable year through the quarter to which the distribution relates, and the denominator is Net Income for the taxable year through the quarter to which the distribution relates. "General Partner Interest" means a Partnership Interest held by the ------------------------ General Partner that is a general partnership interest. A General Partner Interest may be expressed as a number of Partnership Units. "IRS" means the Internal Revenue Service, which administers the --- internal revenue laws of the United States. 5 "Immediate Family" means, with respect to any natural Person, such ---------------- natural Person's spouse and such natural Person's natural or adoptive parents, descendants, nephews, nieces, brothers, and sisters. "Incapacity" or "Incapacitated" means, (i) as to any individual ---------- ------------- Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors, (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above, (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties, (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof, (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within ninety (90) days of such appointment, or (h) an appointment referred to in clause (g) which has been stayed is not vacated within ninety (90) days after the expiration of any such stay. "Indemnitee" means (i) any Person made a party to a proceeding by ---------- reason of his status as (A) the General Partner or (B) a director or officer of the Partnership or the General Partner, or (C) his or its liability, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken assets subject to), and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion. "initial public offering" means the first sale of CHC Shares by the ----------------------- General Partner pursuant to a registration under the Securities Act of 1933, as amended. "Limited Partner" means any person named as a Limited Partner in --------------- Exhibit A attached hereto, as such Exhibit may be amended from time to time, or any Substituted Limited 6 Partner or Additional Limited Partner, in such Person's capacity as a Limited Partner in the Partnership. "Limited Partner Distribution Amount" means the Distribution Amount ----------------------------------- less the General Partner Distribution Amount. "Limited Partner Interest" means a Partnership Interest of a Limited ------------------------ Partner in the Partnership representing a fractional part of the Partnership Interests of all Partners and includes any and all benefits to which the holder of such Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Limited Partner Interest may be expressed as a number of Partnership Units. "Liquidator" has the meaning set forth in Section 13.2. ---------- "Net Income" means, for any taxable period, the excess, if any, of the ---------- Partnership's items of income and gain for such taxable period over the Partnership's items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit A. Once an item of income, gain, loss or deduction that --------- has been included in the initial computation of Net Income is subjected to the special allocation rules in Exhibit B, Net Income or the resulting Net Loss, --------- whichever the case may be, shall be recomputed without regard to such item. "Net Loss" means, for any taxable period, the excess, if any, of the -------- Partnership's items of loss and deduction for such taxable period over the Partnership's items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with federal income tax accounting principles, subject to the specific adjustments provided for in Exhibit A. Once an item of income, gain, loss or deduction that --------- has been included in the initial computation of Net Loss is subjected to the special allocation rules in Exhibit B, Net Loss or the resulting Net Income, --------- whichever the case may be, shall be recomputed without regard to such item. "Nonrecourse Built-in Gain" means, with respect to any Contributed ------------------------- Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit B if such --------- properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for not other consideration. "Nonrecourse Deductions" has the meaning set forth in Regulations ---------------------- Section 1.704-2(b)(1), and the amount of Nonrecourse Deduction for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). 7 "Nonrecourse Liability" has the meaning set forth in Regulations --------------------- Section 1.752-1(a)(2). "Notice of Redemption" means the Notice of Redemption substantially in -------------------- the form of Exhibit C to this Agreement. --------- "Original Limited Partner" means a Limited Partner who is or becomes a ------------------------ Partner on the Effective Date. "Original Limited Partnership Unit" means a Partnership Unit held by --------------------------------- an Original Limited Partner on the Effective Date. "Partner" means a General Partner or a Limited Partner, and "Partners" ------- -------- means the General Partner and the Limited Partners. "Partner Minimum Gain" means an amount, with respect to each Partner -------------------- Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Debt" has the meaning set forth in Regulations ------------------------ Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in ------------------------------ Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704- 2(i)(2). "Partnership" means the limited partnership formed under the Act and ----------- pursuant to the Original Partnership Agreement and any successor thereto. "Partnership Interest" means an ownership interest in the Partnership -------------------- and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Partnership Units. "Partnership Minimum Gain" has the meaning set forth in Regulations ------------------------ Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704- 2(d). "Partnership Record Date" means the record date established by the ----------------------- General Partner for any distribution pursuant to Section 5.1 hereof. 8 "Partnership Unit" means a fractional, undivided share of the ---------------- Partnership interests of all Partners issued pursuant to Section 4.1 or 4.2. As of the Effective Date, there shall be considered to be 10,504,422 Partnership Units outstanding, representing 100% of the Percentage Interests in the Partnership. The ownership of Partnership Units may be evidenced by such form of certificate for units as the General Partner adopts from time to time. "Partnership Year" means the fiscal year of the Partnership, which ---------------- shall end on October 31, 1997. "Percentage Interest" means, as to a Partner, its interest in the ------------------- Partnership as determined by dividing the Partnership Units owned by such Partner by the total number of Partnership Units then outstanding. In the event differing classes of Partnership Interests are issued, Percentage Interests shall be calculated on a class by class basis. "Person" means an individual or a corporation, partnership, trust, ------ unincorporated organization, association or other entity. "Recapture Income" means any gain recognized by the Partnership upon ---------------- the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. "Redeeming Partner" has the meaning set forth in Section 8.6 hereof. ----------------- "Redemption Right" shall have the meaning set forth in Section 8.6 ---------------- hereof. "Regulations" means the Income Tax Regulations promulgated under the ----------- Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Residual Gain" or "Residual Loss" means any item of gain or loss, as ------------- ------------- the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit B to eliminate Book-Tax --------- Disparities. "704(c) Value" of any Contributed Property means the fair market value ------------ of such property or other consideration at the time of contribution as determined by the General Partner using such reasonable method of valuation as it may adopt. The General Partner shall, in its sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values of contributed Properties in a single or integrated transactions among the separate properties on a basis proportional to their respective fair market values. 9 "Specified Redemption Date" means the tenth (10th) Business Day after ------------------------- receipt by the General Partner of a Notice of Redemption; provided that no -------- ---- Specified Redemption Date shall occur before the later of one (1) year from the Effective Date or the date the Redemption Right arises under Section 8.6; provided further that if the General Partner combines its outstanding CHC Shares, no Specified Redemption Date shall occur after the record date and prior to the effective date of such combination. "Subsidiary" means, with respect to any Person, any corporation, ---------- partnership, or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person. "Substituted Limited Partner" means a Person who is admitted as a --------------------------- Limited Partner to the Partnership pursuant to Section 11.4. "Terminating Capital Transaction" means any sale or other disposition ------------------------------- of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership. "Unrealized Gain" attributable to any item of Partnership Property --------------- means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit A hereof) as of such --------- date, over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit A hereof) as of such date. --------- "Unrealized Loss" attributable to any item of Partnership property --------------- means, as of any date of determination, the excess, if any, of (i) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit A --------- hereof) as of such date, over (ii) the fair market value of such property (as determined under Exhibit A hereof) as of such date. --------- "Valuation Date" means the date of receipt by the General Partner of a -------------- Notice of Redemption or, if such date is not a Business Day, the first Business Day thereafter. "Value" means, with respect to a CHC Share, the average of the daily ----- market price for the ten (10) consecutive trading days immediately preceding the Valuation Date. The market price for each such trading day shall be: (i) if the CHC Shares are listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day; (ii) if the CHC Shares are not listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner; or (iii) if the CHC Shares are not listed or admitted to trading on any securities exchange or the NASDAQ National Market System and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a 10 reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than ten (10) days prior to the date in question) for which prices have been so reported; provided that if there are no bid and asked prices reported during the ten (10) - -------- ---- days prior to the date in question, the Value of the CHC Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the CHC Shares Amount includes rights that a holder of CHC Shares would be entitled to receive, and the General Partner acting in good faith determines that the value of such rights is not reflected in the Value of the CHC Shares determined as aforesaid, then the Value of such rights shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization ------------ The Partnership is a limited partnership organized pursuant to the provisions of the Act and upon the terms and conditions set forth herein. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Name ---- The name of the Partnership shall be Cavanaughs Hospitality Limited Partnership. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner, any Affiliate or such other business names as the General Partner shall determine. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time and from time to time and shall notify the Limited Partners of such change in the next regular communication to the Limited Partners. Section 2.3 Registered Office and Agent; Principal Office --------------------------------------------- The address of the registered office of the Partnership in the State of Delaware is 1013 Centre Road, Wilmington, New Castle County, Delaware, 19805, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office shall be Prentice Hall. The principal office of the Partnership shall be 201 W. North River Drive, Suite 100, Spokane, Washington 99201, or such other place as the General Partner may from time to time designate by notice to the Limited Partners. The Partnership may maintain offices at such 11 other place or places within or outside the State of Delaware as the General Partner deems advisable. Section 2.4 Power of Attorney ----------------- A. Each Limited Partner and each Assignee who accepts Partnership Units (or any rights, benefits or privileges associated therewith) is deemed to irrevocably constitute and appoint the General Partner, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to: (1) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the General Partner or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and in all jurisdictions in which the Partnership may or plans to conduct business or own property; (b) all instruments that the General Partner or the Liquidator deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the General Partner deems appropriate or necessary to reflect the dissolution and liquidation of the Partnership pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any partner pursuant to, or other events described in, Article 11, 12 or 13 hereof or the Capital Contribution of any Partner; and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Partnership Interests; and (2) execute, swear to, seal, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the General Partner or any Liquidator, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Partners hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the General Partner or any Liquidator, to effectuate the terms or intent of this Agreement. Nothing contained herein shall be construed as authorizing the General Partner or any Liquidator to amend this Agreement except in accordance with Article 14 hereof or as may be otherwise expressly provided for in this Agreement. B. The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Partners will be relying upon the power of the General Partner and any Liquidator to act as contemplated by this Agreement in any filing or other action by it on behalf of the Partnership, and it shall survive and not be 12 affected by the subsequent Incapacity of any Limited Partner or Assignee and the transfer of all or any portion of such Limited Partner's or Assignee's Partnership Units and shall extend to such Limited Partner's or Assignee's heirs, successors, assigns and personal representatives. Each such Limited Partner or Assignee hereby agrees to be bound by any representation made by the General Partner or any Liquidator, acting in good faith pursuant to such power of attorney, and each such Limited Partner or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the General Partner or any Liquidator, taken in good faith under such power of attorney. Each Limited Partner or Assignee shall execute and deliver to the General Partner or the Liquidator, within fifteen (15) days after receipt of the General Partner's or Liquidator's request therefor, such further designation, powers of attorney and other instruments as the General Partner or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Partnership. Section 2.5 Term ---- The term of the Partnership commenced on October 21, 1997, the date the Certificate was filed in the office of the Secretary of State of Delaware in accordance with the Act and shall continue until October 31, 2097, unless the Partnership is dissolved (sooner) pursuant to the provisions of Article 13 or as otherwise provided by law. ARTICLE 3 PURPOSE Section 3.1 Purpose and Business -------------------- The purpose and nature of the business to be conducted by the Partnership, directly and indirectly through Subsidiaries (including, without limitation, partnerships for which the Partnership is a general partner) is to carry out all activities which may be permitted by the Act, including without limitation invest in, acquire, purchase, lease, own and operate hotels and similar properties and businesses (including interests therein), to engage in all phases of the hotel business, and to pursue such other purposes as may be incidental or related thereto, including disposing of its interests in any or all of its hotels or properties and reinvesting the proceeds thereof in furtherance of its business. Section 3.2 Powers ------ The Partnership is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partner, including, without limitation, full power and authority, directly or through its ownership interest in other entities, to enter into, perform and carry out contracts of any kind, borrow money and issue evidences of indebtedness, whether or not secured by mortgage, deed of trust, pledge or other lien, acquire and develop real property, and lease, sell, transfer and dispose of real property. 13 ARTICLE 4 CAPITAL CONTRIBUTIONS Section 4.1 Issuances of Additional Interests --------------------------------- A. The General Partner may, at any time and from time to time, determine that the Partnership requires additional funds, which funds may consist of cash or property ("Additional Funds") for any Partnership purposes as the General Partner may determine. The General Partner may raise all or any portion of the Additional Funds by accepting additional Capital Contributions (of cash or property) in exchange for Partnership Units or other Partnership Interests, and is hereby authorized to cause the Partnership from time to time to issue to the Partners or other Persons (including, without limitation, admitting Persons to the Partnership as additional Limited Partners ("Additional Limited Partners")) in connection with the contribution of cash or property to the Partnership, additional Partnership Units or other Partnership Interests in one or more classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to Limited Partnership Interests, all as shall be determined by the General Partner in its sole and absolute discretion subject to Delaware law, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests; (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions; and (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership; provided that no such additional Partnership -------- ---- Units or other Partnership Interests shall be issued to the General Partner unless either (a)(1) the additional Partnership Interests are issued in connection with the grant, award, or issuance of shares of the General Partner, which shares have designations, preferences and other rights (except for voting rights) such that the economic interests attributable to such shares are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner in accordance with this Section 4.1.A, and (2) the General Partner shall make a Capital Contribution to the Partnership in an amount equal to the proceeds, if any, raised in connection with the issuance of such shares of the General Partner, or (b) the additional Partnership Interests are issued to all Partners in proportion to their respective Percentage Interests. B. After the Effective Date, the General Partner shall not grant, award, or issue any additional CHC Shares (other than CHC Shares issued pursuant to Section 8.6), or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase CHC Shares (collective "New Securities"), other than to all holders of CHC Shares unless -------------- (i) the General Partner shall cause the Partnership to issue to the General Partner Partnership Interests or rights, options, warrants or convertible or exchangeable securities of the Partnership having designations, preferences and other rights, all such that the economic interests are substantially the same as those of the grant, award or issuance of such New Securities, and (ii) the General Partner contributes the net proceeds from the grant, award or issuance of such New Securities and from the exercise of rights contained in such New Securities to the Partnership. Without limiting the foregoing, the General Partner is expressly authorized to issue 14 New Securities for less than fair market value, and to cause the Partnership to issue to the General Partner corresponding Partnership Interests, so long as (x) the General Partner concludes in good faith that such issuance is in the interests of the General Partner and the Partnership (for example, and not by way of limitation, the issuance of CHC Shares and corresponding Units pursuant to an employee stock purchase plan providing for employee purchases of CHC Shares at a discount from fair market value or employee stock options that have an exercise price that is less than the fair market value of the CHC Shares, either at the time of issuance or at the time of exercise), and (y) the General Partner contributes all proceeds from such issuance and exercise to the Partnership. C. Upon the acceptance of additional Capital Contributions in exchange for Partnership Units, the Percentage Interest related thereto shall be equal to a fraction, the numerator of which is equal to the amount of cash and the Carrying Value of the property contributed as of the Business Day immediately preceding the date on which the additional Capital Contributions are made (an "Adjustment Date") and the denominator of which is equal to the sum of (i) the Value of a CHC Share (computed as of the Business Day immediately preceding the Adjustment Date) multiplied by the CHC Shares Amount (assuming all outstanding Partnership Units are being "offered for redemption") (the "Outstanding Value") plus (ii) the aggregate amount of additional Capital Contributions contributed to the Partnership on such Adjustment Date in respect of such Partnership Units. The Percentage Interest of each other Partner holding Partnership Units shall be adjusted downward accordingly. Notwithstanding the foregoing, solely for purposes of calculating a Partner's Percentage Interest pursuant to this Section 4.1.C, (i) in the case of cash Capital Contributions by the General Partner, such Capital Contributions will be deemed to equal the cash contributed by the General Partner plus, in the case of cash contributions funded by an offering of CHC Shares or other shares of capital stock of the General Partner, the offering costs attributable to the cash contributed to the Partnership, and (ii) in the case of the contribution of properties (or any portion thereof) by the General Partner which were acquired by the General Partner in exchange for CHC Shares immediately prior to such contribution, the General Partner shall be issued a number of Partnership Units equal to the number of CHC Shares issued by the General Partner in exchange for such properties, the Partnership Units held by the other Partners shall not be adjusted, and the Partners' Percentage Interests shall be adjusted accordingly. The General Partner shall promptly give each Partner written notice of its Percentage Interest, as adjusted. Section 4.2 Contributions of Proceeds of Issuance of CHC Shares --------------------------------------------------- In connection with the initial public offering, and any other grant, award, or issuance of CHC Shares or rights, options, warrants, or convertible or exchangeable securities pursuant to Section 4.1, the General Partner shall make a Capital Contribution to the Partnership of the proceeds raised in connection with such grant, award, or issuance; provided that if the proceeds actually -------- ---- received by the General Partner are less than the gross proceeds of such grant, award, or issuance as a result of any underwriter's discount, commission, or fee or other expenses paid or incurred in connection with such grant, award, or issuance, then the General Partner shall be deemed to have made a Capital Contribution to the Partnership in the amount of the gross 15 proceeds of such issuance and the Partnership shall be deemed simultaneously to have reimbursed the General Partner pursuant to Section 7.4.C for the amount of such underwriter's discount or other expenses. Section 4.3 No Preemptive Rights -------------------- No existing Limited Partner shall have any preemptive, preferential or other similar right with respect to (i) additional Capital Contributions or loans to the Partnership; or (ii) issuance or sale of any Partnership Units or other Partnership Interests. Section 4.4 No Interest on Capital ---------------------- No Partner shall be entitled to interest on its Capital Contribution or its Capital Account. Section 4.5 Partnership Units for Initial Capital Contributions --------------------------------------------------- In consideration for the Capital Contributions made by CHC and the Original Limited Partner, the initial ownership of Partnership Units shall be as follows: CHC: _____ Partnership Units as a General Partner Interest _____ Partnership Units as a Limited Partner Interest Original Limited Partner: _____ Partnership Units as a Limited Partner Interest ARTICLE 5 DISTRIBUTIONS Section 5.1 Requirement and Characterization of Distributions ------------------------------------------------- The General Partner shall make distributions to the Partners when the General Partner so determines in its sole and absolute discretion, in accordance with the Partners' respective Percentage Interests on a "Partnership Record Date" determined by the General Partner in its sole and absolute discretion; provided, however, that if there is a Distribution Event, then the General - -------- ------- Partner shall distribute (i) an amount equal to the General Partner Distribution Amount to the General Partner and (ii) an amount equal to the Limited Partner Distribution Amount to the Limited Partners in accordance with the Limited Partners' respective Percentage Interests as soon as practicable after the end of the calendar quarter to which the Distribution Event relates. Further, it is understood by the Partners that the General Partner shall generally not make any distributions other than distributions in connection with a Distribution Event, it being the intent of the Partners that the earnings of the Partnership generally be reinvested in the business. 16 Section 5.2 Amounts Withheld ---------------- All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.5 hereof with respect to any allocation, payment or distribution to the General Partner, the Limited Partners or Assignees shall be treated as amounts distributed to the General Partner, Limited Partners, or Assignees pursuant to Section 5.1 for all purposes under this Agreement. Section 5.3 Distributions Upon Liquidation ------------------------------ Proceeds from a Terminating Capital Transaction and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership, shall be distributed to the Partners in accordance with Section 13.2. Section 5.4 Revisions to Reflect Issuance of Additional Partnership ------------------------------------------------------- Interests --------- In the event that the Partnership issues additional Partnership Interests to the General Partner or any Limited Partner or other Person under Article 4, the General Partner shall make such revisions to this Article 5 as it determines are necessary to reflect the issuance of such additional Partnership Interests. ARTICLE 6 ALLOCATIONS Section 6.1 Allocations For Capital Account Purposes ---------------------------------------- For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership's items of income, gain, loss and deduction (computed in accordance with Exhibit A hereof) shall be --------- allocated among the Partners in each taxable year (or portion thereof) as provided herein below. A. Net Income. After giving effect to the special allocations set forth ---------- in Section 1 of Exhibit B, Net Income shall be allocated (i) first, to the --------- General Partner to the extent that Net Losses previously allocated to the General Partner pursuant to the last sentence of Section 6.1.B exceed Net Income previously allocated to the General Partner pursuant to this clause (i) of Section 6.1.A, and (ii) thereafter, Net Income shall be allocated to the Partners in accordance with their respective Percentage Interests. B. Net Losses. After giving effect to the special allocations set forth ---------- in Section 1 of Exhibit B, Net Losses shall be allocated to the Partners in --------- accordance with their respective Percentage Interests; provided that Net Losses -------- ---- shall not be allocated to any Limited Partner pursuant to this Section 6.1.B to the extent that such allocation would cause such Limited Partner to have an Adjusted Capital Account Deficit at the end of such taxable year (or increase any 17 existing Adjusted Capital Account Deficit). All Net Losses in excess of the limitations set forth in this Section 6.1.B shall be allocated to the General Partner. C. Allocation of Nonrecourse Debt. For purposes of Regulations Section ------------------------------ 1.752-3(a), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of (i) the amount of Partnership Minimum Gain and (ii) the total amount of Nonrecourse Built-in Gain shall be allocated among the Partners in accordance with their respective Percentage Interests. D. Recapture Income. Any gain allocated to the Partners upon the sale or ---------------- other taxable disposition of any Partnership asset shall to the extent possible, after taking into account other required allocations of gain pursuant to Exhibit ------- B, be characterized as Recapture Income in the same proportions and to the same - - extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income (including deductions taken by any Partner with respect to Contributed Property prior to the time such Property was contributed to the Partnership). E. Revisions to Reflect Issuance of Additional Partnership Interests. In ----------------------------------------------------------------- the event that the Partnership issues additional Partnership Interests to the General Partner or any Limited Partner or other Person under Article 4, the General Partner shall make such revisions to this Article 6 as it determines are necessary to reflect the issuance of such additional Partnership Interests. ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS Section 7.1 Management ---------- A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner, and no Limited Partner shall have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners with or without cause, except with the consent of the General Partner. In addition to the powers now or hereafter granted a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 7.3 hereof, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation: (1) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans), the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by deed to secure debt, mortgage, deed of trust or other lien or 18 encumbrance on the Partnership's assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Partnership; (2) the making of tax, regulatory and other filings, or rendering of periodic or other reports to governmental or other agencies having jurisdiction over the business or assets of the Partnership; (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership (including the exercise or grant of any conversion, option, privilege, or subscription right or other right available in connection with any assets at any time held by the Partnership) or the merger or other combination of the Partnership with or into another entity; (4) the use of the assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit, including, without limitation, the financing of the conduct of the operations of the General Partner, the Partnership or any of the Partnership's Subsidiaries, the lending of funds to other Persons (including, without limitation, the Partnership's Subsidiaries) and the repayment of obligations of the Partnership and its Subsidiaries and any other Person in which it has an equity investment and the making of capital contributions to its Subsidiaries; (5) the management, operation, leasing, landscaping, repair, alteration, demolition or improvement of any real property or improvements owned by the General Partner, the Partnership of any of the Partnership's Subsidiaries; (6) the negotiation, execution, and the performance of any contracts, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement, including contracting with contractors, developers, consultants, accountants, legal counsel, other professional advisors and other agents and the payment of their expenses and compensation out of the Partnership's assets; (7) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement; (8) holding, managing, investing and reinvesting cash and other assets of the Partnership; (9) the collection and receipt of revenues and income of the Partnership; (10) the establishment of one or more divisions of the Partnership, the selection and dismissal of employees of the Partnership, any division of the Partnership, or the General Partner (including, without limitation, employees having titles such as "president," "vice president," "secretary" and "treasurer" of the Partnership, any division of the Partnership, or the 19 General Partner), and agents, outside attorneys, accountants, consultants and contractors of the General Partner, the Partnership or any division of the Partnership, and the determination of their compensation and other terms of employment or hiring; (11) the maintenance of such insurance for the benefit of the Partnership and the Partners as it deems necessary or appropriate; (12) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity investment from time to time); (13) the control of any matters affecting the rights and obligations of the Partnership, including the settlement, compromise, submission to arbitration or any other form of dispute resolution, or abandonment of any claim, cause of action, liability, debt or damages due or owing to or from the Partnership, the commencement or defense of suits, legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, and the representation of the Partnership in all suits or legal proceedings, administrative proceedings, arbitrations or other forms of dispute resolution, the incurring of legal expense, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law; (14) the undertaking of any action in connection with the Partnership's direct or indirect investment in its Subsidiaries or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons); (15) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as it may adopt; (16) the exercise, directly or indirectly through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; (17) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Partnership or any other Person in which the Partnership has a direct or indirect interest, or jointly with any such Subsidiary or other Person; (18) the exercise of any of the powers of the General Partner enumerated in this Agreement on behalf of any Person in which the Partnership does not have an interest pursuant to contractual or other arrangements with such Person; 20 (19) the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate in the judgment of the General Partner for the accomplishment of any of the powers of the General Partner; and (20) the distribution of cash to acquire Partnership Units held by a Limited Partner in connection with a Limited Partner's exercise of its Redemption Right under Section 8.6. B. Each of the Limited Partners agrees that the General Partner is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Partnership without any further act, approval or vote of the Partners, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation, to the fullest extent permitted under the Act or other applicable law. The execution, delivery or performance by the General Partner or the Partnership of any agreement authorized or permitted under this Agreement shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Limited Partners or an other Persons under this Agreement or of any duty stated or implied by law or equity. C. At all times from and after the date hereof, the General Partner at the expense of the Partnership, may or may not, cause the Partnership to obtain and maintain (i) casualty, liability and other insurance on the properties of the Partnership and (ii) liability insurance for the Indemnitees hereunder. D. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain at any and all times working capital accounts and other cash or similar balances in such amounts as the General Partner, in its sole and absolute discretion, deems appropriate and reasonable from time to time. E. The General Partner shall have the full power and authority in the name and on behalf of the Partnership in its capacity as the General Partner, to take all such actions and to execute, deliver, and file all such agreements, instruments, reports and documents as may be necessary or advisable in connection with the formation of the General Partner, the issuance of Units in connection with a proposed transaction or any transactions described in or contemplated by the General Partner's Registration Statement on Form S-1 as may be filed with the Securities and Exchange Commission. F. Notwithstanding anything to the contrary contained in this Agreement, any agreement of merger or consolidation of the Partnership entered into in accordance with the provisions of this Agreement may, as provided in Section 17- 211(g) of the Delaware Revised Uniform Limited Partnership Act, (1) effect any amendment to this Agreement or (2) effect the adoption of a new partnership agreement for the Partnership if it is the surviving or resulting limited partnership in the merger or consolidation (provided that no such amendment shall be so 21 effected if it would, under Section 7.3 hereof, require the consent of the Limited Partners (unless the requisite consent or consents shall be obtained), and no provision shall be included in any such new partnership agreement if such provision would, under Section 7.3 hereof, require the consent of the Limited Partners if it were being incorporated in this Agreement by amendment (unless the requisite consent shall be obtained). Section 7.2 Certificate of Limited Partnership ---------------------------------- The Partnership has filed the Certificate with the Secretary of State of Delaware as required by the Act. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to and restatements of the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state or the District of Columbia, in which the Partnership may elect to do business or own property. Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not be required, before or after filing, to deliver or mail a copy of the certificate or any amendment thereto to any Limited Partner. Section 7.3 Restrictions on General Partner's Authority ------------------------------------------- The General Partner may not take an action in contravention of an express prohibition or limitation of this Agreement without the written Consent of a majority of the Partnership Units held by the Limited Partners (including Limited Partnership Interests held by the General Partner or an Affiliate, or such lower percentage of the Limited Partners as may be specifically provided for under a provision of this Agreement or the Act). When there is a provision in this Agreement that the General Partner may take a specific action or the Agreement is silent with respect to a specific action, and there is provided no restrictive qualifications, the General Partner may so act without the Consent of the Limited Partners. Section 7.4 Reimbursement of the General Partner ------------------------------------ A. Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments, and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. B. The General Partner shall be reimbursed on a monthly basis, or such other basis as the General Partner may determine in its sole and absolute discretion, for all expenses it incurs relating to the ownership and operation of, or for the benefit of, the Partnership; provided that the -------- ---- 22 amount of any such reimbursement shall be reduced by any interest earned by the General Partner with respect to bank accounts or other instruments or accounts held by it on behalf of the Partnership as permitted in Section 7.5.A. The Limited Partners acknowledge that, for purposes of this Section 7.4.B, all of the General Partner's expenses (including without limitation, costs and expenses associated with compliance with the periodic reporting requirements and all other rules and regulations of the Securities and Exchange Commission or any other federal, state or local regulatory body, salaries payable to officers and employees of the General Partner, fees and expenses payable to directors of the General Partner, and all other operating of administrative costs of the General Partner) are deemed incurred for the benefit of the Partnership and shall be paid by or reimbursed by the Partnership as provided in this Section 7.4.B. Such reimbursement shall be in addition to any reimbursement to the General Partner as a result of indemnification pursuant to Section 7.7 hereof. All payments and reimbursements hereunder will be characterized for federal income tax purposes as expenses of the Partnership incurred on its behalf, and not expenses of the General Partner. C. The General Partner shall also be reimbursed for all expenses it incurs relating to the organization and/or reorganization of the Partnership and the General Partner, the initial public offering and any other issuance of additional Partnership Interests, CHC Shares or rights, options, warrants, or convertible or exchangeable securities pursuant to Section 4.1 hereof (including, without limitation, all costs, expenses, damages, and other payments resulting from or arising in connection with litigation related to any of the foregoing). D. In the event that the General Partner shall elect to purchase from its shareholders CHC Shares for the purpose of delivering such shares to satisfy an obligation under any dividend reinvestment program adopted by the General Partner, any employee stock purchase plan adopted by the General Partner, or any similar obligation or arrangement undertaken by the General Partner in the future, the purchase price paid by the General Partner for such CHC Shares and any other expenses incurred by the General Partner in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to the General Partner, subject to the condition that: (i) if such CHC Shares subsequently are to be sold by the General Partner, the General Partner shall pay to the Partnership any proceeds received by the General Partner for such CHC Shares (provided that a transfer of CHC Shares for Units pursuant to Section 8.6 would not be considered a sale for such purposes); and (ii) if such CHC Shares are not retransferred by the General Partner within 30 days after the purchase thereof, the General Partner shall cause the Partnership to cancel a number of Partnership Units (rounded to the nearest whole Unit) held by the General Partner equal to the product obtained by multiplying the number of such CHC Shares by a fraction, the numerator of which is one and the denominator of which is the Conversion Factor. Section 7.5 Outside Activities of the General Partner ----------------------------------------- A. Subject to Section 7.5.C below, the General Partner shall not directly or indirectly enter into or conduct any business, other than in connection with the ownership, acquisition and disposition of Partnership Interests as a General Partner, and the management of the businesses 23 of the Partnership, and such activities as are incidental thereto. The General Partner shall not incur any debts other than (i) debt of the Partnership for which it may be liable in its capacity as General Partner of the Partnership, and (ii) indebtedness for borrowed money the proceeds from which borrowing are loaned to the Partnership on the same terms and conditions as the borrowing by the General Partner. The General Partner shall not hold any assets other than Partnership Interests as a General Partner and stock of CHC (and indirectly there through, Partnership Interests as a Limited Partner), other than such bank accounts or similar instruments or accounts as it deems necessary to carry out its responsibilities contemplated under this Agreement and the Articles of Incorporation. Notwithstanding the foregoing, the General Partner may acquire property in exchange for CHC Shares, to the extent such properties are immediately contributed by the General Partner to the Partnership, pursuant to the terms described in Article 4. The General Partner and any Affiliates of the General Partner may acquire Limited Partner Interests and shall be entitled to exercise all rights of a Limited Partner relating to such Limited Partner Interests. B. Subject to the next sentence, the General Partner may, from time to time, purchase and/or redeem CHC Shares (including, without limitation, in connection with a stock repurchase or similar program), if the General Partner determines that it is in the interest of the Partnership for the General Partner to purchase and/or redeem CHC Shares. In the event that the General Partner purchases and/or redeems CHC Shares, then the General Partner shall cause the Partnership to purchase from the General Partner, concurrently with the CHC Share purchase, a number of Partnership Units as determined based on the application of the Conversion Factor for the same consideration (including any fees, commissions, and expenses payable by the General Partner in connection therewith) and on the same terms as the General Partner purchases such CHC Shares. C. Notwithstanding Section 7.5.A above, the General Partner shall have the right to hold assets, conduct business and incur indebtedness in connection therewith, with respect to certain assets that the General Partner believes, in its sole and absolute discretion, cannot or should not be held by or transferred to the Partnership. All benefits and burdens of any activities conducted in this fashion shall inure to the Partnership; all income, gain, loss, deduction, credit, cash flow and indebtedness shall be considered Partnership income, gain, loss, deduction, credit, cash flow and indebtedness. Without limiting the foregoing, for all purposes of this Agreement, the General Partner shall be considered the mere holder of legal title and the Partnership shall be considered the beneficial owner. Section 7.6 Contracts with Affiliates ------------------------- A. The Partnership may lend or contribute funds or other assets to its Subsidiaries or other Persons in which it has an equity investment, and such Persons may borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person. 24 B. Except as provided in Section 7.5, the Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the General Partner, in its sole and absolute discretion, believes are advisable. C. Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are determined by the General Partner in good faith to be fair and reasonable and no less favor to the Partnership than would be obtained from an unaffiliated third party. D. The General Partner, in its sole and absolute discretion and without the approval of the Limited Partners, may propose and adopt on behalf of the Partnership employee benefit plans, stock option plans, and similar plans funded by the Partnership for the benefit of employees of the General Partner, the Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in respect of services performed, directly or indirectly, for the benefit of the Partnership, the General Partner, or any of the Partnership's Subsidiaries. E. The General Partner is expressly authorized to enter into, in the name and on behalf of the Partnership, a right of first opportunity arrangement and other conflict avoidance agreements with various Affiliates of the Partnership and the General Partner, on such terms as the General Partner, in its sole and absolute discretion, believes are advisable. Section 7.7 Indemnification --------------- A. The Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorneys fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the Partnership in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, unless it is established that: (i) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services; or (iii) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. Without limitation, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guaranty or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.7 in favor of any Indemnitee having or potentially having liability for any such indebtedness. The termination of any proceeding, by judgment, order or settlement does not 25 create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.7.A. The termination of any proceeding by conviction of an Indemnitee or upon a plea of nolo contendere or its equivalent by an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, creates a rebuttable presumption that such Indemnitee acted in a manner contrary to that specified in this Section 7.7.A with respect to the subject matter of such proceeding. Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership or otherwise provide funds to enable the Partnership to fund its obligations under this Section 7.7. B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding may be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 7.7.A has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. C. The indemnification provided by this Section 7.7 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity unless otherwise provided in a written agreement pursuant to which such Indemnitee is indemnified. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. For purposes of this Section 7.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of Section 7.7; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. F. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. 26 G. An Indemnitee shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. H. The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Partnership's liability to any Indemnitee under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. Section 7.8 Liability of the General Partner -------------------------------- A. Notwithstanding anything to the contrary set forth in this Agreement, the General Partner shall not be liable for monetary damages to the Partnership, any Partners or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the General Partner acted in good faith. B. The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership and the General Partner's shareholders collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to Limited Partners or Assignees) in deciding whether to cause the Partnership to take (or decline to take) any actions, and that the General Partner shall not be liable to the Partnership or to any Partner for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. C. Subject to its obligations and duties as General Partner set forth in Section 7.1.A hereof, the General Partner may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith. D. Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's liability to the Partnership and the Limited Partners under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. 27 Section 7.9 Other Matters Concerning the General Partner -------------------------------------------- A. The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties. B. The General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers, architects, engineers, environmental consultants and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such General Partner reasonably believes to be within such Person's professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion. C. The General Partner shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent provided by the General Partner in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the General Partner hereunder. Section 7.10 Title to Partnership Assets --------------------------- Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; provided, -------- however, that the General Partner shall use its best efforts to cause beneficial - ------- and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Property assets is held. Section 7.11 Reliance by Third Parties ------------------------- Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Partnership shall be entitled to assume that the General Partner has full power and authority, without consent or approval of any other Partner or Person, to encumber, sell or otherwise use in any manner any and all assets of the Partnership and to enter into any contracts on behalf of the Partnership, and take any and all actions on behalf of the Partnership and such Person shall be 28 entitled to deal with the General Partner as if the General Partner were the Partnership's sole party in interest, both legally and beneficially. Each Limited Partner hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the General Partner in connection with any such dealing. In no event shall any Person dealing with the General Partner or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the General Partner or its representatives. Each and every certificate, document or other instrument executed on behalf of the Partnership by the General Partner or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (i) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (ii) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Partnership and (iii) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Partnership. The indemnification provision set forth in this Section 7.7 and the liability provision set forth in Section 7.8 are for the benefit of the Partners hereto. Any standard used therein is not intended to apply to any matter other than those two Sections; such standards shall specifically not apply to transactions between the Partnership and third parties. ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS Section 8.1 Limitation of Liability ----------------------- The Limited Partners shall have no liability under this Agreement except as expressly provided in this Agreement, including Section 10.5 hereof, or under the Act. Section 8.2 Management of Business ---------------------- No Limited Partner or Assignee (other than the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. 29 Section 8.3 Outside Activities of Limited Partners -------------------------------------- Subject to Section 7.5 hereof and any other agreements entered into by a Limited Partner or its Affiliates with the Partnership or a Subsidiary, any Limited Partner and any officer, director, employee, agent, trustee, Affiliate or shareholder of any Limited Partner shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities that are in direct competition with the Partnership or that are enhanced by the activities of the Partnership. Neither the Partnership nor any Partners shall have any rights by virtue of this Agreement in any business ventures of any Limited Partner or Assignee. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the Partnership relationship established hereby in any business ventures of any other Person (other than the General Partner to the extent expressly provided herein) and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Partnership, any Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Limited Partner or such other Person, could be taken by such Person. Section 8.4 Return of Capital ----------------- Except pursuant to the right of redemption set forth in Section 8.6, no Limited Partner shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Nothing in this Section 8.4 shall be interpreted as limiting the Partnership's right to redeem all or a portion of the Partnership Units held by a Limited Partner, with the consent of such Limited Partner, on such terms and for such consideration as determined by the General Partner to be in the interests of the Partnership. Except to the extent provided by Exhibit B hereof or as permitted by Section 4.1 --------- (relating to preferred interests issued subsequent to the date hereof), or otherwise expressly provided in this Agreement, no Limited Partner or Assignee shall have priority over any other Limited Partner or Assignee either as to the return of Capital Contributions or as to profits, losses or distributions. Section 8.5 Rights of Limited Partners Relating to the Partnership ------------------------------------------------------ A. In addition to other rights provided by this Agreement or by the Act, and except as limited by Section 8.5.C hereof, each Limited Partner shall have the right, for a purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership, upon written demand with a statement of the purpose of such demand and at such Limited Partner's own expense (including such copying and administrative charges as the General Partner may establish from time to time): (1) to obtain a copy of the most recent annual and quarterly reports filed with the Securities and Exchange Commission by the General Partner pursuant to the Securities Exchange Act of 1934; 30 (2) to obtain a copy of the Partnership's federal, state and local income tax returns for each Partnership Year; (3) to obtain a current list of the name and last known business, residence or mailing address of each Partner; (4) to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and (5) to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Partner and which each Partner has agreed to contribute in the future, and the date on which each became a Partner. B. The Partnership shall notify each Limited Partner, upon request, of the then current Conversion Factor and any change therein. C. Notwithstanding any other provision of this Section 8.5, the General Partner may keep confidential from the Limited Partners, for such period of time as the General Partner determines in its sole and absolute discretion to be reasonable, any information that (i) the General Partner reasonably believes to be in the nature of trade secrets or other information the disclosure of which the General Partner in good faith believes is not in the best interests of the Partnership or could damage the Partnership or its business or (ii) the Partnership is required by law or by agreements with an unaffiliated third party to keep confidential. Section 8.6 Redemption Right ---------------- A. Subject to Section 8.6.B, each Limited Partner shall have the right (the "Redemption Right"), on or after the first anniversary of the date on which such Limited Partner acquires its Partnership Units (or such later or earlier date as shall be determined in the sole and absolute discretion of the General Partner at the time of issuance of the Partnership Units), to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Partnership Units held by such Limited Partner at a redemption price equal to and in the form of the Cash Amount to be paid by the Partnership. The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the Partnership (with a copy to the General Partner) by the Limited Partner who is exercising the redemption right (the "Redeeming Partner"). A Limited Partner may not exercise the Redemption Right for less than one thousand (1,000) Partnership Units, or, if such Limited Partner holds less than one thousand (1,000) Partnership Units, all of the Partnership Units held by such Partner. The Assignee of any Limited Partner may exercise the rights of such Limited Partner pursuant to this Section 8.6, and such Limited Partner shall be deemed to have assigned such rights to such Assignee and shall be bound by the exercise of such rights by such Limited Partner's Assignee. In connection with any 31 exercise of such rights by such Assignee on behalf of such Limited Partner, the Cash Amount shall be paid by the Partnership directly to such Assignee and not to such Limited Partner. Neither the Redeeming Partner nor any Assignee of any Limited Partner shall have any right, with respect to any Partnership Units so redeemed, to receive any distributions paid after the Specified Redemption Date. B. Notwithstanding the provisions of Section 8.6.A, in the event a Limited Partner elects to exercise the Redemption Right, the General Partner may, in its sole and absolute discretion, elect to assume directly and satisfy all or a portion of a Redemption Right by electing to buy some or all of the Partnership Units from the Redeeming Partner for either the Cash Amount, the CHC Shares Amount, or a combination thereof, relating to the Partnership Units being purchased by the General Partner (in its sole and absolute discretion) on the Specified Redemption Date, whereupon the General Partner shall acquire such Partnership Units offered for redemption by the Redeeming Partner and shall be treated for all purposes of this Agreement as the owner of such Partnership Units. Unless the General Partner (in its sole and absolute discretion) shall exercise its right to assume directly and satisfy all or a portion of a Redemption Right, the General Partner itself shall have no obligation to the Redeeming Partner or to the Partnership with respect to the Redeeming Partner's exercise of the Redemption Right. In the event the General Partner shall exercise its right to satisfy all or a portion of a Redemption Right in the manner described in the first sentence of this Section 8.6.B, the Partnership shall have no obligation to pay any amount to the Redeeming Partner with respect to such Redeeming Partner's exercise of the Redemption Right to which the General Partner's election relates, and each of the Redeeming Partner, the Partnership, and the General Partner shall treat the transaction between the General Partner and the Redeeming Partner for federal income tax purposes as a sale of such Redeeming Partner's Partnership Units to the General Partner. Each Redeeming Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of CHC Shares upon exercise of the Redemption Right. If the Redemption Right is satisfied by the delivery of CHC Shares, the Redeeming Partner shall be deemed to become a holder of CHC Shares as of the close of business on the Specified Redemption Date. C. Each Limited Partner covenants and agrees with General Partner that all Partnership Units delivered for redemption shall be delivered to the Partnership or the General Partner, as the case may be, free and clear of all liens and, notwithstanding anything herein contained to the contrary, neither the General Partner nor the Partnership shall be under any obligation to acquire Partnership Units which are or may be subject to any liens. Each Limited Partner further agrees that, in the event any state or local property transfer tax is payable as a result of the transfer of its Partnership Units to the Partnership or the General Partner, such Limited Partner shall assume and pay such transfer tax. D. Notwithstanding anything herein to the contrary in this Agreement, with respect to any Redemption Right or exchange for CHC Shares pursuant to this Section 8.6: 32 (1) All Partnership Units acquired by the General Partner pursuant thereto shall automatically, and without further action required, be converted into and deemed to be Limited Partner Interests comprised of the same number and class of Partnership Units. (2) Without the consent of the General Partner, each Limited Partner may not effect a Redemption Right during the period after the Partnership Record Date with respect to a distribution and before the record date established by the General Partner for a distribution to its stockholders of some or all of its portion of such distribution. (3) The consummation of any Redemption Right or exchange for CHC Shares shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (4) Each Redeeming Partner shall continue to own all Partnership Units subject to any Redemption Right or exchange for CHC Shares, and be treated as a Limited Partner with respect to such Partnership Units for all purposes of this Agreement, until such Partnership Units are transferred to the General Partner and paid for or exchanged on the Specified Redemption Date. Until a Specified Redemption Date, the Redeeming Partner shall have no rights as a stockholder of the General Partner with respect to such Redeeming Partner's Partnership Units. E. In the event that the Partnership issues additional Partnership Interests to any Additional Limited Partner pursuant to Section 4.1 hereof, the General Partner shall make such revisions to this Section 8.6 as it determines are necessary to reflect the issuance of such additional Partnership Interests. F. Any Cash Amount to be paid to a Redeeming Partner pursuant to this Section 8.06 shall be paid within 60 days after the Specified Redemption Date relating to the Partnership Units to be redeemed or purchased; provided, -------- however, that such 60-day period may be extended for up to an additional 180-day - ------- period to the extent required for the Company to cause additional CHC Shares to be issued to provide financing to be used to make such payment of the Cash Amount. Notwithstanding the foregoing, the Company and the General Partner agree to use their best efforts to cause the closing of the acquisition of redeemed Partnership Units hereunder to occur as quickly as reasonably possible. SECTION 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting ---------------------- The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's 33 business, including, without limitation, all books and records necessary to provide to the Limited Partners any information, lists and copies of documents required to be provided pursuant to Section 9.3 hereof. Any records maintained by or on behalf of the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micro graphics or any other information storage device, provided that the records so -------- ---- maintained are convertible into clearly legible written form within a reasonable period of time. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or other such basis as the General Partner determines to be necessary or appropriate. Section 9.2 Fiscal Year ----------- The fiscal year of the Partnership shall end on October 31 of each calendar year. Section 9.3 Reports ------- A. As soon as practicable, but in no event later than one hundred five (105) days after the close of each Partnership Year, the General Partner shall cause to be mailed to each Limited Partner as of the close of the Partnership Year, an annual report containing financial statements of the Partnership, or of the General Partner if such statements are prepared solely on a consolidated basis with the General Partner, for such Partnership Year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the General Partner. B. As soon as practicable, but in no event later than one hundred five (105) days after the close of each calendar quarter (except the last calendar quarter of each year), the General Partner shall cause to be mailed to each Limited Partner as of the last day of the calendar quarter, a report containing unaudited financial statements of the Partnership, or of the General Partner, if such statements are prepared solely on a consolidated basis with the General Partner, and such other information as may be required by applicable law or regulation, or as the General Partner determines to be appropriate. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns -------------------------- The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within the time period for filing such returns (without extensions), the tax information reasonably required by Limited Partners for federal and state income tax reporting purposes. 34 Section 10.2 Tax Elections ------------- Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided, however, that the General Partner shall make the -------- election under Section 754 of the Code in accordance with the applicable regulations thereunder effective for the first calendar year following the Effective Date. The General Partner shall have the right to seek to revoke any such election (including, without limitation, the election under Section 754 of the Code) upon the General Partner's determination in its sole and absolute discretion that such revocation is in the best interests of the Partners. Section 10.3 Tax Matters Partner ------------------- A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Partnership, the tax matters partner shall furnish the IRS with the name, address, taxpayer identification number, and profit interest of each of the Limited Partners and the Assignees; provided, -------- however, that such information is provided to the Partnership by the Limited - ------- Partners and the Assignees. B. The tax matters partner is authorized, but not required: (1) to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of the Partnership items required to be taken into account by a Partner for income tax purposes (such administrative proceedings being referred to as a "tax audit" and such judicial proceedings being referred to as "judicial review"), and in the settlement agreement the tax matters partner may expressly state that such agreement shall bind all Partners, except that such settlement agreement shall not bind any Partner (i) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters partner shall not have the authority to enter into a settlement agreement on behalf of such Partner or (ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the Code) or a member of a "notice group" (as defined in Section 6223(b)(2) of the Code); (2) in the event that a notice of a final administrative adjustment at the Partnership level of any item required to be taken into account by a Partner for tax purposes (a "final adjustment") is mailed to the tax matters partner, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the filing of a complaint for refund with the United States Claims Court or the District Court of the United States for the district in which the Partnership's principal place of business is located; (3) to intervene in any action brought by any other Partner for judicial review of a final adjustment; 35 (4) to file a request for an administrative adjustment with the IRS and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition or complaint) for judicial review with respect to such request; (5) to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Partner for tax purposes, or an item affected by such item; and (6) to take any other action on behalf of the Partners of the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.7 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting or legal firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. Section 10.4 Organizational Expenses ----------------------- The Partnership shall elect to deduct expenses, if any, incurred by it in organizing the Partnership ratably over a sixty (60) month period as provided in Section 709 of the Code. Section 10.5 Withholding ----------- Each Limited Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Limited Partner pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any amount paid on behalf of or with respect to a Limited Partner shall constitute a loan by the Partnership to such Limited Partner, which loan shall be repaid by such Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to the Limited Partner or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be 36 distributed to the Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Limited Partner. Each Limited Partner hereby unconditionally and irrevocably grants to the Partnership a security interest in such Limited Partner's Partnership Interest to secure such Limited Partner's obligation to pay to the Partnership any amounts required to be paid pursuant to this Section 10.5. In the event that a Limited Partner fails to pay any amounts owed to the Partnership pursuant to this Section 10.5 when due, the General Partner may, in its sole and absolute discretion, elect to make the payment to the Partnership on behalf of such defaulting Limited Partner, and in such event shall be deemed to have loaned such amount to such defaulting Limited Partner and shall succeed to all rights and remedies of the Partnership as against such defaulting Limited Partner. Without limitation, in such event the General Partner shall have the right to receive distributions that would otherwise be distributable to such defaulting Limited Partner until such time as such loan, together with all interest thereon, has been paid in full, and any such distributions so received by the General Partner shall be treated as having been distributed to the defaulting Limited Partner and immediately paid by the defaulting Limited Partner to the General Partner in repayment of such loan. Any amounts payable by a Limited Partner hereunder shall bear interest at the lesser of (A) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four (4) percentage ------------------- points, or (B) the maximum lawful rate of interest on such obligation, such interest to accrue from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Limited Partner shall take such actions as the Partnership or the General Partner shall request in order to perfect or enforce the security interest created hereunder. ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer -------- A. The term "transfer," when used in this Article 11 with respect to a Partnership Interest or Partnership Unit, shall be deemed to refer to a transaction by which the General Partner purports to assign all or any part of its General Partner Interest to another Person or by which a Limited Partner purports to assign all or any part of its Limited Partner Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term "transfer" when used in this Article 11 does not include any redemption of Partnership Units by a Limited Partner or acquisition of Partnership Units from a Limited Partner by the General Partner pursuant to Section 8.6. B. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void. 37 Section 11.2 Transfer of General Partner's Partnership Interest -------------------------------------------------- A. The General Partner may not transfer any of its General Partner Interest or withdraw as General Partner except in connection with a transaction described in Section 11.2.B or 11.2.C. B. Except as otherwise provided in Section 11.2.C, the General Partner shall not engage in any merger, consolidation or other combination with or into another Person or sale of all or substantially all of its assets, or any reclassification, or recapitalization or change of outstanding CHC Shares (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination as described in the definition of "Conversion Factor") ("Transaction"), unless the Transaction also includes a merger of the Partnership or sale of substantially all of the assets of the Partnership or sale of substantially all of the assets of the Partnership which has been approved by the requisite Consent of the Partners pursuant to Section 7.3 and as a result of which all Limited Partners will receive for each Partnership Unit an amount of cash, securities, or other property equal to the product of the Conversion Factor and the greatest amount of cash, securities or other property paid to a holder of one CHC Share in consideration of one CHC Share at any time during the period from and after the date on which the Transaction is consummated. C. Notwithstanding Section 11.2.B, the General Partner may merge with another entity if immediately after such merger substantially all of the assets of the surviving entity, other than Partnership Units held by the General Partner (whether such Partnership Units constitute the General Partnership Interest or a Limited Partnership Interest), are contributed to the Partnership as a Capital Contribution in exchange for Partnership Units with a fair market value, as reasonably determined by the General Partner, equal to the 704(c) Value of the assets so contributed. Section 11.3 Limited Partners' Rights to Transfer ------------------------------------ A. Subject to the provisions of Section 11.3.F, no Limited Partner shall have the right to transfer all or any portion of his Partnership Interest, or any of such Limited Partner's rights as a Limited Partner, without the prior written consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. Any purported transfer of a Partnership Interest by a Limited Partner in violation of this Section 11.3.A shall be void ab initio and shall not be given effect for any -- ------ purpose by the Partnership. B. If a Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Limited Partner's estate shall have all the rights of a Limited Partner, but not more rights than those enjoyed by other Limited Partners, for the purpose of settling or managing the estate and such power as the Incapacitated Limited Partner possessed to transfer all or any part of his or its interest in the Partnership. The Incapacity of a Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. 38 C. The General Partner may prohibit any transfer by a Limited Partner of his Partnership Units if, in the opinion of legal counsel to the Partnership, such transfer would require filing of a registration statement under the Securities Act of 1933 or would otherwise violate any federal, state or foreign securities laws or regulations applicable to the Partnership or the Partnership Unit. D. No transfer by a Limited Partner of his Partnership Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation for federal income tax purposes, or would result in a termination of the partnership for federal income tax purposes or (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code. E. No transfer of any Partnership Units may be made to a lender to the Partnership or any person who is related (within the meaning of Section 1.752- 4(b) of the Regulations) to any lender to the Partnership whose loan constitutes a Nonrecourse Liability, without the consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion, provided that as a condition to such consent being granted the -------- ---- lender will be required to enter into an arrangement with the Partnership and the General Partner to exchange or redeem for the CHC Shares Amount any Partnership Units in which a security interest is held simultaneously with the time at which such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. F. Prior to the first anniversary of the Effective Date, no Limited Partner shall transfer all or any portion of its Partnership Interest to any transferee without the consent of the General Partner, which consent may be withheld in its sole and absolute discretion; provided, however, that any -------- ------- Limited Partner may, at any time (whether prior to or after such first anniversary), without the consent of the General Partner, (i) transfer all or any portion of its Partnership Interest to the General Partner, (ii) transfer all or an portion of its Partnership Interest to an Affiliate, another Original Limited Partner or to an Immediate Family member, subject to the provisions of Section 11.6, or in the case of an Original Limited Partner, to such Original Limited Partner's shareholders, members, partners or beneficiaries, as the case may be, (iii) transfer all or any portion of its Partnership Interest to a trust for the benefit of a charitable beneficiary or to a charitable foundation, subject to the provisions of Section 11.6 and (iv) subject to the provisions of Section 11.6, pledge (a "Pledge") all or any portion of its Partnership Interest to a lending institution, which is not an Affiliate or such Limited Partner, as collateral or security for a bona fide loan or other extension of credit, and transfer such pledged Partnership Interest to such lending institution in connection with the exercise of remedies under such loan or extension or credit. 39 Section 11.4 Substituted Limited Partners ---------------------------- A. No Limited Partner shall have the right to substitute a transferee as a Limited Partner in his place. The General Partner shall, however, have the right to consent to the admission of a transferee of the interest of a Limited Partner pursuant to this Section 11.4 as a Substituted Limited partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit a transferee of any such interests to become a Substituted Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. B. A transferee who has been admitted as a Substituted Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of a Limited Partner under this Agreement. The admission of any transferee as a substituted Limited Partner shall be subject to the transferee executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement (including, without limitation, the provisions of Section 2.4) and such other documents or instruments as may be required to effect the admission. Section 11.5 Assignees --------- If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.3 as a Substituted Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items of gain, loss, deduction and credit of the Partnership attributable to the Partnership Units assigned to such transferee, and shall be entitled to exercise Redemption Rights to the extent granted in Section 8.6, but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units in any matter presented to the Limited Partners for a vote (such Partnership Units being deemed to have been voted on such matter in the same proportion as all other Partnership Units held by Limited Partners are voted). In the event any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all the provisions of this Article 11 to the same extent and in the same manner as any Limited Partner desiring to make an assignment of Partnership Units. Section 11.6 General Provisions ------------------ A. No Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all of such Limited Partner's Partnership Units in accordance with this Article 11 or pursuant to redemption of all of its Partnership Units under Section 8.6. B. Any Limited Partner who shall transfer all of his Partnership Units in a transfer permitted pursuant to this Article 11 shall cease to be a Limited Partner upon the admission of all 40 Assignees of such Partnership Units as Substitute Limited Partners. Similarly, any Limited Partner who shall transfer all of his Partnership Units pursuant to a redemption of all of his Partnership Units under Section 8.6 shall cease to be a Limited Partner. C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees. D. If any Partnership Interest is transferred or assigned in compliance with the provisions of this Article 11 or redeemed or transferred pursuant to Section 8.6, on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such interest for such Partnership Year shall be divided and allocated between the transferor Partner and the transferee Partner by taking into account their varying interests during the fiscal year in accordance with Section 706(d) of the Code, using the interim closing of the books method (unless the General Partner, in its sole and absolute discretion, elects to adopt a daily, weekly or monthly proration method, in which event Net Income, Net Losses and each item thereof for such Partnership Year shall be prorated based upon the applicable period selected by the General Partner). Solely for purposes of making such allocations, each of such items for the calendar month in which the transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which a redemption occurs shall be allocated to the Redeeming Partner. All distributions of the Partner Distribution Amount attributable to such Partnership Unit with respect to which the Partnership Record Date is before the date of such transfer, assignment or redemption shall be made to the transferor Partner or the Redeeming Partner, as the case may be, and, in the case of a transfer or assignment other than a redemption, all distributions of the Partner Distribution Amount thereafter attributable to such Partnership Unit shall be made to the transferee Partner. ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Successor General Partner -------------------------------------- A successor to all of the General Partner Interest pursuant to Section 11.2.C hereof who is proposed to be admitted as a successor General Partner shall be admitted to the Partnership as the General Partner, effective upon such transfer. Any such transferee shall carry on the business of the Partnership without dissolution. In each case, the admission shall be subject to the successor General Partner executing and delivering to the Partnership an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission. In the case of such admission on any day other than the first day of a Partnership Year, all items attributable to the General Partner Interest for such Partnership Year shall be allocated between the transferring General Partner and such successor as provided in Section 11.6.D hereof. 41 Section 12.2 Admission of Additional Limited Partners ---------------------------------------- A. A Person who makes a Capital Contribution to the Partnership in accordance with this Agreement (or who exercises an option to receive Partnership Units) shall be admitted to the Partnership as an Additional Limited Partner only upon furnishing to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Section 2.4 hereof and (ii) such other documents or instruments as may be required in the discretion of the General Partner in order to effect such Person's admission as an Additional Limited Partner. B. Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Limited Partner without the consent of the General Partner, which consent may be given or withheld in the General Partner's sole and absolute discretion. The admission of any Person as an Additional Limited Partner shall become effective on the date upon which the name of such Person is recorded on the books and records of the Partnership, following the consent of the General Partner to such admission. C. If any Additional Limited partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Additional Limited Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which an admission of any Additional Limited Partner occurs shall be allocated among all the Partners and Assignees including such Additional Limited Partner. All distributions of the Partner Distribution Amount with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees other than the Additional Limited Partner, and all distributions of the Partner Distribution Amount thereafter shall be made to all the Partners and Assignees including such Additional Limited Partner. Section 12.3 Amendment of Agreement and Certificate of Limited Partnership ------------------------------------------------------------- For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practical an amendment of this Agreement and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Section 2.4 hereof. 42 ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution ----------- Except as set forth in this Article 13, no Partner shall have the right to dissolve the Partnership. The Partnership shall not be dissolved by the admission of Substituted Limited Partners or Additional Limited Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; B. (i) a final and non-appealable judgment is entered by a court of competent jurisdiction ruling that the General Partner is bankrupt or insolvent, or a final and non-appealable order for relief is entered by a court with appropriate jurisdiction against the General Partner, in each case under any federal or state bankruptcy or insolvency laws as now or hereafter in effect, unless prior to the entry of such order or judgment all of the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of a date prior to the date of such order or judgment, of a substitute General partner, or (ii) any other event of withdrawal of the General Partner, as defined in the Act (other than an event of bankruptcy), unless, within ninety (90) days after such event of withdrawal a majority of the Partnership Units held by the remaining Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal, of a successor General Partner; C. an election to dissolve the Partnership made by the General Partner, in its sole and absolute discretion; D. entry of a decree of judicial dissolution of the Partnership pursuant to the provisions of the Act; or E. the sale of all or substantially all of the assets and properties of the Partnership. Section 13.2 Winding Up ---------- A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner, or, in the event there is no remaining General Partner, any Person elected by a majority in interest of the Limited Partners (the General Partner or such other Person being referred to herein as the "Liquidator") shall be responsible for overseeing the 43 winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the General Partner, include shares of stock in the General Partner) shall be applied and distributed in the following order: (1) First, to the payment and discharge of all of the Partnership's debts and liabilities to creditors other than the Partners; (2) Second, to the payment and discharge of all of the Partnership's debts and liabilities to the General Partner; (3) Third, to the payment and discharge of all of the Partnership's debts and liabilities to the other Partners; and (4) The balance, if any, to the General Partner and Limited Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. B. Notwithstanding the provisions of Section 13.2.A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors) and/or distribute to the Partners, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2.A hereof, undivided interests in such Partnership assets as the Liquidator deems not suitable for liquidation. Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Partners, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time. The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt. C. In the discretion of the Liquidator, a pro rata portion of the distributions that would otherwise be made to the General Partner and Limited Partners pursuant to this Article 13 may be: (1) distributed to a trust established for the benefit of the General Partner and Limited Partners for the purposes of liquidating Partnership assets, collecting amounts owed to 44 the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the General Partner arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the General Partner and Limited Partners from time to time, in the reasonable discretion of Liquidator, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the General Partner and Limited Partners pursuant to this Agreement; or (2) withheld or escrowed to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the partnership, provided that such withheld or escrowed amounts shall be distributed to the General Partner and Limited Partners in the manner and order of priority set forth in Section 13.2.A as soon as practicable. Section 13.3 Compliance with Timing Requirements of Regulations -------------------------------------------------- In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article 13 to the General Partner and Limited Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a deficit balance in his Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Partner shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or to any other Person for any purpose whatsoever. Section 13.4 Deemed Distribution and Recontribution -------------------------------------- Notwithstanding any other provision of this Article 13, in the event the Partnership is considered liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership's property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Instead, for federal income tax purposes and purposes of maintaining Capital Accounts pursuant to Exhibit A hereto, the Partnership shall be deemed to have --------- distributed the property in kind to the General Partner and Limited Partners, who shall be deemed to have assumed and taken such property subject to all Partnership liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the General Partner and Limited Partners shall be deemed to have recontributed the Partnership property in kind to the Partnership, which shall be deemed to have assumed and taken such property subject to all such liabilities. Section 13.5 Rights of Limited Partners -------------------------- Except as otherwise provided in this Agreement, each Limited Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership. Except as otherwise 45 provided in this Agreement, no Limited Partner shall have priority over any other Partner as to the return of its Capital Contributions, distributions, or allocations. Section 13.6 Notice of Dissolution --------------------- In the event a Liquidating Event occurs or an event occurs that would, but provisions of an election or objection by one or more Partners pursuant to Section 13.1, result in a dissolution of the Partnership, the General Partner shall, within thirty (30) days thereafter, provide written notice thereof to each of the Partners. Section 13.7 Termination of Partnership and Cancellation of Certificate of ------------------------------------------------------------- Limited Partnership ------------------- Upon the completion of the liquidation of the Partnership cash and property as provided in Section 13.2 hereof, the Partnership shall be terminated, a certificate of cancellation shall be filed, and all qualifications of the Partnership as a foreign limited partnership in jurisdictions other than the State of Delaware shall be cancelled and such other actions as may be necessary to terminate the Partnership shall be taken. Section 13.8 Reasonable Time for Winding-Up ------------------------------ A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Partnership and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Partners during the period of liquidation. Section 13.9 Waiver of Partition ------------------- Each Partner hereby waives any right to partition of the Partnership property. Section 13.10 Liability of the Liquidator --------------------------- The Liquidator shall be indemnified and held harmless by the Partnership from and against any and all claims, demands, liabilities, costs, damages and cause of action of any nature whatsoever arising out of or incidental to the Liquidator's taking of an action authorized under or within the scope of this Agreement; provided, however, that the Liquidator shall not be entitled to -------- ------- indemnification, and shall not be held harmless, where the claim, demand, liability, cost, damage or cause of action at issue arises out of: (i) a matter entirely unrelated to the Liquidator's action or conduct pursuant to the provisions of this Agreement; or (ii) the proven willful misconduct or gross negligence of the Liquidator. 46 ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS Section 14.1 Amendments ---------- A. Amendments to this Agreement may be proposed by the General Partner or by any Limited Partners holding twenty-five percent (25%) or more of the Partnership Interests. Following such proposal, the General Partner shall submit any proposed amendment to the Limited Partners. Subject to Section 14.2.B, the General Partner shall seek the written vote of the Partners on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the General Partner may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period shall constitute a vote which is consistent with the General Partner's recommendation with respect to the proposal. Except as provided in Section 14.1.B, 14.1.C or 14.1.D, a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the General Partner and it receives the Consent of Partners holding a majority of the Percentage Interests of the Limited Partners (including Limited Partner Interests held by the General Partner). B. Notwithstanding Section 14.1.A, the General Partner shall have the power, without the consent of the Limited Partners, to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; (2) to reflect the admission, substitution, termination, or withdrawal of Partners in accordance with this Agreement; (3) to set forth the designations, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.1 hereof; (4) to reflect a change that does not adversely affect any of the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; and (5) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law. 47 The General Partner shall provide notice to the Limited Partners when any action under this Section 14.1.B is taken. C. Notwithstanding Section 14.1.A and 14.1.B hereof, this Agreement shall not be amended without the Consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a general partner interest, (ii) modify the limited liability of a Limited Partner in a manner adverse to such Limited Partner, (iii) alter the rights of the Partner to receive distributions pursuant to Article 5, or the allocations specified in Article 6 (except as permitted pursuant to Section 4.1 and Section 14.1.B(3) hereof) in a manner adverse to such Partner, (iv) alter or modify the Redemption Right and CHC Shares Amount as set forth in Sections 8.6, and related definitions hereof, (v) cause the termination of the Partnership prior to the time set forth in Sections 2.5 or 13.1, or (vi) amend this Section 14.1.C. Further, no amendment may alter the restrictions on the General Partner's authority set forth in Section 7.3 without the Consent specified in that section. D. Notwithstanding Section 14.1.A or Section 14.1.B hereof, the General Partner shall not amend Sections 4.1.A, 7.5, 7.6, 11.2 or 14.2 without the Consent of a majority of the Percentage Interests of the Limited Partners including Limited Partnership Interests held directly or indirectly by the General Partner. Section 14.2 Meetings of the Partners ------------------------ A. Meetings of the Partners may be called by the General Partner and shall be called upon the receipt by the General Partner of a request by Limited Partners holding twenty-five percent (25%) or more of the Partnership Interests. The call shall state the nature of the business to be transacted. Notice of any such meeting shall be given to all Partners not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Partners may vote in person or by proxy at such meeting. Whenever the vote or Consent of the Partners is permitted or required under this Agreement, such vote or Consent may be given at a meeting of the Partners or may be given in accordance with the procedure prescribed in Section 14.1.A hereof. Except as otherwise expressly provided in this Agreement, the Consent of holders of a majority of the Percentage Interests shall be that Consent required to obtain approval by the Partnership on all Partnership votes. B. Any action required or permitted to be taken at a meeting of the Partners may be taken without a meeting if a written consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement such consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Partners (or such other percentage as is expressly required by this Agreement). Such consent shall be filed with the General Partner. An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified. 48 C. Each Limited Partner may authorize any Person or Persons to act for him by proxy on all matters in which a Limited Partner is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Limited Partner or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Limited Partner executing it, such revocation to be effective upon the Partnership's receipt of written notice of such revocation form the Limited Partner executing such proxy. D. Each meeting of Partners shall be conducted by the General Partner or such other Person as the General Partner may appoint pursuant to such rules for the conduct of the meeting as the General Partner or such other Person deems appropriate in its sole discretion. Without limitation, meetings of Partners may be conducted in the same manner as meetings of the shareholders of the General Partner and may be held at the same time as, and as part of, meetings of the shareholders of the General Partner. ARTICLE 15 GENERAL PROVISIONS Section 15.1 Addresses and Notice -------------------- Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee. Such communications shall be deemed sufficiently given, served, sent or received for all purposes at such time as delivered to the addressee (with the return receipt or delivery receipt being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. Section 15.2 Titles and Captions ------------------- All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 15.3 Pronouns and Plurals -------------------- Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 49 Section 15.4 Further Action -------------- The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.5 Binding Effect -------------- This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.6 Creditors --------- Other than as expressly set forth herein with respect to the Indemnitees, none of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Partnership. Section 15.7 Waiver ------ No failure by any partner to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. Section 15.8 Counterparts ------------ This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on an the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affixing its signature hereto. Section 15.9 Applicable Law -------------- This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. Section 15.10 Invalidity of Provisions ------------------------ If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. 50 Section 15.11 Entire Agreement ---------------- This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes any other prior written or oral understandings or agreements among them with respect thereto. Section 15.12 No Rights as Shareholders ------------------------- Nothing contained in this Agreement shall be construed as conferring upon the holders of the Partnership Units any rights whatsoever as shareholders of the General Partner, including without limitation any right to receive dividends or other distributions made to shareholders of the General Partner or to vote or to consent or to receive notice as shareholders in respect of any meeting of shareholders for the election of directors of the General Partner or any other matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first written above. AS GENERAL PARTNER: CAVANAUGHS HOSPITALITY CORPORATION, a Washington corporation By _______________________________________ Donald K. Barbieri, President LIMITED PARTNERS: NORTH RIVER DRIVE COMPANY, a Washington corporation By _______________________________________ Richard L. Barbieri, Vice President 51 EXHIBIT A CAPITAL ACCOUNT MAINTENANCE 1. Capital Accounts of the Partners. -------------------------------- A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions and any other deemed contributions made by such Partner to the Partnership pursuant to this Agreement and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.A of the Agreement and Exhibit B hereof, and decreased by (x) the amount of cash or --------- the Carrying Value of all actual and deemed distributions of cash or property made to such partner pursuant to this Agreement (reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder) and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit B hereof. --------- B. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners' Capital Accounts, unless otherwise specified in this Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes determined in accordance with Section 703(a)(1) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (1) Except as otherwise provided in Regulations Section 1.704- 1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership, provided that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners' Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4). (2) The computation of all items of income, gain, and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable gross income or are neither currently deductible nor capitalized for federal income tax purposes. 1 (3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date. (4) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year. (5) In the event the Carrying Value of any Partnership Asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset. (6) Any items specifically allocated under Section 2 of Exhibit B hereof --------- shall not be taken into account. C. Generally, a transferee (including an Assignee) of a Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor; provided, however, that, if the transfer causes a termination of the Partnership - -------- ------- under Section 708(b)(1)(B) of the Code, the Partnership's properties shall be deemed solely for federal income tax purposes, to have been contributed to a new partnership in exchange for interests therein and then liquidated. In such event, the Carrying Values of the Partnership properties shall be adjusted, if appropriate, in accordance with Section 1.D(2) hereof. The Capital Account of such reconstituted Partnership shall be maintained in accordance with principles of this Exhibit A. --------- D. (1) Consistent with the provisions of Regulations Section 1.704- 1(b)(2)(iv)(f), and as provided in Section 1.D(2), the Carrying Values of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement. (2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; and (c) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments -------- ------- pursuant to clauses (a) and (b) above shall be made only if the General Partner determines that such adjustments are necessary or 2 appropriate to reflect the relative economic interests of the Partners in the Partnership. (3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the Carrying Value of Partnership assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed. (4) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit A, the aggregate cash amount and fair market value --------- of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article 13 of the Agreement, shall be determined and allocated by the Liquidator using such reasonable methods of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties). E. The provisions of this Agreement (including this Exhibit A and the --------- other Exhibits to this Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners) are computed in order to comply with such Regulations, the General Partner may make such modification without regard to Article 14 of the Agreement, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article 13 of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of the Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulation's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). 2. No Withdrawal. ------------- No Partner shall be entitled to withdraw any part of his Capital Contribution or his Capital Account or to receive any distribution from the Partnership, except as provided in Articles 5, 7 and 13 of the Agreement. 3 EXHIBIT B SPECIAL ALLOCATION RULES 1. Special Allocation Rules. ------------------------ Notwithstanding any other provision of the Agreement or this Exhibit B, the --------- following special allocations shall be made in the following order: A. Minimum Gain Chargeback. Notwithstanding the provisions of Section ----------------------- 6.1 of the Agreement or any other provisions of this Exhibit B, if there is a --------- net decrease in the Partnership Minimum Gain during any Partnership Year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and for purposes of this Section 1.A only, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of this Agreement with respect to such Partnership Year and without regard to any decrease in Partner Minimum Gain during such Partnership Year. B. Partnership Minimum Gain Chargeback. Notwithstanding any other ----------------------------------- provision of Section 6.1 of this Agreement or any other provisions of this Exhibit B (except Section 1.A hereof), if there is a net decrease in Partner - --------- Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership Year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specifically allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each General Partner and Limited Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for purposes of this Section 1.B, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit with respect to such Partnership Year, other than allocations pursuant to Section 1.A hereof. C. Qualified Income Offset. In the event any Partner unexpectedly ----------------------- receives any adjustments, allocations or distributions described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704- 1(b)(2)(ii)(d)(6), and after giving effect to the allocations 1 required under Section 1.A and 1.B hereof, such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income and gain for the Partnership Year) and shall be specifically allocated to such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. This Section 1.C is intended to constitute a "qualified income offset" under Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership ---------------------- Year shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that the Partnership's Nonrecourse Deductions must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Limited Partners, to revise the prescribed ratio for such Partnership Year to the numerically closest ratio which would satisfy such requirements. E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions ------------------------------ for any Partnership Year shall be specifically allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(b)(4) and 1.704-2(i). F. Code Section 754 Adjustments. To the extent an adjustment to the ---------------------------- adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specifically allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. 2. Allocations for Tax Purposes. ---------------------------- A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit B. --------- B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss and deduction shall be allocated for federal income tax purposes among the Partners as follows: (i) (a) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners consistent with the principles of 2 Section 704(c) of the Code to take into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution (taking into account Section 2.C of this Exhibit B), and --------- (b) any item of residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of "Book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit B. --------- (ii) (a) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Exhibit A, --------- and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B(1) of this Exhibit B; and --------- (b) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of the Exhibit B. --------- (iii) all other items of income, gain, loss and deduction shall be allocated among the Partner the same manner as their correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of the Exhibit B. --------- C. To the extent Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit a Partnership to utilize alternative methods to eliminate the disparities between the Carrying Value of property and its adjusted basis, the General Partner shall, subject to the following, have the authority to elect the method to be used by the Partnership and such election shall be binding on all Partners. With respect to the Contributed Property transferred to the Partnership on or about the Effective date, the Partnership shall elect to use the "traditional method" set forth in Treasury Regulations Section 1.704-3(b). 3 EXHIBIT C FORM OF NOTICE OF REDEMPTION The undersigned hereby irrevocably (i) redeems ______ Partnership Units in Cavanaughs Hospitality Limited Partnership in accordance with the terms of the Limited Partnership Agreement of Cavanaughs Hospitality Limited Partnership and the Redemption Right referred to therein, (ii) surrenders such Limited Partnership Units and all right, title and interest therein, and (iii) directs that the Cash Amount or CHC Shares Amount (as determined by the General Partner) deliverable upon exercise of the Redemption Right be delivered to the addresses specified below, and if CHC Shares are to be delivered, such CHC Shares be registered or placed in the name(s) and at the address(es) specified below. The undersigned hereby represents, warrants and certifies, that the undersigned (a) has marketable and unencumbered title to such Partnership Units, free and clear of the rights of or interests of any other person or entity, (b) has the full right, power and authority to redeem and surrender such Partnership Units as provided herein, and (c) has obtained the consent or approval of all persons or entities, if any, having the right to consult or approve such redemption and surrender. Dated: Name of Limited Partner: ________________________________ (Signature of Limited Partner) ________________________________ (Street Address) ________________________________ (City, State, Zip Code) Signature Guaranteed by: ________________________________ If CHC Shares are to be issued, issue to: Name: Please insert social security or identifying number: 1 EXHIBIT D LIST OF LIMITED PARTNERS 1. North River Drive Company, a Washington corporation, 201 W. North River Drive, Spokane, Washington, 99201. 1 EX-10.8 6 1998 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.8 CAVANAUGHS HOSPITALITY CORPORATION 1998 EMPLOYEE STOCK PURCHASE PLAN Section 1. Establishment and Purpose 1.1 Establishment. Cavanaughs Hospitality Corporation, a Washington corporation ("Cavanaughs" or the "Company"), hereby establishes a stock purchase plan for employees as described herein, which shall be known as the Cavanaughs Hospitality Corporation 1998 EMPLOYEE STOCK PURCHASE PLAN (the "Plan"). 1.2 Purpose. The purpose of the Plan is to provide eligible employees the opportunity to purchase the Company's common stock at a favorable price by means of payroll deductions. It is intended that the Plan qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code") and all provisions hereof shall be construed in a manner to so comply. Section 2. Definitions 2.1 Definitions. Whenever used hereinafter, the following terms shall have the meanings set forth below: (a) "Affiliate" means any corporation, which (i) is a "subsidiary corporation" of the Company, within the meaning of Section 424 of the Code, now or in the future and (ii) has been authorized by the Board to participate in the Plan. (b) "Base Earnings" means a Participant's regular rate of pay and does not include overtime pay, shift premium,bonuses and other special payments, or amounts payable under employee benefit plans. (c) "Board" means the Board of Directors of Cavanaughs. (d) "Committee" means the Compensation Committee of the Board. (e) "Eligible Employee", with respect to any PlanYear, means an employee (including officers and directors who are also employees) of the Company or any Affiliate who has been employed by the Company or an Affiliate for the first two weeks of the month preceding the first day of such Plan Year, other than those employees whose customary employment is 30 hours or less per week or not more than five months during any calendar year. (f) "Fair Market Value" of a share of Stock as of a given date shall be (i) the mean between the highest and lowest selling price of a share of Common Stock on the principal exchange on which shares of Stock are then trading, if any, on such date, or if shares were not traded on such date, then on the closest preceding date on which a trade occurred, or (ii) if the Stock is not traded on an exchange, the mean between the closing representative bid and asked prices for the Stock on such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its successor quotation system; or (iii) if Stock is not publicly traded, the Fair Market Value of a share of Stock as established by the Committee acting in good faith. (g) "Participant" means an Eligible Employee who has elected to participate in the Plan pursuant to Section 4.1. (h) "Plan Year" means the twelve-month period beginning each January 1, provided that the first Plan Year shall be a short year beginning July 1, 1998 and ending December 31, 1998. (i) "Stock" means the Common Stock of the Company, par value $.01 per share. Section 3. Stock Subject to the Plan 3.1 Number. The total number of shares of Stock to be reserved for sale under this Plan shall be 300,000 shares in the aggregate. These shares may consist, in whole or in part, of authorized but unissued Stock or treasury Stock not reserved for any other purpose. 3.2 Adjustment in Capitalization. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, extraordinary distribution with respect to Stock or other change in corporate structure affecting the Stock, the Committee may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan and the price payable therefor and/or such other substitution or adjustments in the shares reserved for issuance under the Plan as it may determine to be appropriate in its sole discretion; provided, however that the number of shares of Stock issuable under the Plan shall always be a whole number. Section 4. Participation 4.1 Participation. Any employee who is an Eligible Employee on June 15, 1998 may elect to become a Participant. Any employee who is an Eligible Employee on December 1 of any year (including 1998), may elect to become a Participant as of the first day of the next Plan Year. Any election to participate shall be made in the form and at the time provided in rules adopted by the Committee from time to time. Notwithstanding anything herein to the contrary, in no event shall an Eligible Employee be granted an option to purchase Stock under the Plan if after the purchase such Eligible Employee would own capital stock of Cavanaughs possessing 5% or more of the total combined voting power or value of all classes of capital stock of Cavanaughs. Also, an Eligible Employee may not become or remain a Participant at any time when such Eligible Employee owns capital stock possessing 5% or more of the total combined voting power or value of all classes of capital stock of Cavanaughs. For purposes of this subsection, the rules of Section 424(d) of the Code shall apply in determining the stock ownership of an individual, 2 and capital stock which an employee may purchase under outstanding options shall be treated as capital stock owned by the employee. Section 5. Purchase of Stock 5.1 Contributions for Purchase of Stock. At the time an Eligible Employee elects to become a Participant in the Plan, such Eligible Employee shall elect to contribute to the Plan by authorizing payroll deductions in an amount (in increments of 1%) not less than 0%, and not more than 10%, of Base Earnings. Unless otherwise elected by the Participant, the rate of withholding such Participant has elected will remain in effect for subsequent Plan Years. A Participant at any time may reduce the rate of withholding or discontinue withholding entirely. A Participant may not increase the rate of withholding except in connection with an election with respect to a subsequent Plan Year. If a Participant elects to discontinue withholding, he or she may resume withholding only as of the first day of any subsequent Plan Year. Any election or direction under this section shall be made in writing in the form and pursuant to rules adopted by the Committee from time to time, and shall become effective at a time specified by the Committee. 5.2 Grant of Option. As of the first day of each Plan Year, each Participant shall be granted an option, which shall entitle him or her to purchase shares of Stock in accordance with the terms of the Plan. Subject to Section 5.5 and any additional limitations established by the Committee, in its sole discretion, for such Plan Year, the maximum number of shares of Stock that a Participant may purchase pursuant to such option for the Plan Year shall equal the number of whole shares determined by (a) multiplying the percentage of Base Earnings the Participant elected to have withheld for such Plan Year by such Base Earnings, and (b) dividing the result by 85% of the Fair Market Value of a share of Stock on the first business day of such Plan Year (which shall be the "option price."). 5.3 Disposition of Contributions. Amounts withheld pursuant to Section 5.1 shall be held by a Participant's employer until used to purchase Stock, except that: (a) A Participant who elects to discontinue withholding may elect at any time to withdraw all or any part of the amounts previously withheld. Any such withdrawal shall be paid to the Participant by his or her employer in cash, with interest (at the annual rate determined by the Committee prior to the beginning of each Plan Year), if any, on such amounts. (b) Any portion of the amounts withheld which is not paid to the Participant in cash pursuant to this Section shall be automatically applied to purchase Stock under Section 5.4. (c) Any withdrawal election under this Section shall be made in writing in the form and pursuant to rules adopted by the Committee from time to time. 3 5.4 Purchases of Stock. As of the last day of each Plan Year, each Participant who has not withdrawn the entire amount withheld during such year shall be deemed to have exercised his or her option to purchase the number of whole shares of Stock determined by dividing the remaining amount by the option price. Fractional shares will not be issued under the Plan, and any accumulated payroll deductions that would have been used to purchase fractional shares will be carried over in the Participant's account for the purchase of shares in the next Plan Year. 5.5 Privileges of a Stockholder. A Participant shall not have stockholder privileges with respect to any Stock until the date of issuance of such Stock. 5.6 Limitation on Stock Purchases. As required by Section 423 of the Code, no Participant may purchase Stock under the Plan and all other employee stock purchase plans of Cavanaughs (including any parent or subsidiary corporation, to the extent provided in Section 423) at a rate in excess of $25,000 in Fair Market Value of such Stock (determined as of the first business day of the Plan Year with respect to which Stock is granted) for each calendar year in which any such right to purchase Stock granted to such Participant is outstanding at any time. If a Participant is not entitled to purchase Stock under any other such plan during a Plan Year, the total number of shares purchased under this Plan for the Participant with respect to that Plan Year may not exceed $25,000 divided by the Fair Market Value of a share of Stock on the first day of such Plan Year. 5.7 Exhaustion of Shares. If at any time the shares of Stock available under the Plan are over subscribed, the number of shares subject to options for such Plan Year shall be reduced proportionately (or in such other nondiscriminatory manner chosen by the Committee, in its sole discretion) to eliminate the over subscription, and the amounts, if any, that cannot be applied to the purchase of shares shall be refunded to the Participants, without interest. Section 6. Termination of Employment 6.1 Termination of Employment. No shares of Stock may be purchased by a Participant pursuant to this Plan with respect to a Plan Year if his or her employment terminates for any reason prior to the end of such Plan Year. Any amount withheld from the pay of a Participant during the Plan Year in which his or her employment terminates shall be paid to such Participant in cash, with interest (at the annual rate determined by the Committee prior to the beginning of each Plan Year), if any, on such amount promptly after such Participant's termination of employment. If a Participant's death occurs at any time during a Plan Year, any amount withheld from the pay of such Participant shall be paid to the Participant's personal representative in cash, with interest (at the annual rate determined by the Committee prior to the beginning of each Plan Year), if any, on such amount and no portion thereof shall be applied to purchase Stock under the Plan. 4 Section 7. Rights of Employees; Participants 7.1 Employment. Nothing in this Plan shall interfere with or limit in any way the right of Cavanaughs or any Affiliate to terminate any employee's, Eligible Employee's, or Participant's employment at any time, nor confer upon any such person any right to continue in the employ of Cavanaughs or any of its Affiliates. 7.2 Nontransferability. No right or interest of any Participant in the Plan shall be assignable or transferable, or subject to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge, or bankruptcy. Any attempted assignment, transfer, pledge or other disposition of any rights under the Plan shall be null and void, and shall automatically terminate all rights of a participant under the Plan. Section 8. Administration 8.1 The Committee. (a) The Plan shall be administered by the Committee. (b) The Committee is vested with full authority to make, administer, and interpret such equitable rules and regulations regarding the Plan as it may deem advisable. The Committee's determination as to the interpretation and operation of the Plan, or any right granted under it, shall be final and conclusive, unless otherwise determined by the Board. No member of the Board or the Committee shall be liable for any action or determination made in good faith by such member with respect to the Plan or any option granted under it. (c) Prior to the commencement of any Plan Year, the Committee may prescribe rules to apply to such Plan Year including, but not limited to, setting forth a limit on the number of shares of Stock which may be purchased under the Plan during the Plan Year in the aggregate or by any Participant, and the method for reducing Participants' elections if such a limit would otherwise be exceeded. (d) The Committee may act by a majority vote at a meeting of the Committee or by a document signed by all of the members of the Committee. Section 9. Amendment, Modification and Termination of Plan 9.1 Amendment, Modification, and Termination of the Plan. The Board or the Committee, at any time may terminate, and at any time and from time to time and in any respect, may amend or modify the Plan, provided, however, that no such action of the Board, or the Committee, without approval of the shareholders of Cavanaughs, may: (a) increase the total amount of Stock which may be offered under the Plan, except as provided in Section 3.2 of the Plan; or (b) permit any person, while a member of the Committee, to be eligible to participate in the Plan. 5 Section 10. Requirements of Law 10.1 Requirements of Law. The issuance of Stock and the payroll deductions pursuant to this Plan shall be subject to all applicable laws, rules, and regulations, and shares of Stock shall not be issued nor cash payments made except upon approval of proper government agencies of stock exchanges as may be required. 10.2 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Washington, without regard to the conflicts of law provisions thereof. Section 11. Effective Date of the Plan 11.1 Effective Date. The Plan shall be effective as of the date on which the initial public offering of the Stock shall be consummated (it being understood that the shareholders of the Company approved the Plan on January __, 1998. 11.2 Duration of the Plan. Unless the Board terminates the Plan earlier, the Plan shall remain in effect until the earlier of the date upon which all Stock subject to it shall be issued pursuant to the Plan and January 1, 2008. 6 EX-10.9 7 1998 STOCK INCENTIVE PLAN EXHIBIT 10.9 1998 STOCK INCENTIVE PLAN OF CAVANAUGHS HOSPITALITY CORPORATION Cavanaughs Hospitality Corporation, a Washington corporation, has adopted the 1998 Stock Incentive Plan (the "Plan"), effective January __, 1998, for the benefit of its eligible employees, consultants, and directors. The purposes of this Plan are as follows: (1) To provide an additional incentive for directors, key Employees, and consultants to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of directors, key Employees, and consultants considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I DEFINITIONS 1.1 General. Wherever the following terms are used in this Plan they ------- shall have the meaning specified below, unless the context clearly indicates otherwise. 1.2 Award Limit. "Award Limit" shall mean five hundred thousand ----------- (500,000) shares of Common Stock. 1.3 Board. "Board" shall mean the Board of Directors of the Company. ----- 1.4 Code. "Code" shall mean the Internal Revenue Code of 1986, as ---- amended. 1.5 Committee. "Committee" shall mean the Compensation Committee of the --------- Board, or a subcommittee of the Board, appointed as provided in Section 9.1. 1.6 Common Stock. "Common Stock" shall mean the common stock of the ------------ Company, par value $.01 per share, and any equity security of the Company issued or authorized to be issued in the future, but excluding any warrants, options or other rights to purchase Common Stock. Debt securities of the Company convertible into Common Stock shall be deemed equity securities of the Company. 1.7 Company. "Company" shall mean Cavanaughs Hospitality Corporation, a ------- Washington corporation. 1.8 Deferred Stock. "Deferred Stock" shall mean Common Stock awarded -------------- under Article VII of this Plan. 1.9 Director. "Director" shall mean a member of the Board. -------- 1.10 Dividend Equivalent. "Dividend Equivalent" shall mean a right to ------------------- receive the equivalent value (in cash or Common Stock) of dividends paid on Common Stock, awarded under Article VII of this Plan. 1.11 Employee. "Employee" shall mean any officer or other employee (as -------- defined in accordance with Section 3401(c) of the Code) of the Company, or of any corporation which is a Subsidiary. 1.12 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act ------------ of 1934, as amended. 1.13 Fair Market Value. "Fair Market Value" of a share of Common Stock as ----------------- of a given date shall be (i) the mean between the highest and lowest selling price of a share of Common Stock on the principal exchange on which shares of Common stock are then trading, if any, on such date, or if shares were not traded on such date, then on the closest preceding date on which a trade occurred, or (ii) if Common Stock is not traded on an exchange, the mean between the closing representative bid and asked prices for the Common Stock on such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its successor quotation system; or (iii) if Common Stock is not publicly traded, the Fair Market Value of a share of Common Stock as established by the Committee acting in good faith. 1.14 Grantee. "Grantee" shall mean an Employee or consultant granted a ------- Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation Right, or an award of Deferred Stock, under this Plan. 1.15 Incentive Stock Option. "Incentive Stock Option" shall mean an ---------------------- conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. 1.16 Independent Director. "Independent Director" shall mean a member of -------------------- the Board who is not an Employee of the Company. 1.17 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean -------------------------- an Option which is not designated as an Incentive Stock Option by the Committee. 2 1.18 Option. "Option" shall mean a stock option granted under Article III ------ of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option; provided, however, that Options granted to Independent Directors and consultants - -------- ------- shall be Non-Qualified Stock Options. 1.19 Optionee. "Optionee" shall mean an Employee, consultant, or -------- Independent Director granted an Option under this Plan. 1.20 Performance Award. "Performance Award" shall mean a cash bonus, stock ---------------- bonus or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII of this Plan. 1.21 Plan. "Plan" shall mean the 1998 Stock Incentive Plan. ---- 1.22 QDRO. "QDRO" shall mean any qualified domestic relations order as ---- defined by the Code or Title I of the Employee Retirement Income Security Act, of 1974, as amended, or the rules and regulations thereunder. 1.23 Restricted Stock. "Restricted Stock" shall mean Common Stock awarded ---------------- under Article VI of this Plan. 1.24 Restricted Stockholder. "Restricted Stockholder" shall mean an ---------------------- Employee or consultant granted an award of Restricted Stock under Article VI of this Plan. 1.25 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under ---------- the Exchange Act, as such Rule may be amended from time to time. 1.26 Stock Appreciation Right. "Stock Appreciation Right" shall mean a ------------------------ stock appreciation right granted under Article VIII of this Plan. 1.27 Stock Payment. "Stock Payment" shall mean (i) a payment in the form ------------- of shares of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee or consultant in cash, awarded under Article VII of this Plan. 1.28 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken ---------- chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 1.29 Termination of Directorship. "Termination of Directorship" shall mean --------------------------- the time when an Optionee who is an Independent Director ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death 3 or retirement. The Board, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to Termination of Directorship. 1.30 Termination of Employment. "Termination of Employment" shall mean the ------------------------- time when the employee-employer relationship between the Optionee, Grantee or Restricted Stockholder and the Company or any Subsidiary is terminated for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement; but excluding (i) terminations where there is a simultaneous reemployment, continuing employment or retention as a consultant of an Optionee, Grantee or Restricted Stockholder by the Company or any Subsidiary, (ii) at the discretion of the Committee, terminations which result in a temporary severance of the employee-employer relationship, and (iii) at the discretion of the Committee, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Employment; provided, however, that, with respect to Incentive Stock Options, a -------- ------- leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purpose of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. Notwithstanding any other provision of this Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate an Employee's employment at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. ARTICLE II SHARES SUBJECT TO PLAN 2.1 Shares Subject to Plan. ----------------------- (a) The shares of stock subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock, initially shares of the Company's Common stock, par value $.01 per share. The aggregate number of such shares which may be issued upon exercise of such options or rights or upon any such awards under the Plan Shall not exceed nine hundred thousand (900,000). The shares of Common Stock issuable upon exercise of such options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (b) The maximum number of shares which may be subject to Options or Stock Appreciation Rights granted under the Plan to any individual in any calendar year shall not exceed the Award Limit. To the extent required by Section 162(m) of the Code, shares subject to 4 Options which are canceled continue to be counted against the Award Limit and if, after grant of an Option, the price of shares subject to such Option is reduced, the transaction is treated as a cancellation of the Option and a grant of a new Option and both the Option deemed to be canceled and the Option deemed to be granted are counted against the Award Limit. Furthermore, to the extent required by Section 162(m) of the Code, if, after grant of a Stock Appreciation Right, the base amount on which stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Company's Common Stock, the transaction is treated as a cancellation of the Stock Appreciation Right and a grant of a new Stock Appreciation Right and both the Stock Appreciation Right deemed to be canceled and the Stock Appreciation Right deemed to be granted are counted against the Award Limit. 2.2 Unexercised Options and Other Rights. If any Option, or other right ------------------------------------ to acquire shares of Common Stock under any other award under this Plan, expires or is canceled without having been fully exercised, the number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration or cancellation may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. ARTICLE III GRANTING OF OPTIONS 3.1 Eligibility. Subject to the Award Limit, any Employee, consultant, ----------- or Independent Directors elected by the Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an Option. 3.2 Disqualification for Stock Ownership. No person may be granted an ------------------------------------ Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any then existing Subsidiary unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 3.3 Qualification of Incentive Stock Options. No Incentive Stock Option ---------------------------------------- shall be granted unless such Option, when granted, qualifies as an "incentive stock option" under Section 422 of the Code. No Incentive Stock Option shall be granted to any person who is not an Employee. 3.4 Granting of Options ------------------- (a) Subject to the provisions of subsection (d) hereof, the Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are key Employees and select from among the key Employees, consultants, or Independent Directors (including Employees, 5 consultants, or Independent Directors who have previously received Options or other awards under this Plan) such of them as in its opinion should be granted Options; (ii) Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected key Employees, consultants, or Independent Directors; (iii) Determine whether such Options are to be Incentive Stock Options or Non-Qualified Stock Options and whether such Options are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; and (iv) Determine the terms and conditions of such Options, consistent with this Plan; provided, however, that the terms and conditions -------- ------- of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. (b) Upon the selection of a key Employee, consultant, or Independent Director to be granted an Option, the Committee shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee, consultant, or Independent Director that the Employee, consultant, or Independent Director surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or other rights which have been previously granted to him under this Plan or otherwise. An Option, the grant of which is conditioned upon such surrender, may have an option price lower (or higher) than the exercise price of such surrendered Option or other award, may cover the same (or a lesser or greater) number of shares as such surrendered Option or other award, may contain such other terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option or other award. (c) Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. (d) The Board shall be authorized to make the initial grants of Restricted Stock set forth on the Addendum to this Plan, which grants shall become effective upon the closing of the Company's initial public offering. Future grants shall be made by the Committee in accordance with the provisions of this Plan 6 ARTICLE IV TERMS OF OPTIONS 4.1 Option Agreement. Each Option shall be evidenced by a written Stock ---------------- Option Agreement, which shall be executed by the Optionee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Stock Option Agreements evidencing Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. 4.2 Option Price. The price per share of the shares subject to each ------------ Option shall be set by the Committee; provided, however, that such price shall -------- ------- be no less than the par value of a share of Common Stock, and (i) in the case of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code such price shall be no less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted, and (ii) in the case of Incentive Stock Options such price shall not be less than the greater of: (a) 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted, or (b) 110% of the Fair Market Value of a share of Common Stock on the date such Option is granted in the case of an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary. 4.3 Option Term. The term of an Option shall be set by the Committee in ----------- its discretion; provided, however, that, in the case of Incentive Stock Options, -------- ------- the term shall not be more than ten (10) years from the date the Incentive Stock Option is granted, or five (5) years from such date if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary. 4.4 Option Vesting. -------------- (a) The period during which the right to exercise an Option in whole or in part vests in the Optionee shall be set by the Committee, and the Committee may determine that an Option may not be exercised in whole or in part for a specified period after it is granted; provided, however, that unless -------- ------- otherwise determined by the Committee, no Option granted to a person subject to Section 16 of the Exchange Act shall be exercisable until at least six months have elapsed from (but excluding) the date on which the Option was granted. Subject to the preceding sentence, at any time after grant of an Option, the Committee may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option vests. 7 (b) No portion of an Option which is unexercisable at Termination of Employment, Termination of Directorship, or termination of a consultancy, as applicable, shall thereafter become exercisable, except as may be otherwise provided by the Committee either in the Stock Option Agreement or in a resolution adopted following the grant of the Option; provided that the Committee may determine that the Option may be exercised subsequent to Termination of Employment, Termination of Directorship, or termination of consultancy without cause, or following a change in control of the Company, or because of the Optionee's retirement, death or disability, or otherwise. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company and any Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.4(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. 4.5 Consideration. In consideration of the granting of an Option, the ------------- Optionee shall agree, in the written Stock Option Agreement, to remain in the employ of (or to consult for or to serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year after the Option is granted (or until the next annual meeting of stockholders of the Company, in the case of an Independent Director). Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary, or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without good cause. ARTICLE V EXERCISE OF OPTIONS 5.1 Partial Exercise. An exercisable Option may be exercised in whole or ---------------- in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee may require that, by the terms of the Option, a partial exercise be with respect to a minimum number of shares. 5.2 Manner of Exercise. All or a portion of an exercisable Option shall ------------------ be deemed exercised upon delivery of all of the following to the Secretary of the Company or the Secretary's office: 8 (a) A written notice complying with the applicable rules established by the Committee stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion; (b) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; (c) In the event that the Option shall be exercised pursuant to Section 10.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option; and (d) Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, at the discretion of the Committee, the terms of the Option may (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of Common Stock owned by the Optionee, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (v) allow payment, in whole or in part, through the delivery of a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee, or (vi) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii), (iv) and (v). In the case of a promissory note, the Committee may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law. 5.3 Conditions to Issuance of Stock Certificate. The Company shall not be ------------------------------------------- required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange 9 Commission or any other governmental regulatory body which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience; and (e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax. 5.4 Rights as Stockholders. The holders of Options shall not be, nor have ---------------------- any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. 5.5 Ownership and Transfer Restrictions. The Committee, in its absolute ----------------------------------- discretion, may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Common Stock acquired by exercise of an Incentive Stock Option within (i) two years from the date of granting such Option to such Employee or (ii) one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to given prompt notice of disposition. ARTICLE VI AWARD OF RESTRICTED STOCK 6.1 Award of Restricted Stock ------------------------- (a) The Committee shall from time to time, in its absolute discretion: (i) Select from among the key Employees or consultants (including Employees or consultants who have previously received other awards under this Plan) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with this Plan. 10 (b) The Committee shall establish the purchase price, if any, and form of payment for Restricted Stock; provided, however, that such purchase price -------- ------- shall be no less than the par value of the Common Stock to be purchased. In all cases, legal consideration shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee or consultant to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 6.2 Restricted Stock Agreement. Restricted Stock shall be issued only -------------------------- pursuant to a written Restricted Stock Agreement, which shall be executed by the selected key Employee or consultant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 6.3 Consideration. As consideration for the issuance of Restricted Stock, ------------- in addition to payment of any purchase price, the Restricted Stockholder shall agree, in the written Restricted Stock Agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after the Restricted Stock is issued. Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder any right to continue in the employ of, or consult for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with or without good cause. 6.4 Rights as Stockholders. Upon delivery of the shares of Restricted ---------------------- Stock to the escrow holder pursuant to Section 6.7, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in the Restricted Stockholder's Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Committee, any -------- ------- extraordinary distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5. 6.5 Restriction. All shares of Restricted Stock issued under this Plan ----------- (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance; provided, however, -------- ------- that unless otherwise determined by the Committee, no share of Restricted Stock granted to a person subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise transferred until at least six months have elapsed from (but excluding) the date on which the Restricted Stock was issued, and provided, -------- further, that by a resolution adopted after the Restricted Stock is issued, the - ------- Committee may, on 11 such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon Termination of Employment or, if applicable, upon the termination of the Restricted Stockholder's consulting relationship with the Company. 6.6 Repurchase of Restricted Stock. The Committee shall provide in the ------------------------------ terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment or, if applicable, upon a termination of any consulting relationship between the Restricted Stockholder and the Company, at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock; provided, however, that provision may be made that no -------- ------- such right of repurchase shall exist in the event of a Termination of Employment or termination of consultancy without cause, or following a change in control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. 6.7 Escrow. The Secretary of the Company or such other escrow holder as ------ the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed. 6.8 Legend. In order to enforce the restrictions imposed upon shares of ------ Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. ARTICLE VII PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS 7.1 Performance Awards. Any key Employee or consultant selected by the ------------------ Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific 12 type of award) the contributions, responsibilities and other compensation of the particular key Employee or consultant. 7.2 Dividend Equivalents. Any key Employee or consultant selected by the -------------------- Committee may be granted Dividend Equivalents based on the dividends declared on Common Stock, to be credited as of dividend payment dates, during the period between the date an Option, Stock Appreciation Right, Deferred Stock or Performance Award is granted, and the date such Option, Stock Appreciation Right, Deferred Stock or Performance Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by such formula and at such time and subject to such limitations as may be determined by the Committee. 7.3 Stock Payments. Any key Employee or consultant selected by the -------------- Committee may receive Stock Payments in the manner determined from time to time by the Committee. The number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee on the date such Stock Payment is made or on any date thereafter. 7.4 Deferred Stock. Any key Employee or consultant selected by the -------------- Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. 7.5 Performance Award Agreement, Dividend Equivalent Agreement, Deferred -------------------------------------------------------------------- Stock Agreement, Stock Payment Agreement. Each Performance Award, Dividend - ---------------------------------------- Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 7.6 Term. The term of a Performance Award, Dividend Equivalent, award of ---- Deferred Stock and/or Stock Payment shall be set by the Committee in its discretion. 7.7 Exercise Upon Termination of Employment. A Performance Award, --------------------------------------- Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable only while the Grantee is an Employee or consultant; provided that the Committee may determine that the Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be exercised 13 subsequent to Termination of Employment or termination of consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. 7.8 Payment on Exercise. Payment of the amount determined under Section ------------------- 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Section 5.3. 7.9 Consideration. In consideration of the granting of a Performance ------------- Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee shall agree, in a written agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after such Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is granted. Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VII STOCK APPRECIATION RIGHTS 8.1 Grant of Stock Appreciation Rights. Subject to the Award Limit, a ---------------------------------- Stock Appreciation Right may be granted to any key Employee or consultant selected by the Committee. A Stock Appreciation Right may be granted (i) in connection and simultaneously with the grant of an Option, (ii) with respect to a previously granted Option, or (iii) independent of an Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with this Plan as the Committee shall impose, and shall be evidenced by a written Stock Appreciation Right Agreement, which shall be executed by the Grantee and an authorized officer of the Company. The Committee, in its discretion, may determine whether a Stock Appreciation Right is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights intended to so qualify shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition of the grant of a Stock Appreciation Right to an Employee or consultant that the Employee or consultant surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, or other rights which have been previously granted to him under this Plan or otherwise. A Stock Appreciation Right, the grant of which is conditioned upon such surrender, may have an exercise price lower (or higher) than the exercise price of the surrendered Option or other award, may cover the same (or a lesser or greater) number of shares as such surrendered Option or other award, may contain such other 14 terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option or other award. 8.2 Coupled Stock Appreciation Rights. --------------------------------- (a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a particular Option and shall be exercisable only when and to the extent the related Option is exercisable. (b) A CSAR may be granted to the Grantee for no more than the number of shares subject to the simultaneously or previously granted Option to which it is coupled. (c) A CSAR shall entitle the Grantee (or other person entitled to exercise the Option pursuant to this Plan) to surrender to the Company unexercised a portion of the Option to which the CSAR relates (to the extent then exercisable pursuant to its terms) and to receive from the Company in exchange therefor an amount determined by multiplying the difference obtained by subtracting the Option exercise price from the Fair Market Value of a share of Common Stock on the date of exercise of the CSAR by the number of shares of Common Stock with respect to which the CSAR shall have been exercised, subject to any limitations the Committee may impose. 8.3 Independent Stock Appreciation Rights. ------------------------------------- (a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated to any Option and shall have a term set by the Committee. An ISAR shall be exercisable in such installments as the Committee may determine. An ISAR shall cover such number of Shares of Common Stock as the Committee may determine; provided, however, that, unless otherwise determined by the -------- ------- Committee, no ISAR granted to a person subject to Section 16 of the Exchange Act shall be exercisable until at least six months have elapsed from (but excluding) the date on which the ISAR was granted. The exercise price per share of Common Stock subject to each ISAR shall be set by the Committee. An ISAR is exercisable only while the Grantee is an Employee or consultant; provided that the Committee may determine that the ISAR may be exercised subsequent to Termination of Employment or termination of consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. (b) An ISAR shall entitle the Grantee (or other person entitled to exercise the ISAR pursuant to this Plan) to exercise all or a specified portion of the ISAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per share of the ISAR from the Fair Market Value of a share of Common Stock on the date of exercise of the ISAR by the number of shares of Common Stock with respect to which the ISAR shall have been exercised, subject to any limitations the Committee may impose. 15 8.4 Payment and Limitations on Exercise. ----------------------------------- (a) Payment of the amount determined under Section 8.2(c) and 8.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee. To the extent such payment is effected in Common Stock it shall be made subject to satisfaction of all provisions of Section 5.3 hereinabove pertaining to Options. (b) Grantees of Stock Appreciation Rights who are subject to Section 16 of the Exchange Act may, in the discretion of the Committee, be required to comply with any timing or other restrictions under Rule 16b-3 applicable to the settlement or exercise of a Stock Appreciation Right. 8.5 Consideration. In consideration of the granting of a Stock ------------- Appreciation Right, the Grantee shall agree, in the written Stock Appreciation Right Agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least one year after the Stock Appreciation Right is granted. Nothing in this Plan or in any Stock Appreciation Right Agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE IX ADMINISTRATION 9.1 Compensation Committee. The Compensation Committee (or a subcommittee ---------------------- of the Board assuming the functions of the Committee under this Plan) shall consist of two or more Directors appointed by and holding office at the pleasure of the Board, each of whom is both a "Non-Employee Director" as defined by Rule 16b-3 and, if Options and Stock Appreciation Rights granted under the Plan are intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, an "outside director'' as defined under Section 162(m) of the Code. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. 9.2 Duties and Powers of Committee. It shall be the duty of the Committee ------------------------------ to conduct the general administration of this Plan in accordance with its provisions. The Committee shall have the power to interpret this Plan and the agreements pursuant to which Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments are granted or awarded, and to adopt such rules for the administration, interpretation, and application of this Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such grant or award under this Plan need not be the same with respect to each Optionee, Grantee or Restricted Stockholder. Any such 16 interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. 9.3 Majority Rule. The Committee shall act by a majority of its members ------------- in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. 9.4 Compensation; Professional Assistance; Good Faith Actions. Members of --------------------------------------------------------- the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, the Company and all other interested persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, and all members of the Committee shall be fully protected by the Company in respect of any such action, determination or interpretation. ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Not Transferable. Options, Restricted Stock awards, Deferred Stock ---------------- awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan may not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution, unless and until such rights or awards have been exercised, or the shares underlying such rights or awards have been issued, and all restrictions applicable to such shares have lapsed. No Option, Restricted Stock award, Deferred Stock award, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or interest or right therein shall be liable for the debts, contracts or engagements of the Optionee, Grantee or Restricted Stockholder or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided however, that this Section 10.1 shall not prevent (i) transfers by will or by the 17 applicable laws of descent and distribution, (ii) the designation by the optionee or Grantee of a beneficiary to exercise the Optionee's Option or other right or award (or any portion thereof) granted under the Plan after the Optionee's or Grantee's death, or (iii) transfers to an Optionee's Grantee's or Restricted Stockholder's alternate payee pursuant to a QDRO. During the lifetime of the Optionee or Grantee, only the Optionee, or an alternate payee under a QDRO, may exercise an Option or other right or award (or any portion thereof) granted to the Optionee or Grantee under the Plan. After the death of the Optionee or Grantee, any exercisable portion of an Option or other right or award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Stock Option Agreement or other agreement, be exercised by the Optionee's or Grantee's personal representative or by any person empowered to do so under the deceased Optionee's or Grantee's beneficiary designation, will or under the then applicable laws of descent and distribution. 10.2 Amendment, Suspension or Termination of this Plan. This Plan shall ------------------------------------------------- terminate on the date of the annual meeting of the Board immediately following the tenth anniversary of the Board's adoption of this Plan. This Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Committee. However, without approval of the Company's stockholders given within twelve months before or after the action by the Committee, no action of the Committee may, except as provided in Section 10.3, increase the limits imposed in Section 2.1 on the maximum number of shares which may be issued under this Plan or modify the Award Limit, and no action of the Committee may be taken that would otherwise require stockholder approval as a matter of applicable law, regulation or rule. No amendment, suspension or termination of this Plan shall, without the consent of the holder of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, alter or impair any rights or obligations under any Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted or awarded, unless the award itself otherwise expressly so provides. No Options, Restricted Stock, Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or awarded during any period of suspension or after termination of this Plan, and in no event may any Incentive Stock Option be granted under this Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted by the Board; or (b) The expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 10.5. 10.3 Changes in Common Stock or Assets of the Company. In the event that ------------------------------------------------ the outstanding shares of Common Stock are hereafter changed into or exchanged for cash or a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock 18 splitup, stock dividend, or combination of shares, appropriate adjustments shall be made by the Committee in the number and kind of shares for which Options, Restricted Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, Deferred Stock awards or Stock Payments may be granted, including adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and of the Award limit described in Section 1.2. In the event of such a change or exchange, other than for shares or securities of another corporation or by reason of reorganization, the Committee shall also make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, or portions thereof then unexercised, shall be exercisable and in the number and kind of shares of outstanding Restricted Stock or Deferred Stock. Such adjustment shall be made with the intent that after the change or exchange of shares, each Optionee's and each Grantee's and each Restricted Stockholder's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment may include a necessary or appropriate corresponding adjustment in Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment exercise price, but shall be made without change in the total price applicable to the Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment, or the unexercised portion thereof (except for any change in the aggregate price resulting from rounding-off of share quantities or prices). Where an adjustment of the type described above is made to an Incentive Stock Option under this Section, the adjustment will be made in a manner which will not be considered a "modification" under the provisions of subsection 424(h)(3) of the Code. Notwithstanding the foregoing, in the event of such a reorganization, merger, consolidation, recapitalization, reclassification, stock splitup, stock dividend or combination, or other adjustment or event which results in shares of Common Stock being exchanged for or converted into cash, securities or other property, the Company will have the right to terminate this Plan as of the date of the exchange or conversion, in which case all options, rights and other awards under this Plan shall become the right to receive such cash, securities or other property, net of any applicable exercise price. In the event of a "spin-off" or other substantial distribution of assets of the Company which has a material diminutive effect upon the Fair Market Value of the Company's Common Stock, the Committee may in its discretion make an appropriate and equitable adjustment to the Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment exercise price to reflect such diminution. 10. Merger of the Company. In the event of the merger or consolidation of --------------------- the Company with or into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, the acquisition by another corporation or 19 person of all or substantially all of the Company's assets or 80% or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company: (a) At the discretion of the Committee, the terms of an Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment may provide that it cannot be exercised after such event. (b) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or by a resolution adopted prior to the occurrence of such event that, for a specified period of time prior to such event, such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in this Plan or in the provisions of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. (c) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or by a resolution adopted prior to the occurrence of such event that upon such event, such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment shall be assumed by the successor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices. (d) In its discretion, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of a Restricted Stock award or Deferred Stock award or by a resolution adopted prior to the occurrence of such event that, for a specified period of time prior to such event, the restrictions imposed under a Restricted Stock Agreement or a Deferred Stock Agreement upon some or all shares of Restricted Stock or Deferred Stock may be terminated, and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase under Section 6.6 after such event. 10.5 Approval of Plan by Stockholders. This Plan will be submitted for the -------------------------------- approval of the Company's stockholders within twelve months after the date of the Board's initial adoption of this Plan. Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted and Restricted Stock or Deferred Stock may be awarded prior to such stockholder approval, provided that such Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such Restricted Stock or Deferred Stock shall not vest prior to the time when this Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments previously granted and all Restricted Stock or 20 Deferred Stock previously awarded under this Plan shall thereupon be canceled and become null and void. 10.6 Tax Withholding. The Company shall be entitled to require payment in --------------- cash or deduction from other compensation payable to each Optionee, Grantee or Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. The Committee may in its discretion and in satisfaction of the foregoing requirement allow such Optionee, Grantee or Restricted Stockholder to elect to have the Company withhold shares of Common Stock (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. 10.7 Loan. The Committee may, in its discretion, extend one or more loans ---- to key Employees in connection with the exercise or receipt of an Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted under this Plan, or the issuance of Restricted Stock or Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee. 10.8 Limitations Applicable to Section 16 Persons and Performance-Based ------------------------------------------------------------------ Compensation. Notwithstanding any other provision of this Plan, any Option, - ------------ Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock awarded, to a key Employee or Director who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule, and this Plan shall be deemed amended to the extent necessary to conform to such limitations. Furthermore, notwithstanding any other provision of this Plan, any Option or Stock Appreciation Right intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. 10.9 Effect of Plan Upon Options and Compensation Plans. The adoption of -------------------------------------------------- this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for Employees of the Company or any Subsidiary or (ii) to grant or assume options or other rights otherwise than under this Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, firm or association. 21 10.10 Compliance with Laws. This Plan, the granting and vesting of options, -------------------- Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 10.11 Titles. Titles are provided herein for convenience only and are not ------ to serve as a basis for interpretation or construction of this Plan. 10.12 Governing Law. This Plan and any agreements hereunder shall be ------------- administered, interpreted and enforced under the internal laws of the State of Washington without regard to conflicts of laws thereof. * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Cavanaughs Hospitality Company on January __, 1998. Executed on this __th day of January, 1998. /s/ ------------------- Richard Barbieri Secretary 22 ADDENDUM The Company hereby approves the grants of awards of Restricted Stock under the Plan to the following persons in the amounts set forth below.
Name Number of Shares - ---- ---------------- Arthur Coffey 15,000 shares John Taffin 10,000 shares Lori Farnell 10,000 shares David Peterson 10,000 shares Shannon Kapek 10,000 shares
The foregoing Restricted Stock awards shall be subject to the terms and conditions of the Plan and those set forth in written Restricted Stock Agreements, which shall include, among other things, that 20% of the shares of Restricted Stock subject to each recipient's Award shall be issued on the date the Company consummates the initial public offering of Common Stock, and an additional 20% shall be issued on each anniversary date thereof. The officers of the Company are authorized and directed to prepare, negotiate and execute, on behalf of the Company, the Restricted Stock Agreements with respect to the foregoing Awards. 23 EX-10.10 8 1998 COMPANY-WIDE STOCK OPTION PLAN EXHIBIT 10.10 CAVANAUGHS HOSPITALITY CORPORATION 1998 COMPANY-WIDE STOCK OPTION PLAN 1. INTRODUCTION AND DEFINITIONS 1.1 THE PLAN: This 1998 Company-Wide Stock Option Plan (this "Plan") establishes the right of and procedures for Cavanaughs Hospitality Corporation (the "Company") to grant stock options to its employees. 1.2 DEFINITIONS: Capitalized terms used in this Plan shall have the following meanings: "ACT." "Act" shall mean the Securities Act of 1933, as amended. "BOARD." The "Board" shall mean the Board of Directors of the Company. "BUY OUT NOTICE." "Buy Out Notice" shall have the meaning set forth in Section 7 hereof. "CODE." "Code" shall mean the Internal Revenue Code of 1986, as amended. "COMMITTEE. "Committee" shall mean the Compensation Committee of the Board, or a subcommittee of the Board. "COMPANY." The "Company" shall mean Cavanaughs Hospitality Corporation. "FAIR MARKET VALUE." "Fair Market Value" of a share of Common Stock as of a given date shall be (i) the mean between the highest and lowest selling price of a share of Common Stock on the principal exchange on which shares of Common stock are then trading, if any, on such date, or if shares were not traded on such date, then on the closest preceding date on which a trade occurred, or (ii) if Common Stock is not traded on an exchange, the mean between the closing representative bid and asked prices for the Common Stock on such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its successor quotation system; or (iii) if Common Stock is not publicly traded, the Fair Market Value of a share of Common Stock as established by the Committee acting in good faith. "PLAN." "Plan" shall mean the Cavanaughs Hospitality Corporation 1998 Company-Wide Stock Option Plan, as amended. "SHARES." The "Shares" shall mean the Shares reserved for issuance under this Plan as further defined in Section 2.2. 2. GENERAL PROVISIONS 2.1 OBJECTIVES OF THE PLAN: The purpose of this Plan is to encourage ownership of common stock of the Company by all employees of the Company and any current or future subsidiary. This Plan is intended to provide an incentive and bonus for maximum effort in the successful operation of the Company and is expected to benefit the shareholders by associating the interests of the Company's employees with those of its shareholders and by enabling the Company to attract and retain personnel of the best available talent through the opportunity to share, by the proprietary interests created by this Plan, in the increased value of the Company's shares to which such personnel have contributed. The benefits of this Plan are not a substitute for compensation otherwise payable to Company employees pursuant to the terms of their employment. This Plan provides for the granting of "Non-Qualified Stock Options," which options are not to be construed as "Incentive Stock Options" as defined and governed by Section 422A of the Code. This Plan sets forth provisions applicable to Non-Qualified Options only. 2.2 STOCK RESERVED FOR THIS PLAN: The Stock reserved for issue upon the exercise of options granted under this Plan will not exceed 300,000 shares of the $.01 par value common stock of the Company (the "Shares") which may be either authorized and unissued shares or issued shares held in or hereafter acquired for the treasury of the Company. Shares subject to any option under this Plan which are not exercised in full or Shares as to which the right to purchase is forfeited through default or otherwise, shall remain available for other options under this Plan. 2.3 ADMINISTRATION OF THIS PLAN: This Plan shall be administered by the Company's Compensation Committee (the "Committee"), provided that each member of the Board who participates in administration must be a "non-employee director" as that term is defined in Rule 16b(3) of the Securities Exchange Act of 1934. Such committee shall have sole discretion to determine the employees to be granted options under this Plan, to determine the size and applicable terms and conditions of grants to be made to such employees, to determine a time when options will be granted, and to authorize grants to eligible employees. Such committee shall have full power and authority to administer and interpret this Plan and to adopt, from time to time, such guidelines, rules, regulations, agreements, and instruments for the administration of this plan as it deems necessary or advisable. The Committee's interpretations of this Plan, and all actions taken and determinations made by the Committee concerning any matter arising under or with respect to this Plan or any 2 options granted pursuant to this Plan, shall be final, binding, and conclusive on all interest parties, including the Company, its shareholders, and all former, present and future employees of the Company. The Committee may, as to all questions of accounting rely conclusively upon any determinations made by independent public accounts of the Company. The guidelines for administration of this plan as adopted by and amended by the Board shall be attached to this Plan for reference. 2.4 ELIGIBILITY; FACTS TO BE CONSIDERED IN GRANTING OPTIONS: An option may be granted to any full-time or part-time employee who, as of the date the option is granted, is then an employee and had been an employee of the Company or of any subsidiary for at least 180 consecutive days during the Company's last fully-completed fiscal year, provided that employees who hold any of the positions of President, Chief Executive Officer, Chief Financial Officer, or Principal Accounting Officer may not participate. In its determination of an employee to whom an option shall be granted and the number of shares to be covered by such option, the Committee may also take into account any or all of the following factors: the salary and/or wages of the employee; the duties of the employee; the present and potential contributions of the employee to the success of the Company; the anticipated number of years of service remaining before the attainment by the employee of the age of retirement; and other factors deemed relevant by the Committee in connection with accomplishing the purpose of this Plan. An employee who has been granted an option to purchase Shares of the Company, whether under this Plan or otherwise, may, if the Committee shall so determine, be granted additional options, provided that no employee may be granted options under this Plan that in the aggregate would result in such employee receiving more than 5% of the maximum number of Shares available for issuance under this Plan. 2.5 VESTING OF OPTIONS: The Committee shall have the authority to establish the time or times at which the optioned Shares may be purchased and whether all of the options may be exercised at one time or in increments. 2.6 RIGHTS OF OPTIONEE IN EVENT OF MERGER, CONSOLIDATION, TENDER OFFER, TAKEOVER BID, SALE OF ASSETS OR DISSOLUTION: (a) Notwithstanding Section 2.5 above or anything else in this Plan to the contrary, the Optionee may purchase the full amount of optioned Shares for which options have been granted to the Optionee and for which the options have not been exercised under the following conditions: (1) The Optionee may conditionally purchase any or all optioned Shares during the period commencing twenty-seven (27) days and ending seven (7) days prior to the scheduled effective date of a merger or consolidation (as such effective date may be delayed 3 from time to time) wherein the Company is not to be the surviving corporation, which merger or consolidation is not between or among the Company and other corporations related to or affiliated with the Company; (2) The Optionee may conditionally purchase any or all optioned Shares during the period commencing on the initial date of a tender offer or takeover bid for the optioned Shares (other than a tender offer by the Company) subject to the Securities Exchange Act of 1934 and the rules promulgated thereunder and ending on the day preceding the scheduled termination date of acceptance of tenders of Shares by the offeror under any such tender offer or takeover bid (as such termination date may be extended by such offeror); (3) The Optionee may conditionally purchase any or all optioned Shares during the period commencing on the date the shareholders of the Company approve a sale of substantially all the assets of the Company and ending seven (7) days prior to the scheduled closing date of such sale (as such closing date may be delayed from time to time); and (4) The Optionee may conditionally purchase any or all optioned Shares during the period commencing on the date the Company files its Statement of Intent to Dissolve and ending thirty (30) days later but not in any event later than the day before the Company files its Articles of Dissolution. (b) If the merger, consolidation, tender offer, takeover bid, sale of assets, or dissolution, as the case may be and as described in Subsections (1) through (4) of Section 2.6(a), once commenced, is cancelled or revoked, the conditional purchase of Shares for which the option to purchase would not have otherwise been exercisable at the time of said cancellation or revocation, but for the operation of this Section 2.6, shall be rescinded. With respect to all other Shares conditionally purchased, the Optionee may rescind such purchase at his or her option. (c) If the merger, consolidation, tender offer, takeover bid, or sale of assets does occur or thirty (30) days passes after a Statement of Intent to Dissolve is filed (or Articles of Dissolution are filed), as the case may be and as described in Subsections (1) through (4) of Section 2.6(a), and the Optionee has not conditionally purchased all optioned Shares, all unexercised options shall terminate on the effective, termination, or closing date, or thirty (30) days after the date of said filing date (but not later than the day before Articles of Dissolution are filed), as the case may be. (d) If the Company shall be the surviving corporation in any merger or is a party to a merger or consolidation which is between or among the Company and other corporations related to or affiliated with the Company, any option granted hereunder shall pertain and apply to the securities to which a holder of the number of Shares of common stock subject to the option would have been entitled. (e) Nothing herein shall allow the Optionee to purchase optioned Shares, the options for which have expired. 4 2.7 TERMS AND EXPIRATION OF OPTIONS: Each option granted under this Plan shall be in writing, shall be subject to such amendment or modification from time to time as the Committee shall deem necessary or appropriate to comply with or take advantage of applicable laws or regulations and shall contain provisions to the following effect, together with such other provisions as the Board shall from time to time approve: (a) that, subject to the provisions of Section 2.7(b) below, the option, as to the whole or any part thereof, may be exercised only by the Optionee or such Optionee's personal representative; (b) that neither the whole nor any part of the option shall be transferable by the Optionee or by operation of law otherwise than by the will of, or by the laws of descent and distribution applicable to, a deceased Optionee and that the option and any and all rights granted to the Optionee thereunder and not theretofore effectively and completely exercised shall automatically terminate and expire upon any sale, transfer, or hypothecation or any attempted sale, transfer, or hypothecation of such rights or upon the bankruptcy or insolvency of the Optionee or his or her estate; (c) that subject to the foregoing provisions, an option may be exercised at different times for portions of the total number of Shares for which the right to purchase shall have vested provided that such portions are in multiples of 10 shares if the Optionee holds vested options for 99 or fewer shares and otherwise in multiples of 100 shares; (d) that no Optionee shall have the right to receive any dividend on or to vote or exercise any right in respect of any Shares unless and until the certificates for such Shares have been issued to such Optionee; (e) that the option shall expire at the earliest of the following: (1) The date specified in the option; (2) Ninety (90) days after voluntary or involuntary termination of Optionee's employment other than termination as described in Paragraphs (3) or (4) below: (3) Upon the discharge of Optionee for misconduct, willfully or wantonly harmful to the Company; (4) Twelve months after Optionee's death or disability; or (5) In the event of a merger, consolidation, tender offer, takeover bid, sale of assets, or filing of a Statement of Intent to Dissolve (or the filing of Articles of Dissolution), as the case may be and as described in Subsections (1) through (4) of 5 Section 2.6(a), on the date specified in Section 2.6(c). However, if the merger, consolidation, tender offer, takeover bid, or sale of assets does not occur or if a Statement of Intent to Dissolve is not filed, as the case may be and as described in Subsections (1) through (4) of Section 2.6(a), all options which are terminated pursuant to this Subsection (e)(5) shall be reinstated as if no action with respect to any of said events had been contemplated or taken by any party thereto and all Optionees shall be returned to their respective positions on the date of termination; (f) that, to the extent an option provides for the vesting thereof in increments, such vesting shall cease as of the date of the Optionee's death, disability, or voluntary or involuntary termination of Optionee's employment with the Company; (g) that the terms of the option shall not be affected by any change of duties or position so long as the Optionee shall continue to be employed by the Company or a subsidiary. 2.8 EXERCISE OF OPTIONS: The Optionee (or other person or persons, if any, entitled thereto hereunder) desiring to exercise an option granted and exercisable hereunder as to all or part of the Shares covered thereby shall notify the Company or, if required by the Company, the brokerage firm designated by the Company to facilitate exercises and sales under this Plan, specifying the number of option Shares to be purchased and, if required by the Company, representing in form satisfactory to the Company that the Shares are being purchased for investment and not with a view to resale or distribution. The notification to the brokerage firm shall be made in accordance with procedures of such brokerage firm approved by the Company. With respect to any Shares conditionally purchased pursuant to Section 2.6(a) above and for which such purchase has not been voluntarily or otherwise rescinded pursuant to Section 2.6(b), the Optionee shall be deemed to have given the notice required by this Section 2.8 as of ten (10) days prior to the closing or effective date of the merger, consolidation, tender offer, takeover bid, or sale of assets or as of the twentieth (20th) day after a Statement of Intent to Dissolve is filed (or the tenth (10th) day before the filing of Articles of Dissolution if it precedes said twentieth (20th) day), as the case may be and as described in Subsections (1) through (4) of Section 2.6(a). 2.9 METHOD OF EXERCISE OF OPTION: The option shall be exercised as to the number of Shares specified in the notice provided pursuant to Section 2.8 above by payment to the Company of the amount specified below in Section 3.2. Payment of the option price shall be made in cash or in accordance with procedures for a "cashless exercise" as the same shall have been established from time to time by the Company and the brokerage firm designated by the Company to facilitate exercises and sales under this Plan. Payment in shares of the Company's common stock shall be deemed to be the equivalent of payment in cash at the Fair Market Value of those shares. No such payment in shares of the Company's common stock shall be allowed when the same may in the reasonable opinion of the Company cause the Company to record a loss or expense as a result thereof. 6 2.10 RECAPITALIZATION: The aggregate number of Shares for which options may be granted hereunder, the number of Shares covered by each outstanding option, and the price per Share thereof in each such option shall be proportionately adjusted for an increase or decrease in the number of outstanding shares of common stock of the Company resulting from a stock split or reverse split of shares or any other capital adjustment or the payment of a stock dividend or other increase or decrease in such shares effected without receipt of consideration by the Company excluding any decrease resulting from the purchase of shares for the treasury. If the adjustment would result in a fractional Share, the Optionee shall be entitled to one (1) additional Share, provided that the total number of Shares to be granted under this Plan shall not be increased above the equivalent number of Shares initially allocated or later increased by approved amendment to this Plan. 2.11 SUBSTITUTIONS AND ASSUMPTION: The Board shall have the right to substitute or assume options in connection with mergers, reorganizations, separations, or other "corporate transactions" as that term is defined in and said substitutions and assumptions are permitted by Section 425 of the Code and the regulations promulgated thereunder. The number of Shares reserved pursuant to Section 2.2 may be increased by the corresponding number of options assumed and, in the case of a substitution, by the net increase in the number of Shares subject to options before and after the substitution. 2.12 TERMINATION: The directors of the Company may at any time modify, amend, or terminate this Plan. No amendment, modification, or termination of the Plan may adversely affect options granted prior to such action. 2.13 GRANTING OF OPTIONS: The granting of any option pursuant to this Plan shall be entirely in the discretion of the Committee and nothing herein contained shall be construed to give any employee any right to participate under this Plan. 2.14 WITHDRAWAL: An Optionee may at any time elect in writing to abandon an option with respect to the number of Shares as to which the option shall not have been exercised. 2.15 GOVERNMENT REGULATIONS: This Plan and the granting and exercise of any option hereunder and the obligations of the Company to sell and deliver Shares under any such option shall be subject to all applicable laws, rules, and regulations and to such approvals by any governmental agencies as may be required. 7 2.16 PROCEEDS FROM SALE OF STOCK: Proceeds of the purchase of optioned Shares by an Optionee shall be for the general business purposes of the Company. 2.17 BOARD AUTHORIZATION: This Plan has been adopted and authorized by the Board for a period of ten years beginning as of the first day of the Company's 1998 fiscal year. 2.18 COMPLIANCE WITH SECURITIES LAWS: The Committee shall have the right to: (a) require an Optionee to execute, as a condition of the exercise of an option, a letter evidencing Optionee's intent to acquire the Shares for investment and not with a view to the resale or distribution thereof; (b) place appropriate legends upon the certificate or certificates for the Shares; and (c) take such other acts as it deems necessary in order to cause the issuance of optioned Shares to comply with applicable provisions of State and Federal Securities Laws. In furtherance of the foregoing, and not by way of limitation thereof, no option shall be exercisable unless such option and the Shares to be issued pursuant thereto shall be registered under appropriate Federal and State Securities Laws, or shall be exempt therefrom, in the opinion of the Committee upon advice of counsel to the Company. Each option agreement shall contain adequate provisions to assure that there will be no violation of such Laws. This provision shall in no way obligate the Company to undertake registration of options or Shares hereunder. Issue, transfer or delivery of certificates for Shares pursuant to the exercise of options may be delayed, at the discretion of the board, until the Board is satisfied that the applicable requirements of the Federal and State Securities Laws have been met. 2.19 TERMINAL DATE OF PLAN: This Plan shall not extend beyond January 1, 2008. 3. OPTION PRICE AND WITHHOLDING TAX In addition to the provisions of Section 2 above, the following paragraphs shall apply to any options granted under this Plan: 8 3.1 OPTION PRICE: The option or purchase price of each Share optioned under this Plan shall be determined by the Committee at the time of the action for the granting of the option. 3.2 WITHHOLDING ON PAYMENT FOR OPTIONED SHARES: The amount to be paid by the Optionee upon exercise of an option shall be the full purchase price thereof provided in the option, together with the amount of federal, state, and local income and FICA taxes required to be withheld by the Company. An Optionee may elect to pay his or her federal, state, or local income and FICA withholding tax by having the Company withhold shares of Company common stock having a value equal to the amount required to be withheld. The value of the shares to be withheld is deemed to equal the fair market value of the shares on the day the option is exercised, as determined in accordance with Section 2.9. An election by an Optionee to have shares withheld for this purpose will be subject to the following restrictions: (a) If an Optionee has received multiple option grants, a separate election must be made for each grant; (b) The election must be made prior to the day the option is exercised; (c) The election will be irrevocable; (d) The election will be subject to the disapproval of the Board; (e) If the Optionee is an officer of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934 ("Section 16"), the election may not be made within six months following the grant of the option; and (f) If the Optionee is an officer of the Company within the meaning of said Section 16, the election must be made either six months prior to the day the option is exercised or the ten day "window" beginning on the third day following the release of the Company's quarterly or annual summary statement of sales and earnings. 4. AMENDMENT This Plan and all rules and regulations adopted in respect hereof may be terminated, suspended, or amended at any time by a majority vote of the Board, except as otherwise specifically set forth in Section 2.12, provided that no such action shall adversely affect any rights of Optionees granted under this Plan prior to such action. The Board may amend the terms and conditions of outstanding options, provided, however, that (i) no such amendment would be adverse to the holders of such options, (ii) no such amendment shall extend the Period for 9 exercise of an option, and (iii) the amended terms of an option would be permitted under this Plan. 5. REGISTRATION, LISTING, AND QUALIFICATION OF SHARES Each option shall be subject to the requirement that if at any time the Committee shall determine that the registration, listing, or qualification of the shares covered thereby upon any securities exchange or under any foreign, federal, state, or local law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the purchase of shares thereunder, no such option may be exercised unless and until such registration, listing, qualification, consent, or approval shall have been effected or obtained free of any condition not acceptable to the Committee. Any person exercising an option shall make such representations and agreements and furnish such information as the Committee may request to assure compliance with the foregoing or any other applicable legal requirements. 6. BUY OUT OF OPTION GAINS At any time after any option becomes exercisable, the Committee shall have the right to elect, in its sole discretion and without the consent of the Optionee, to cancel such option and to pay such Optionee the excess of the fair market value of the shares of the Company's common stock covered by such option over the option exercise price of such option at the date the Committee provides written notice (the "Buy Out Notice") of its intention to exercise such right. Buy outs pursuant to this provision shall be effected by the Company as promptly as possible after the date of the Buy Out Notice. Payments of buy out amounts may be made in cash, in shares of the Company's common stock, or partly in cash and partly in common stock, as the Committee deems advisable. To the extent payment is made in shares of common stock, the number of shares shall be determined by dividing the amount of the payment to be made by the fair market value of a share of common stock at the date of the Buy Out Notice. In no event shall the Company be required to deliver a fractional share of common stock in satisfaction of this buy out provision. Payment of any such buy out amount shall be made net of any applicable foreign, federal (including FICA), state, and local withholding taxes. 7. NO RIGHTS TO OPTIONS OR EMPLOYMENT; NO RESTRICTIONS No employee or other person shall have any claim or right to be granted an option under this Plan. Having received an option under this Plan shall not give an employee any right to receive any other grant or option under this Plan. An Optionee shall have no rights to or interest in any option except as set forth herein. Neither this Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company. Nothing in this Plan shall restrict the Company's rights to adopt other option plans pertaining to any or all of the employees covered under this Plan or other employees not covered under this Plan. 10 8. COSTS AND EXPENSES Except as provided herein with respect to the payment of taxes, all costs and expenses of administering the Plan shall be borne by the Company and shall not be charged to any grant nor any employee receiving a grant. 9. PLAN UNFUNDED This Plan shall be unfunded. Except for the Board's reservation of a sufficient number of authorized shares to the extent required by law to meet the requirements of the Plan, the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure payment of any grant under the Plan. 10. GOVERNING LAW This Plan shall be governed by and construed in accordance with the laws of the state of Washington. 11 EX-10.12 9 FORM OF RESTRICTED STOCK AWARD AGREEMENT EXHIBIT 10.12 CAVANAUGHS HOSPITALITY CORPORATION RESTRICTED STOCK AWARD AGREEMENT THIS AGREEMENT, dated ________, 1998, is made by and between Cavanaughs Hospitality Corporation, Inc., a Washington corporation hereinafter referred to as "Company," and __________, an employee of the Company, hereinafter referred to as "Recipient". WHEREAS, the Company wishes to award Recipient shares of its $.01 par value Common Stock; and WHEREAS, the Company wishes to carry out the Plan (the terms of which are hereby incorporated by reference and made a part of this Agreement); and WHEREAS, the Committee, appointed to administer the Plan, has determined that it would be to the advantage and best interest of the Company and its shareholders to grant the Award provided for herein to the Recipient as an inducement to enter into or remain in the service of the Company or its Subsidiaries and as an incentive for increased efforts during such service, and has advised the Company thereof and instructed the undersigned officers to issue said Award; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS ----------- Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary. Unless otherwise defined herein, capitalized terms used herein shall have the meanings set forth therefor in the plan. The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. "Award" shall mean an award of Restricted Stock granted under this Agreement and Article VI of the Plan. "Cause" shall mean (i) the Recipient's failure or refusal to perform specific and lawful directions with respect to the Recipient's employment with the Company, (ii) the commission by the Recipient of a felony or the perpetration by the Recipient of an act of fraud, dishonesty, or misrepresentation against, or breach of fiduciary duty toward, the Company, or (iii) any willful act or omission by the Recipient which is injurious in any material respect to the financial condition or business reputation of the Company. "Plan" shall mean The 1998 Stock Incentive Plan of Cavanaughs Hospitality Corporation. ARTICLE II GRANT OF AWARD -------------- Section 2.1 Grant of Award -------------- In consideration of the Recipient's agreement to remain in the employ of the Company for a period of at least one year after the Award is granted and for other good and valuable consideration, on the date hereof the Company irrevocably grants to the Recipient the Award of an aggregate of ____ shares of its $.01 par value Common Stock upon the terms and conditions set forth in this Agreement. Section 2.2 Purchase Price -------------- The purchase price of the shares of stock covered by the Award shall be $.01 per share (the par value of the Common Stock), without commission or other charge. Section 2.3 Consideration to Company ------------------------ The consideration to the Company for the Award consists of services performed by Recipient and the following agreement of Recipient. In consideration of the granting of this Award by the Company, the Recipient agrees to render faithful and efficient services to the Company or a Subsidiary, with such duties and responsibilities as the Company shall from time to time prescribe, for a period of at least one (1) year from the date this Award is granted. Nothing in the Plan or this Agreement shall confer upon any Recipient any right to continue in the employ of the Company or any Subsidiary, or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge the Recipient at any time for any reason whatsoever, with or without cause. Section 2.4 Adjustments in Award -------------------- (a) In the event that the outstanding shares of the stock subject to the Award are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split up, stock dividend or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and 2 kind of shares as to which the Award, or portions thereof not then received, shall be issuable, to the end that after such event the Recipient's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in the Award may include any necessary. Any such adjustment made by the Committee shall be final and binding upon the Recipient, the Company and all other interested persons. (b) Notwithstanding the foregoing, in the event of such a reorganization, merger, consolidation, recapitalization, reclassification, stock split up, stock dividend or combination, or other adjustment or event which results in shares of Common Stock being exchanged for or converted into cash, securities or other property, the Company will have the right to terminate the Plan as of the date of the exchange or conversion, in which case all Awards, rights and other awards under this Award shall become the right to receive such cash, securities or other property. (c) In the event of a "spin-off" or other substantial distribution of assets of the Company which has a material diminutive effect upon the Fair Market Value of the Company's Common Stock, the Board may in its discretion make an appropriate and equitable adjustment to the Award to reflect such diminution. ARTICLE III PROOF OF ISSUANCE ----------------- Section 3.1 Schedule of Issuance -------------------- (a) Subject to Section 5.6, the Award shall become issuable in five installments as follows: (i) The first installment shall consist of _____ (20%) of the shares covered by the Award and shall become issuable on the date the Company completes the initial public offering of the Common Stock under the Securities Act (the "IPO Date"). (ii) The second installment shall consist of _____ (20%) of the shares covered by the Award and shall become issuable on the first anniversary of the IPO Date. (iii) The third installment shall consist of _____ (20%) of the shares covered by the Award and shall become issuable on the second anniversary of the IPO Date. (iv) The fourth installment shall consist of _____ (20%) of the shares covered by the Award and shall become issuable on the fourth anniversary of the IPO Date. (v) The fifth installment shall consist of _____ (20%) of the shares covered by the Award and shall become issuable on the fifth anniversary of the IPO Date. (b) No portion of the Award which has not been issued at Termination of 3 Employment shall thereafter become issuable, except as may be otherwise provided by the Committee. Section 3.2 Expiration of Award ------------------- The Award may not be issued to any extent after the first to occur of the following events: (a) The time of the Recipient's Termination of Employment unless such Termination of Employment results from the Recipient's death, the Recipient's retirement in accordance with the Company's retirement policies or after age fifty five (55) if the Recipient has completed five (5) years of employment with the Company, the Recipient's total and permanent disability, or the Recipient's being discharged other than for Cause; or (b) The expiration of three (3) months from the date of the Recipient's Termination of Employment by reason of the Recipient's being discharged other than for Cause, unless the Recipient dies within said three-month period; or (c) The expiration of one (1) year from the date of the Recipient's Termination of Employment by reason of the Recipient's total and permanent disability or the Recipient's retirement in accordance with the Company's retirement policies or after age fifty five (55) if the Recipient has completed five (5) years of employment with the Company; or (d) The expiration of one (1) year from the date of the Recipient's death; or (e) The effective date of either the merger or consolidation of the Company with or into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, the acquisition by another corporation or person of all or substantially all of the Company's assets or eighty percent (80%) or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, unless the Committee waives this provision in connection with such transaction. At least twenty (20) days prior to the effective date of such merger, consolidation, exchange, acquisition, liquidation or dissolution, the Committee shall give the Recipient notice of such event if the shares subject to the Award have not then either been issued nor become unissuable under this Section 3.2. Section 3.3 Acceleration ------------ In the event of the merger or consolidation of the Company with or into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, the acquisition by another corporation or person of all or substantially all of the Company's assets or eighty percent (80%) or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, the Committee may, in its absolute discretion and upon such terms and conditions as it deems appropriate, provide by resolution, adopted prior to such event and incorporated in the notice referred to in Section 3.2(f), 4 that at some time prior to the effective date of such event this Award shall be issuable as to all the shares covered hereby, notwithstanding that this Award may not yet have become fully issuable under Section 3.1(a); provided, however, that this acceleration of issuance shall not take place if: (a) This Award becomes unissuable under Section 3.2 prior to said effective date; or (b) In connection with such an event, provision is made for an assumption of this Award or a substitution therefor of a new Award by an employer corporation or a parent or subsidiary of such corporation, and provided, further, that nothing in this Section 3.3 shall make this Award issuable if it is otherwise unissuable by reason of Section 5.6. The Committee may make such determinations and adopt such rules and conditions as it, in its absolute discretion, deems appropriate in connection with such acceleration, including, but not by way of limitation, provisions to ensure that any such acceleration and resulting issuance shall be conditioned upon the consummation of the contemplated corporate transaction. None of the foregoing discretionary terms of this Section shall be permitted to the extent that such discretion would be inconsistent with the requirements of Rule 16b-3. Section 3.4 Conditions to Issuance of Stock Certificates -------------------------------------------- The shares of stock deliverable pursuant to the Award, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such shares shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock pursuant to the Award or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee or Board shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee or Board shall, in its absolute discretion, determine to be necessary or advisable; and (d) The receipt by the Company of full payment for such shares, including payment of all amounts which, under federal, state or local tax law, it is required to withhold upon 5 delivery of shares subject to the Award; and (e) The receipt of a bona fide written representation and agreement, in a form satisfactory to the Committee or the Board, signed by the Recipient or other person then entitled to receive such Award or portion, stating that the shares of stock are being acquired for the Recipient's own account, for investment and without any present intention of distributing or reselling said shares or any of them except as may be permitted under the Securities Act and then applicable rules and regulations thereunder, and that the Recipient or other person then entitled to receive such Award or portion will indemnify the Company against and hold it free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the shares by such person is contrary to the representation and agreement referred to above. The Committee may, in its absolute discretion, take whatever additional actions it deems appropriate to insure the observance and performance of such representation and agreement and to effect compliance with the Securities Act and any other federal or state securities laws or regulations. Without limiting the generality of the foregoing, the Committee may require an opinion of counsel acceptable to it to the effect that any subsequent transfer of shares acquired does not violate the Securities Act, and may issue stop-transfer orders covering such shares. Share certificates evidencing Restricted Stock Awards shall bear an appropriate legend referring to the provisions of this subsection and the agreements herein. The written representation and agreement referred to in the first sentence of this subsection shall, however, not be required if the Restricted Stock have been registered under the Securities Act, and such registration is then effective in respect of such shares; and ARTICLE IV OTHER PROVISIONS ---------------- Section 4.1 Administration -------------- The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Recipient, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Award. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Section 4.2 Award Not Transferable ---------------------- Neither the Award nor any interest or right therein or part thereof shall be liable for the 6 debts, contracts or engagements of the Recipient or the Recipient's successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 4.2 shall not prevent (i) transfers by will or by the applicable laws of descent and distribution, (ii) the designation by the Recipient of a beneficiary to receive the Recipient's Award or other rights under this Agreement after the Recipient's death, or (iii) transfers pursuant to a QDRO. Section 4.3 Shares to Be Reserved --------------------- The Company shall at all times during the term of the Award reserve and keep available such number of shares of stock as will be sufficient to satisfy the requirements of this Agreement. Section 4.4 Restriction. No shares of Restricted Stock issued under this ----------- Award (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shallto a person subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise transferred until at least six months have elapsed from (but excluding) the date on which the Restricted Stock was issued, and provided, that by a resolution adopted after the Restricted Stock is -------- issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of this Restricted Stock Agreement. Section 4.5 Repurchase of Restricted Stock. The Company shall have the right ------------------------------ to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment or, if applicable, upon a termination of any consulting relationship between the Restricted Stockholder and the Company, at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock; provided, however, that no such right of repurchase shall -------- ------- exist in the event of a Termination of Employment without cause, or following a change in control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. Section 4.6 Escrow. The Secretary of the Company or such other escrow holder ------ as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed. Section 4.7 Legend. In order to enforce the restrictions imposed upon shares ------ of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, which legend or legends shall make appropriate reference to the conditions 7 imposed thereby. Section 4.8 Notices ------- Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary, and any notice to be given to the Recipient shall be addressed to the Recipient at the address given beneath the Recipient's signature hereto. By a notice given pursuant to this Section 4.8, either party may hereafter designate a different address for notices to be given to that party. Any notice which is required to be given to the Recipient shall, if the Recipient is then deceased, be given to the Recipient's personal representative if such representative has previously informed the Company of such representative's status and address by written notice under this Section 4.8. Any notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service. Section 4.9 Titles ------ Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. Section 4.10 Shareholder Approval -------------------- The Plan will be submitted for approval by the Company's shareholders within twelve (12) months after the date the Plan was initially adopted by the Board. Shares of Restricted Stock pursuant to this Award may not issued prior to the time when the Plan is approved by the shareholders, and if such approval has not been obtained by the end of said twelve-month period, this Award shall thereupon be canceled and become null and void. Section 4.11 Construction ------------ This Agreement shall be administered, interpreted and enforced under the laws of the State of Washington. Section 4.12 Conformity to Securities Laws ----------------------------- The Recipient acknowledges that the Plan is intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, including without limitation Rule 16b-3. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Award is granted, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 8 Section 4.13 Amendments. etc. ---------------- This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Recipient and by a duly authorized representative of the Company. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. CAVANAUGHS HOSPITALITY CORPORATION By: President By: Secretary [Name] - ------ Recipient [ ] - ---------- Address Recipient's Taxpayer Identification Number: [ ] - ---------- 9 EX-23.1 10 CONSENT OF COOPERS & LYBRAND LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333- ) of our report dated December 10, 1997, except for Notes 7, 14 and 15, as to which the date is January 15, 1998, on our audits of the combined financial statements of Cavanaughs Hospitality Corporation, Barbieri Investment Company and Lincoln Building Limited Partnership. We also consent to the reference to our firm under the caption "Experts". /s/ COOPERS & LYBRAND L.L.P. Spokane, Washington January 16, 1998 EX-23.3 11 CONSENT OF PETER F. STANTON Exhibit 23.3 CONSENT OF DIRECTOR NOMINEE I, Peter Stanton, do hereby consent to being named in the Prospectus constituting part of this Form S-1 as a nominee for director of Cavanaughs Hospitality Corporation. /s/ Peter F. Stanton ---------------- Peter Stanton January 20, 1998 EX-23.4 12 CONSENT OF RONALD R. TAYLOR Exhibit 23.4 CONSENT OF DIRECTOR NOMINEE I, Ronald R. Taylor, do hereby consent to being named in the Prospectus constituting part of this Form S-1 as a nominee for director of Cavanaughs Hospitality Corporation. /s/ Ronald R. Taylor ---------------- Ronald R. Taylor January 20, 1998 EX-23.5 13 CONSENT OF ROBERT G. TEMPLIN Exhibit 23.5 CONSENT OF DIRECTOR NOMINEE I, Robert G. Templin, do hereby consent to being named in the Prospectus constituting part of this Form S-1 as a nominee for director of Cavanaughs Hospitality Corporation. /s/ Robert G. Templin ----------------- Robert G. Templin January 20, 1998 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 1,000 YEAR OCT-31-1997 OCT-31-1997 6,440 0 2,944 (80) 376 10,808 144,279 (34,325) 124,448 13,582 0 0 495 704 8,224 124,448 52,043 52,043 22,927 41,385 0 0 8,817 2,742 932 1,810 0 0 0 1,810 0.26 0.26
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